Resource Guide to Pricing — Finding Fair Value Exchange

15 min readJun 21, 2019

Annotated links and references

This resource guide is on general topics relevant to FairPay pricing architecture and processes, and on work specific to the related areas of Value-based pricing and Pay What You Want (PWYW) pricing (all related to co-pricing or participative pricing).

It is intended to make this work relevant and accessible to managers and entrepreneurs, but also to be useful to scholars and researchers. This is a work in progress, to be expanded, and may include added topics as they become relevant.

[Cross-posted from FairPayZone.com on 6/21/19 — check there for updates]

FairPay is a radically new pricing architecture which takes elements from Freemium, Value-based pricing, PWYW, Name Your Price, and others, and adds Internet feedback on individual pricing history to create a dynamically adaptive, individualized pricing process that improves upon all of these. As noted below, these studies are strongly suggestive that Value-based pricing is the holy grail, that PWYW is far more promising than generally understood, and that FairPay can be expected to make Value-based pricing effective in B2C markets.

A motivation for promoting this work is to identify the benefits of FairPay (in its range of forms), and to encourage studies specific to FairPay.

I have been collaborating with Adrian Payne and Pennie Frow on a research paper exploring this space from the perspective of how co-pricing (such as with PWYW) works in digital markets, and how two-way, interactive learning (such as in FairPay) affects the design and fine-tuning of value propositions. That paper was accepted on 6/19/19 for publication in the Australasian Journal of Marketing, and is included below (and cites additional references). Suggestions of additional publications relevant to ongoing updates of this resource guide are invited. Please make contact if you know of or are considering doing similar studies. (FairPay [at] teleshuttle [dot] com)

(Copies may be redistributed for non-profit use, given attribution to Richard Reisman, FairPayZone.com, http://www.fairpayzone.com/p/pricing.html)

(Draft in progress, to be further revised and expanded — 10/4/10. Last revised 6/21/19[in progress].)

Pricing in General

Smart Pricing: How Google, Priceline, and Leading Businesses Use Pricing Innovation for Profitability, Jagmohan Raju, Z. John Zhang. Wharton School Publishing; (April 5, 2010).
An excellent and very readable overview of many innovative pricing strategies. Has a very current and helpful chapter on “Pay As You Wish,” with eye-opening insight into why this deserves more serious attention that one might think (see chapter comments below). Also good background on Name Your Own Price, Subscribe and Save, and Pay If It Works, all of which have some relation to FairPay.

Free: The Future of a Radical Price, Chris Anderson. Hyperion (July 7, 2009).
An excellent overview of the current crisis in revenue models for digital products/services. Builds a richly developed case for the power of Free (especially in the hybrid form of Freemium, with its many variations), arguing that “eventually the force of economic gravity will win,” driving prices down to zero.

The Strategy and Tactics of Pricing (5th Edition), Thomas Nagle, John Hogan, Joseph Zale. Prentice Hall; 5th edition (March 12, 2010).
A comprehensive and practical, step-by-step guide to pricing analysis and strategy development. Does not address PWYW or Freemium, and not oriented to digital products/services, but much useful background, including discussion of dynamic pricing models.

Emergent Pricing Strategy, G. Smith, in Visionary Pricing: Reflections and Advances in Honor of Dan Nimer, D Smith, editor, Emerald Group 2012.

“…argues that firms need to develop new strategic pricing skills that lead to more improvisational, innovative, or adaptive pricing strategies. …Innovative pricing strategies that the organization judges, or senses to be effective, are repeated, shared, expanded, and refined into successful pricing patterns that, over time and across situations, become pricing strategy. Thus, rather than specifically designing pricing strategy to achieve a goal, here the organization acts upon a price innovation that seems to make sense for this customer, this market segment, this setting, and this situation, then interprets the outcomes, signals, and reactions that seem to flow from the pricing action, and shares and encourages adoption and adaption by others in the organization.”

FairPay, a new architecture for customer-value-based pricing

A current list of external publications about FairPay — the innovative pricing strategy that is the main subject of this blog — is maintained under the News tab (chronological). A fuller, thematic list of items on this blog and elsewhere is under the Selected Items tab.

Extensive information on FairPay and the broader pricing issues it relates to is on this blog — see the tabs at top.

Pay What You Want (PWYW)
AKA: Pay As You Want (PAYW), Pay What You Wish, Pay What You Like (PWYL), Pay As You Wish, Pay As You Like (PAYL), Pay What You Will (PWYW), Pay As You Will (PAYW)

These works provide valuable insights into PWYW pricing, in a flurry of work since the Radiohead offer brought this model to wide attention.. While PWYW has been neglected as not a viable option for most businesses, it can be surprisingly effective in many situations, such as for selected product lines, for sellers who are viewed as deserving of compensation, and in combination with charity. In spite of its limitations, many sellers would do well to consider how it might apply in selected contexts, and to consider the larger lessons about pricing that it demonstrates. As this research shows, buyers can be surprisingly fair and even generous. PWYW can sometimes increase profitability over conventional models, and can be useful for both real and digital products/services. It also shows that when you let buyers set prices, no one can compete with you on price, and you can expand your market to make all of “the profit that fair-minded consumers are willing to give.” (And of course much of this should apply to and work even better with FairPay — studies of that could be very illuminating.)

Research papers:

Featured coverage of FairPay

A Novel Architecture to Monetize Digital Offerings, Richard Reisman, Marco Bertini — Journal of Revenue and Pricing Management, December 2018, (available online, free to all, open access).

Excellent scholarly introduction to FairPay, its roots in traditional and emerging practice, core methods, and implications — quite readable for managers.

Pricing in Consumer Digital Markets: A Dynamic Framework, Richard Reisman, Pennie Frow, Adiran Payne — forthcoming in Australasian Journal of Marketing (accepted 6/19/19, available online, free to all, open access).

Deeper scholarly introduction to FairPay, with a more extensive survey of antecedent forms of pricing, especially pay what you want and other participative pricing, along with more on the FairPay process and its implications, and suggestions for future research.

Other selected papers, chronologically

Pay what you want: a new participative pricing mechanism, JY Kim, M Natter, M Spann -Journal of Marketing, January 2009 — Am Marketing Assoc. (no free full-text URL found)

Apparently the first of a flurry of research papers on PWYW. It addresses the value of participative methods to enable individually differentiated prices, and the insights into willingness to pay that are obtained. Notes that the results depend on the proportion of “deal profit” a buyer is willing to share, and that that “is mainly driven by the consumer’s fairness, satisfaction, price consciousness, and income” and secondarily, by altruism and loyalty.

Pay What You Like. J Fernandez, B Nahata — April 2009, Munich Personal RePEc Archive.

Explores motivations for consumers and firms. Notes that PWYW is polar opposite from “buffet pricing (or flat-fee pricing)” [aka “all you can eat”] where consumer decides how much to consume for a given price. Models how consumer maximizes long-term utility by not threatening survival of seller. Seller benefits include reduction in price-setting costs, and maximizing inclusion of consumers in the market (including those with low willingness to pay). Models show “that PWYL pricing would be more successful in sectors where products are more differentiated (or have fewer substitutes) such as music and specialty foods, but would fail in sectors where the service or product is homogenous (or has many close substitutes) such as gasoline.” If a market is “sufficiently differentiated it facilitates a voluntary segmentation based on consumers self selection thus making a 1st-degree price discrimination feasible, but without incurring the cost such practice generally requires.”

Do consumers pay voluntarily? The case of online music. T Regner, JA Barria — Journal of Economic Behavior & Organization, August, 2009.

Especially relevant to digital media content (music), insightful real-world analysis of Magnatune, an indie music distributor that applied a PWYW purchase business model with suggested price and min and max (apparently since changed, after a number of years, to a fixed-price subscription model instead of download sales), and which advertises a relatively high 50–50 split with artists. Applies behavioral and game theory to find significant factors to be the seller offering of pre-purchase access to try the product before setting price, as 1) creating a reciprocity motivation in buyer to pay fairly, and 2) reducing a buyer’s need to under-price in order to offset risk of buyer remorse (from product disappointment, music being an experience good). Suggests strongest factor motivating good prices may be social reciprocity, but that social preferences (“warm glow”), and guilt (paying less than one should) may also be factors. Finds that individual type differences in their underlying motivation factors are significant in the pricing behavior patterns of repeat buyers.

Pay-as-You-Wish Pricing. Yuxin Chen, Oded Koenigsberg, Z. John Zhang. October 30, 2009, working paper.

Cites advantages of PWYW as 1) helps a firm to maximally penetrate a market; 2) allows a firm to price discriminate among heterogeneous consumers; 3) helps to moderate price competition. Suggests PWYW penetrates deeply into markets with low willingness to pay, and that it may not require very low marginal costs. Finds a suggested or minimum price to be helpful. Concludes that it enables autonomous price discrimination and thus moderates price competition — firms “make the profit that fair-minded consumers are willing to give.”

“Pay As You Wish” Pricing chapter in Smart Pricing: How Google, Priceline, and Leading Businesses Use Pricing Innovation for Profitability, Jagmohan Raju, Z. John Zhang. Wharton School Publishing; (April 5, 2010). (See book description above)

Gives very readable and insightful overview of Radiohead offer, high costs of price-setting (“menu cost”), personalized selling to all interested buyers, elimination of piracy, applicability to restaurants as well as media, incentives for better service and customer relationships, and reduced payments to middlemen. Explores five key qualities for successful use:
1. A product with low marginal cost
2. A fair-minded customer
3. A product that can be sold credibly at a wide range of prices
4. A strong relationship between buyer and seller
5. A very competitive marketplace
Suggests buyer-set prices depend on framing, and can involve combinations of anchor pricing (or reference pricing), value pricing (value to buyer), and fair pricing (fair return to seller).

The Pay-What-You-Like Business Model: Warm Glow Revenues and Endogenous Price Discrimination. RM Isaac, JP Lightle, DA Norton — May 21, 2010, papers.ssrn.com

Describes conditions where PWYW can increase profits. Favors use of a suggested minimum price, and finds key advantage of PWYW as “endogenous price discrimination,” enabling sellers to obtain more than a suggested amount from rational buyers, “to earn more revenue and generate more efficient outcomes,” and to benefit from reciprocity in the form of a “gift exchange.”

Substituting Piracy with a Pay-What-You-Want Option: Does it Make Sense? G Grolleau, I Bekir, S El Harbi — CEAFE, tn.refer.org, June 2010.

Examines the Radiohead PWYW offer and implications for artists, publishers, and consumers, relative to piracy and fixed prices. Suggests artists and consumers may mutually benefit (and reduce piracy), with publishers being squeezed.

Shared Social Responsibility: A Field Experiment in Pay-What-You-Want Pricing and Charitable Giving. A Gneezy, U Gneezy, LD Nelson, A Brown — Science, 7/16/2010.

Very interesting findings that adding charitable giving to PWYW can significantly increase total revenue and profit, even over a conventional fixed price. PWYW+charity yielded significantly higher total profit than PWYW without charity, and also more than either a simple set-price, or set-price+charity. Individually, the PWYW buyers paid less than the set-price buyers, but far more of them made a purchase. In this case the product was a photo of the participant taken during an amusement park ride. Purchase rates were very low with standard pricing (at $12.95) and only slightly higher when 50% of that price went to charity. As summarized in the Discover blog, “…But when customers could pay what they wanted in the knowledge that half of that would go to charity, sales and profits went through the roof.”

Kish: Where Customers Pay As They Wish. Ju-Young Kim, Martin Natter, and Martin Spann. Review of Marketing Science, Special Issue: Marketing Science in Practice, August 05, 2010.
Focus here is on a lunch time buffet, finding PWYW very effective for this high fixed cost, low variable cost offering, and an effective customer acquisition method (leading to more profitable full-price dinners). As with earlier study by these authors, fairness and reciprocity are considered key motivators to pay well.

We’re In This Together: How Sellers, Social Values, and Relationship Norms Influence Consumer Payments in Pay-What-You-Want Contexts. Shelle Santana, Vicki G. Morwitz. Under Revision for Invited Review at Journal of Marketing, June 17, 2013.

Very interesting study that shows that consumers not only pay more than zero, but sometimes above their reference price, and explores how sellers can influence that. Buyers consider both their own welfare and that of the seller, and this varies depending on (1) their social value orientation (a trait) and (2) whether exchange or communal norms are felt to apply (a situational variable). This is particularly helpful in understanding how to maximize profit under PWYW, and especially under FairPay, as discussed in a blog post.

PWYW Pricing ex post Consumption: A Sales Strategy for Experience Goods. Henrik Egbert, Matthias Greiff and Kreshnik Xhangolli. Munich Personal RePEc Archive, 2/4/14.

Highlights the potentially very significant benefits of an underexploited variant of PWYW. From abstract: “This paper addresses PWYW pricing for bundles of experience goods. … a PWYW pricing mechanism, if applied ex post consumption, separates the decision to buy from the decision how much to pay. Information asymmetries about the quality of the good are reduced during the act of consumption so that buyers are informed about the product’s quality when they decide how much to pay. As a consequence, risk-averse buyers who would otherwise refrain from purchasing under a fixed price mechanism, can be attracted to purchase under a PWYW pricing ex post consumption (PWYW-EPC) mechanism. In this case, the pricing mechanism itself constitutes a signal. The paper concludes [this] can be a profitable strategy … to attract risk-averse buyers for realizing economies of scale in production” They suggest that “ sending such a signal may be the beginning of a relational contract initiated by the seller’s choice to implement a PWYW pricing mechanism.”

Voluntary MarketPayments: Underlying Motives, Success Drivers and Success Potentials. Martin Natter, Katharina Kaufmann. Journal of Behavioral and Experimental Economics (August 2015), doi: 10.1016/j.socec.2015.05.008

Perhaps the most comprehensive survey to date of PWYW and related forms of voluntary payment (tipping, donations, gifts) — part of a special issue on that topic. Examines many relevant factors as they relate to voluntary pricing strategies, including product characteristics, consumer-related characteristics, situational variables, relational techniques, and reference prices. Also addresses economic and communicative success, and underlying market motives.

The Pay-What-You-Want Game and Laboratory Experiments. Matthias Greiﬀ, Henrik Egbert. Munich Personal RePEc Archive, 11/22/16.

Important as the only work I have seen that focuses on the realization that PWYW can be far more effective when done as a repeated game that motivates cooperation and trust than as a single-shot game (as it is so far most common in practice). Defines a PWYW game as embedding the dictator game and the trust game as subgames. The basic repeated PWYW offers may be ended by the seller if results are not satisfactory, giving the seller a level of control and changing buyer behavior to seek to maintain PWYW offers. Concludes that success is enhanced by effective communication and reduction of goal conflicts. This is essentially the repeated game that FairPay applies, and so this work gives strong support to the expectations of success of the FairPay repeated game.

Pay what you want as a pricing model for open access publishing?, Martin Spann, Lucas StichL, Klaus M. Schmidt, October 2017, Communications of the ACM 60(11):29–31

Interesting application of PWYW to journal publishing supported by author publication fees (as an alternative to reader fees). Promising early results, including the useful finding that, after listing a suggested price, having customers set the price as a discount (even allowing 100%) leads to higher payments than setting the price itself.

Beyond Posted Prices: the Past, Present, and Future of Participative Pricing Mechanisms. Spann, M., Zeithammer, R., Bertini, M. et al. Customer Needs and Solutions (2018)

Important review of PWYW in its broader context, as one on a spectrum of participative pricing methods — one in which the buyer has full power over in price setting — along with others such as auctions or Name Your Price which feature shared participation. This spectrum of participation is one of the dimensions of what I have called a “ladder of value” but this paper omits consideration of FairPay, which seeks balanced participation of the buyer and seller. It also omits consideration of the separate, related, and important dimension of time in pricing. (FairPay applies post-pricing to balance participation over time, over the relationship, rather than the transaction.)

Paying before or paying after? Timing and uncertainty in pay-what-you-want pricing, Viglia, G., Maras, M., Schumann, J., & Navarro-Martinez, D. Journal of Service Research, In press, 2019.

Important support for the benefits of post-pricing: “A large field experiment conducted in conventional and fast-food restaurants provides initial support that paying after consumption increases PWYW amounts. A laboratory study then details the underlying psychological process; payments after consumption help resolve uncertainty about the service process and service outcome. Another study affirms these insights and further shows that PWYW after consumption, compared with fixed pricing, can increase profitability due to enhanced service capacity utilization.”

Consumer response to design variations in pay-what-you-want pricing. Christopher, R. M., & Machado, F. S., 2019. Journal of the Academy of Marketing Science.

Surveys PWYW many studies, plus examines key managerial variables: “consumers’ four possible responses to design variations in PWYW exchange: (1) opt-out, (2) free-ride, (3) default to recommendation, or (4) other payment …findings pertaining to four managerially controllable variables namely, ‘payment visibility’, ‘information on payment recipients’, ‘timing of payment’, and ‘explicit price recommendations’ using both secondary data and controlled experiments.”

Commercial Successes and News items:

Numerous news items and analyses have addressed PWYW, including successful use in business — such as the Radiohead offer, other music offers, numerous video games offers, restaurants (including Panera Bread), the Freakonomics movie PWYW preview offer, and fashion e-tailer Everlane. One particularly notable example is Humble Bundle, an aggregator of indie games, music, and e-books that raised $4.7 million from Sequoia Capital in 2011, and by October 2014 participating developers had grossed more than $100 million (while raising more than $50 million for charities). Links to a selection of such items are planned to be included in the future. (Referrals to other compendia will also be considered for inclusion.)

The Wikipedia entry on Pay What You Want also contains useful background, including actual business examples.

How-to guide: For those seeking to implement PWYW offers in their business an excellent practical resource, full of insights and experience on best practices, is “The Complete Guide to Pay What You Want Pricing” by Tom Morkes (2014), as described in a post here. (Bonus content available with that guide includes an audio interview of me about FairPay.)

Note to business-people: Many of the above works are not easy reading, and are based on advanced mathematical models with simplifying assumptions, or on analysis of simplified experiments. Nevertheless, they are generally consistent, and all suggest interesting conclusions that can be gleaned from scanning of selected sections. The caveat, of course, is that both experiments and mathematical models are only as relevant as the particular cases and assumptions (often oversimplified or different from cases of interest), and may be best taken as suggestive examples.

Other Pricing Models — Value-based, Performance-based, Outcomes-based, Freemium, Micropayments, Microdonations, Post-pricing, Usage-based, etc.

Pending expansion of this section, please refer to these surveys containing numerous reference links, and other posts on this blog:

Context on Marketing/Pricing in the Relationship Economy

These two books provide valuable real-world insight into the broad context of relationship-centered marketing in service/subscription contexts, and how it differs from our traditional product/transaction mindset:

Subscription Marketing: Strategies for Nurturing Customers in a World of Churn, Anne Janzer, 2017.

One of the best and most popular guides on this increasingly vital subject, provides a practical understanding of the essentials of subscription businesses — why value nurturing matters and how to make it central to your business. See, also, Janzer’s review of how her suggestions align with FairPay.

Subscribed: Why the Subscription Model Will Be Your Company’s Future — and What to Do About It, Tien Tzuo, Gabe Weisert, 2018.

Excellent orientation to what I call the Relationship Economy, and they call the Subscription Economy, including how this changes pricing and value propositions, and requires that firms focus on service to the customer, not products, and on maximizing Customer Lifetime Value with a more integrated, long-term orientation. See my full commentary.

[Cross-posted from FairPayZone.com on 6/21/19 — check there for updates]

Resource Guide to Pricing — Finding Fair Value Exchange

Written by Richard Reisman