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Small Business Advice – Pay What You Wish?

On the surface, it sounds crazy, but these days various types of businesses are experimenting with a format where customers are allowed to pay whatever they want for a service or product.

The trend has been going on for years, as can be seen in this 2007 Springwise trendspotting article about restaurants in cities including Denver, Salt Lake City and Vienna allowing customers to choose their own prices (and sometimes even portion sizes).

Today, it looks as if each of those restaurants is still going strong, which is some accomplishment in the unforgiving restaurant industry, especially in a recession.

Some of the restaurants in question do seem to have combined the pay-what-you-wish concept with progressive social activism, which may help them attract a clientele willing to engage in good faith and support the concept rather than freeloading and mooching of the proprietors.

In any case, the concept is not limited to restaurants. The best known example of pay-what-you-wish might be the opaque pricing site Priceline.com, where customers can bid for hotel rooms and rental cars by offering to pay whatever price seems fair to them.

Of course, Priceline is not a true pay-what-you-wish concept since there is a hidden price for each city or category below which rental car companies and hotel chains will not provide inventory. You can offer to pay $5 for a 4-star hotel in New York City, but the hotel is under no obligation to accept.

On the other hand, Priceline does seem to have carved out a sustainable niche that allows customers access to good deals while also simultaneously giving hotels and car rental chains the ability to dispose of excess inventory without eroding prices across the board.

The question of course is whether pay-what-you-wish pricing makes sense in the big picture. A recent article on Inc.com’s Retail blog by Tom Szaky, co-founder and CEO of TerraCycle, shows that the concept may have relevance for the general retail world. Szaky reported on his blog that TerraCycle had moved from a pure dot.com model into the brick-and-mortar retail world by opening a pay-what-you-wish retail store.

In defending/justifying his decision, Szaky pointed out that the concept has worked in other industries, including music where bands like Radiohead have managed to make money by selling digital albums and letting users choose whatever price they think is fair.

The model may work best where the incremental costs of each additional product sold are very low or even non-existent (i.e. digital content) or where brand loyalty (rock bands) is high.

On the other hand, one could argue that auction sites like eBay prove that retailers don’t need to set prices to make money. As long as buyers are operating in a situation of perceived or real scarcity, they will compete among themselves to set a price that may in fact be higher than what a retailer would get if he/she had set the price to begin with.

What do you think? Would you ever let your customers choose their own prices for some of the products or services you sell? Have you participated as a seller in any auction sites such as eBay? Share your thoughts and experiences in the comments section below!

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