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The hidden virtue of naming your price


It seems an awfully long time ago that Radiohead made waves with the release of their In Rainbows record.  Whilst the quality of the music itself was no doubt noteworthy, the main point of interest was that they’d offered the record to customers free of charge.  Or at least that was the perception, because they’d allowed fans to get the record whilst paying whatever they wanted for it.  You have to remember, this was at the height of the torrents era, so there was quite a bit of hand wringing over such a tactic, with doomsayers predicting that the majority would not bother paying anything at all.

Alas, that didn’t actually happen, and it emerged that the record generated more money for the band than the release of their previous record Hail to the Thief.

Whilst it would be rather extravagant to say this heralded a culture shift in either the music industry or industry as a whole, it did raise the profile of such a pricing mechanism.  In this prime shopping season, it’s been revisited by researchers at UC Berkeley’s Greater Good Science Center, but this time with a twist.  Rather than setting your own price for things you buy yourself, the researchers looked at what happens when people could set the price and pay for someone else.

“It’s assumed that consumers are selfish and always looking for the best deal, but when we gave people the option to pay for someone else, they always paid more than what they paid for themselves,” said the study’s lead author, Minah Jung, a doctoral student at the Haas School of Business and a Gratitude Dissertation Fellow at UC Berkeley’s Greater Good Science Center.

It was an interesting insight into the various social and psychological forces that guide the decisions we make when out shopping.  As an example, it emerged that we often overestimate the generosity of others, until that is we become party to that information.

“People don’t want to look cheap. They want to be fair, but they also want to fit in with the social norms,” said Jung, whose findings have been presented at the annual meeting of the Society for Personality and Social Psychology, and the Association for Consumer Research, among other conferences, and are being submitted for publication.

How pay it forward works

  1. Customers are told that a previous customer has paid for them
  2. That customer then gets the chance to pay for the following customer

As with the Radiohead pay what you like model, this style of payment has been seen most often in service type environments, such as at cafes and restaurants.

The researchers conducted eight experiments, comprising nearly 2,500 participants in various locations to test how consumers responded to both the pay it forward model and the pay what you like model.  Interestingly, at a museum and farmers market, consumers would regularly pay more for other people than they did for themselves.  The same dynamic occurred in a laboratory setting.  The only time this trend was bucked was when participants were told what previous people had paid, which resulted in subsequent payments being adjusted towards that figure.

“The results suggest that businesses that rely entirely on consumers’ social preferences can survive and even thrive,” Jung said. “It’s pretty amazing.”

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