Segmented Pay As You Wish

Young geekThe other day I learned Brian, a friend of mine, uses an interesting pricing strategy, segmented pay as you wish.

As you’ve read here in previous blogs, you really should segment your pricing. You want to charge different customers different prices based on their willingness to pay. What was unique about Brian’s pricing strategy is he used a different pricing strategy (not just a different price) based on who the customer is.  Brian combined a normal fee for service model with pay as you wish.

Pay as you wish is a pricing strategy where you don’t even mention a price. Instead, you simply ask people to pay what they think the product is worth. This strategy became more widely known in 2007 when RadioHead (a music group) released an entire album on line and aked people to pay what they wanted. RadioHead claimed it was wildly successful. (However, their next album they did not use pay as you wish.) (You can read more details on pay as you wish in my book Impact Pricing.)

Pay as you wish works best when you have low (or zero) variable costs and when you have a relationship with your customers. In the RadioHead example, their mp3’s had essentially no variable cost and their fans surely had a positive relationship with the band, a good fit for pay as you wish.

In Brian’s business, he provides a service which includes hardware as well as his time and expertise. Since most of his customers are regulars, he makes friends with many of them. Also, many of his customers are relatively well off.  When Brian finishes providing his service, the customer typically asks, “How much do I owe you?” Brian responds one of two ways:

1. He hands them an invoice which includes the price of the parts and his service.
2. He hands them an invoice which only includes the price of the parts. No service charge. He says something like, “The parts come to $147.84.”

As you might imagine, when he uses technique 2 for his wealthy “friends”, his customers tend to pay him more for the service than if he had given them a price.  One thing I love about Brian’s overall strategy is he can try this technique with any customer. If they don’t pay him more than he would have charged, then the next transaction with that customer he invoices for the service component as well. The customers are completely unaware that Brian is choosing which pricing strategy to use based on his expectations of their payment behavior.  After all, both of these pricing strategies are extremely fair.

What is your lesson for today? Think creatively. Think about many different customers and determine the optimal pricing strategy for each customer. If you find you have more than one pricing strategy, then try to think of a way to legitimately use different pricing strategies for different customers.

Special thanks to Brian for providing another example of how fun pricing is. 🙂

Mark Stiving, Ph.D.