Let's discuss pay what you want, which is a new and very interesting pricing strategy that's really suited for our new digital age. I would like to begin with a quote from my favorite book on pricing, The Strategy and Tactics of Pricing by Thomas Nagle and Reed Holden. This is the best book on pricing today. Thomas says, "Pricing is the moment of truth. All of marketing comes into focus in the pricing decision." As illustrated by this quote, picking the right price is extremely important, a very important part of a firm's marketing strategy. If the price is too high, firms will lose potential sales. If it's too low, it will lose potential revenue. Thus the key is to find the price that's just right. The problem is that what is just right for you, maybe too high or too low for me. Thus by allowing price to vary according to the value that a product provides to various potential customers makes a lot of sense. Firms try to do this in a number of ways. For example, in the US and other countries, movie theaters offer discounts to demographic groups that typically have lower incomes such as students and senior citizens. This approach is called price segmentation as commonly used pricing strategy. The setting of these different price segments has been traditionally determined by firms rather than customers. For example, my local grocery store offers discounts on donuts that are two days old. I can't walk into the store and say that I want to pay this discounted price for new freshly baked donuts. However in recent years, a few firms have experimented with the idea of allowing the customers to segment themselves by letting them name their own price. This rather unorthodox strategy is quickly getting popularity and is being called Pay What You Want or PWYW for short. Although this pricing strategy has been employed in some physical stores, it is ideally suited to the digital marketing environment because of the increased ability of firms to control the distribution of their product and to track customer payment activity on a digital platform. In addition, since the marginal cost of a digital good is close to zero, this strategy is relatively low risk in a digital marketing environment. Let's take a look at some examples of this intriguing pricing strategy. First example is a fellow named Louis CK. This is a famous American comedian who recently sold his comedy through a website called Humble Bundle using a pay what you want strategy. This website specializes in offering digital products such as music, books, and videos using a Pay What You Want approach. It also donates some of these proceeds to charity. The second example is a website called Headsets.com. In recent years, this online headset retailer has experimented with a pay what you want strategy as a means of rewarding customer loyalty. Nearly all these customers actually paid the suggested price, or close to it which is interesting. According to its CEO Mike Faith, this strategy has resulted in a 30 percent increase in its return on investment. The third example is from Radiohead. In 2007, the British rock band Radiohead offered its new album In/Rainbows for sale using a pay what you want strategy. This approach received worldwide attention and was the launching pad for the Pay What You Want movement. We'll discuss this example in more detail during our case study for this module. Now that you have these examples, let's take a look at the definition of Pay What You Want. This strategy lets consumers decide how much they want to pay for a particular product. Although a firm may suggest a price, its customers are free to pay less or even more than this price. Indeed, several pay what you want offerings let customers pay even nothing.
