Do name-your-price models yield revenue?

- November 23, 2012


Fresh from Thanksgiving and its associated warm fuzzies, I found myself wondering if the spirit of generosity and gratitude extend to business contexts.

For example, how do people respond when they are presented a product or service without a corresponding price? I am specifically referring to situations where the seller invites the buyer to name his own price for something of value that is being offered by the seller.

Evidence shows that when the user is asked to name his price he often quotes $0!

A popular variant of name-your-price model in internet businesses is the “Support the Product” or “Donate” button where the user is free to name a price for the software module.

A lot of independent developers and incubating startups often use the Support or Donate button when they spin up a new product or service. Since the product just launched, the developer tends to be unclear about the pricing model and often is motivated by building something that people want; monetization is a secondary problem. The argument goes “if you are building something people want then why not let people pay what they want for it?”

Well, it turns out that customer based pricing is flawed because customers have no idea about what they should pay for it.

For example when we launched Filepicker.io on April 19th on HN, we had a “support our Product” button on our website too! We weren’t sure about how we would price Filepicker.io but more importantly we wanted to validate if the product was something that people wanted. So we put up a “Support our Product” button inviting those interested to contribute whatever they wanted. Hopefully, after seeing the documentation & API calls they would see the value in the product and then pay us.

We observed something interesting. We had about 14,000 unique visitors from the launch and about 2000 odd signups for the API keys but no one clicked the Support button to pay us for the product. In subsequent days and weeks we saw a lot of our customers go-live with Filepicker.io but the metrics on payments never changed. Still $0.

It turns out that this problem with “name your price” isn’t unique to software. In 2007, the British band Radiohead released their Album ‘In Rainbows’ in a pay-what-you-want model. Around 62% of listeners chose to pay nothing for the album though they were fans of Radiohead! On a worldwide basis the average price for the album was $2.26. More details here
It is interesting to note that while name-your-own-price didn’t yield massive revenues, the buzz around the scheme helped the Radioheads see additional discs, concert tours etc.!

So moral of the story is that name-your-price schemes tend not to work if you are sharing something with a broader audience and expecting them to pay for it (or at least want to know how much it is worth). You are better off naming price and asking customers to pick a price point that works for them.

By the way, there are two exceptions to the name-your-price models that seem to be working in the marketplace currently; Kickstarter and auctions. I suspect that social proof that there are others backing a project motivates Kickstarter users to name a price (starting at $1 minimum bid). It would be interesting to see the statistics on how the funding pattern breaks down because there are different rewards for different amounts contributed (much like different benefits in economy class vs. first class on airlines).

In auctions, the pressure of being outbid forces users to bid up to the point where the fair market value of the product is established. This is true of bid-buy products like ebay and Priceline.com

As far as Filepicker.io‘s “Support the Product” button went, we yanked it after we found it didn’t help us learn how much customers were willing to pay. We later on changed the pricing model to explicitly present a pricing plan and tweaked it around a bit to build alignment with the marketplace. You can read about our learning from pricing changes here.

-Anand Dass

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