Understanding the pay what you want business model
The pay what you want business model is a business model where you offer your product ‘for free’ with the expectation that customers pay what they think is appropriate (or can afford). This may involve giving your product away for free, with a proportion of users then contributing back.
In some versions of the model the product is largely consumed freely (possibly with a small ‘contribute to the creator’ box that suggests a contribution). In other cases, there is a strong push to contribute – clear expectations given that this is not ‘free’, but rather you decide how much to contribute, possibly with a suggested contribution amount.
Key dimensions impacting the success of the pay what you want business model
Whether or not the ‘pay what you want’ business model makes sense depends on several factors – the proportion of customers that do pay, the average contribution amount, and the cost of providing each product. While low cost digital items may make financial sense with a very low contribution proportion, other settings require a much larger proportion of users to pay to re-coup the costs involved (and to subsidise the proportion of customers that opt not to make a contribution).
The proportion of customers that pay
The first clear dimension that can influence the success of the pay what you want business model is how many customers you actually convince to make a payment. In some settings this may be very low – digital downloads, for example of web-browser extensions, for example, may suggest a contribution to the developer, but with the vast majority of users opting to use the extension for free.
The average contribution
The next dimension that will influence the success of the pay what you want business model is the average contribution. Naturally, you can multiple up the proportion of customers that pay by the average contribution to get the overall revenue made.
In some settings, you may have a small number of users that make disproportionally large contributions. For example, museums and art galleries that use a ‘pay what you want’ approach may benefit from a small number of benefactors whose individual contributions offset the majority of users that do not pay.
The cost of providing each product
The final dimension to consider if considering the ‘pay what you want’ business model is the actual cost of providing the product or service. The business model tends to work well in situations where either almost everyone pays with strong expectations of contribution, or when the costs of providing each product is essentially zero.
With digital downloads, for example, it only takes a small proportion of users to pay n order to recoup the costs associated with providing the service. Indeed, for many developers providing software on a pay what you want model, the hosting costs are generally incurred by a different firm (e.g., Google Chrome Store), and thus there is no risk that the costs will exceed any money made. While there is no guarantee that the returns will be high, at least there will be no direct costs incurred (beyond the time involved).
Settings where the pay what you want business model may work
Some settings where the ‘pay what you want’ business model exists include:
- Digital downloads: for example, browser extensions and software (where donations to the developers are encouraged), photography (e.g., Pexels where donations to the photographers are encouraged).
- Museums and art galleries: With suggested contributions for attending
- ‘Free’ public events: Where donations are collected