Let’s pretend I’m selling a product through this blog. It could be an e-book about using psychology to change the world (if you enjoy the blog content) or something gaudier and more exciting (if you don’t). Which of the following choices do you think would be most likely to actually earn me back my virtual printing costs?
a) a cover price of $10 (or €7 or £6 or ¥8)
b) a cover price of $10 where half goes to charity
c) pay whatever you like
d) pay whatever you like and half goes to charity
It’s not obvious, is it? Would the extra buyers attracted by the charity opportunity make up for giving up half the profits? Would a lower number of buyers be cancelled out by a higher cover price? People write algebra problems like this (when they’re not figuring out how soon train A going at 65 kph will hit train B going at 85 kph).
Ayelet Gneezy and her colleagues decided to find out in a real-world study at an amusement park. Customers who rode one of the park’s most popular roller coasters were photographed on the ride and offered their printed photograph when they exited. Over the eight days of the study, more than 113,000 people rode and were offered a photo – but for different prices.
For two randomly chosen days, the price was $12.95, which is what the park usually charged. For another two days it was $12.95 but riders were informed that half the price went to a nationally recognized patient support foundation. On another two days, the price was whatever riders chose to pay. During the remaining two days, they could pay whatever they chose but they were told that half would go to the patient foundation.
In third place was the “pay what you like” option. This choice attracted the most buyers – one in 12 riders decided to get a photo – but so many paid nothing or very low sums that the average price per photo was only 92 cents. The profit for the park was almost nothing.
Tied for second place were the two $12.95 options. Only one rider in 200 wanted a photo at its regular price, and adding “half goes to charity” made hardly any difference. The total profit was about the same on those days, although the park only got half of it on the charity days.
The far-and-away, romping-to-the-finish-line winner was “pay what you like and half goes to charity”. This option attracted only half as many buyers as the plain “pay what you like” choice, but those who did buy a photo paid much more for it – an average of $5.33. Even after giving half the price to charity, the amusement park made more money with this option than with any other. In fact, Gneezy’s group calculated that the park could make an extra $600,000 per year by switching to this strategy – and of course, the charity would also make at least that much.
The researchers described this tactic as “shared social responsibility” and theorized that it might work because it reduces consumers’ suspicion of a business’ motives and increases their sense of personal choice. The charity component reduced the number of people willing to simply grab a free photo, perhaps because doing so at the charity’s expense made them uncomfortable.
I’ve written before about the possibility that purchasing a charity-related product reduces an individual’s later donations to that charity, so that’s something to keep in mind. But this also has terrific potential for doing good.
Myself, I plan to use exactly this pricing strategy when I offer that e-book next year. Watch this space!