In the fast-paced world of retail, marketers are constantly seeking innovative strategies to capture consumer attention and drive sales. Time scarcity promotions are powerful tools that allow brands to break through the noise and create a sense of urgency that compels customers to take immediate action. These promotions typically involve offering discounts, deals, or exclusive offers that are only available for a specific period or until a certain deadline. Common examples of time scarcity promotions include flash sales, limited time offers, countdown timers, and expiring discount codes. By emphasizing the limited availability of the offer, time scarcity promotions aim to drive consumer interest, increase conversion rates, and stimulate immediate action.

Such strategies are mainstays in both brick-and-mortar and online retail contexts—but can firms expect the same level of effectiveness in both settings?

Time Scarcity Promotions Online Versus Offline

A by Jillian Hmurovic, Cait Lamberton, and Kelly Goldsmith sheds light on the efficacy of these promotions. The authors explored the effectiveness of time scarcity promotions in online retail compared to offline, while also examining the optimal implementation strategies in the online context.

Contrary to previous findings in brick-and-mortar settings, this research suggests that the positive effects of time scarcity promotions may not be as robust in online settings. The findings show that online time scarcity promotions tend to be less effective than promotions without time limits, largely due to the activation of increased persuasion knowledge by consumers (i.e., consumers online are more aware that the retailer is trying to persuade them with a promotion). Furthermore, the study reveals that online time scarcity promotions can be more effective when the justification for the time limit is outside of the retailer’s control, such as when the promotion involves a consumer’s birthday, a holiday, or a change of season.

Online time scarcity promotions can be more effective when the justification for the time limit is outside of the retailer’s control, such as when the promotion involves a consumer’s birthday, a holiday, or a change of season.

However, the authors caution against assuming that online time scarcity promotions will consistently outperform identical online control promotions. They emphasize the need for careful managerial implementation and further research to better understand the optimal translation of offline tactics to the online retail environment. In a time when marketers face tightening budgets and high demands, understanding the limits of offline promotions in the online world may be critical for retail success.

To further explore the dynamics involved in time scarcity promotions, we interviewed the authors for some behind-the-scenes insights into the research process and findings:

Q: What phenomena inspired you to study online time scarcity promotions? How did you develop the idea for this research paper? 

A: A key inspiration for this paper came from observing the disconnect between how time scarcity promotions are implemented in the contemporary marketplace and how time scarcity promotions have been studied in the marketing literature. Time scarcity promotions are widely used online, yet much of the empirical work in this area predates the proliferation of e-commerce and examines time scarcity promotions intended for offline retail contexts (e.g., newspaper inserts, physical coupons, supermarket flyers, and print advertisements). To date, limited marketing literature has directly examined time scarcity appeals in their contemporary online forms. Because of the transformative changes the internet has had for the retail marketplace, consumer experience, and promotion implementation, this raised questions about the applicability of pre-internet, offline effects to the modern-day, online retail context. Ultimately, these questions spurred a deeper exploration of time scarcity promotions and, more generally, an interest in online retailing and communications.

Q:  What are the main implications of this research for managerial decision making?

A:  The research offers several practical insights. For one, results suggest time scarcity promotion tactics may be relatively less effective when implemented in online retail contexts compared to offline retail contexts. Furthermore, findings suggest that online time scarcity promotions can activate more persuasion knowledge than identical control promotions. Critically for marketers, however, providing justification for the online promotion’s timeframe that is exogenous to the retailer can produce positive effects. As such, marketers attempting to translate traditionally offline promotional tactics to the online environment may therefore want to consider the online context’s nature and consumers’ persuasion knowledge schema. In addition, retailers wanting to implement time scarcity promotions online may benefit from justifying the deal’s limited timeframe in terms of an event that is not under the retailer’s control. More broadly, and perhaps more importantly, the findings also suggest that retailers implementing online time scarcity promotions may want to temper their efficacy expectations. In this article, positive effects of online time scarcity promotions primarily emerged in relatively costless engagement activities, typically occurring early in the purchase funnel, such as opening an email or clicking a Facebook ad. This suggests online time scarcity promotions might be better utilized as part of marketing promotion strategies aimed at building awareness rather than immediately driving sales.

Q: Your research explores the (in)effectiveness of time scarcity marketing promotions in the online retail context. Did you identify any cognitive or emotional processes that were particularly influential in driving consumer responses to time-limited offers?

A: Our study focuses on persuasion knowledge activation, predicting that online time scarcity promotions activate more persuasion knowledge than identical control promotions. Despite its theoretical importance and practical usefulness, persuasion knowledge is not the only difference between offline and online retail contexts that might affect offline-to-online promotion translation. The article also discusses three additional critical psychological differences between online and offline retail contexts that warrant further exploration: search costs, experience of psychological distance, and arousal.

Q: Your research provides generalizable findings across various product categories. It is also important to note that consumers’ expectations and behavior toward services may differ from those toward products. Do you anticipate similar outcomes for services, and if so, why?

A:  At least two of the studies in the article involve products that possess experiential features (e.g., recording music, delivering food); however, it remains an open empirical question whether providing a retailer-exogenous justification for the time restriction associated with an online time scarcity promotion similarly enhances consumer interest for services. The paper’s predictions suggest that to the extent that the online time scarcity promotion for services similarly activates persuasion knowledge, one would anticipate a similar pattern of results to emerge. By the same logic, however, identifying distinct features of services (vs. material goods) that theory suggests could alter persuasion knowledge activation may reveal specific testable hypotheses to investigate. As noted in the paper, future work needs to continue to examine the various moderators of online time scarcity promotions and their efficacy. To that end, probing the product category represents a natural extension of such efforts.

Q: To what extent do you view positive customer reviews as a means to mitigate the negative impact of time scarcity promotions on consumers’ persuasion knowledge? Considering that time constraints can divert attention from the true value of a deal, would you perceive positive customer reviews as a potential remedy for such distractions?

A: Although specifically examining the role of customer reviews was beyond the scope of this work, this speaks to the bigger question of how marketers can increase the likelihood that online time scarcity promotions are effective. Our article suggests incorporating elements that reduce persuasion knowledge activation can, under some conditions, increase the effectiveness of online time scarcity promotions. Although the article purposely focuses on aspects of the online time scarcity promotion that marketers can directly alter (e.g., justification for the time limitation of the discount, time remaining until expiry), future research could focus on features of the online retail context over which marketers have comparatively less control (e.g., user-generated customer reviews). It’s possible that positive customer reviews may offset persuasion knowledge activation in ways that can increase the efficacy of online time scarcity promotions, for example by enhancing the online retailer’s credibility, reducing perceived purchase risk, or providing social proof, although such effects may depend on the degree to which consumers perceive positive customer reviews to be authentic and free from retailer influence. Ideally, continued systematic exploration will provide a richer and more comprehensive understanding of the various contextual, promotional, and methodological moderators of online time scarcity promotions. There remains much to be explored!

Q: Your research article offers two field studies. Can you reflect on the process of developing partnerships with companies? Are there any tips (and/or pitfalls) for researchers and practitioners on implementing these partnerships? What benefits can companies get when partnering with academics to endeavor research? Can you cite specific outputs that the companies received in this research project?

A:  Developing successful partnerships with companies can be challenging, particularly for early-career academics; however, there are multiple ways to foster such collaborations. Examples include reaching out to colleagues, professional contacts, or alumni who may have connections with companies interested in research partnerships; attending conferences or seminars that provide opportunities to initiate conversations with professionals about potential research collaborations; joining interdisciplinary research teams investigating complex issues with established industry partners; and organizing informal interviews with industry professionals about their firsthand insights and ongoing challenges related to the phenomenon of interest. 

Companies can derive several potential benefits from partnering with academics. A few include accessing specialized expertise, skills, and tools that may not be readily available within the organization; developing innovative practices and interventions supported by rigorous research methodology and analysis; conducting research experiments that would otherwise be too difficult or costly to conduct independently; and tackling specific challenges facing the company while concurrently enhancing the firm’s reputation within the industry.

Although specific outputs will depend on the nature of the collaboration, it’s common for companies engaging in research partnerships to receive outputs such as research reports and briefs, data analysis code and results, detailed recommendations, and insights, as well as presentations showcasing findings and impact.

Read the full article:

Jillian Hmurovic, Cait Lamberton, and Kelly Goldsmith (2023), “,” Journal of Marketing Research, 60 (2), 299–328. doi:.

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Across the globe, over one billion individuals—including 650 million adults, 340 million teenagers, and 39 million children—are considered obese (). This number is still rising, and with dangerous expected outcomes. According to the World Health Organization, by 2025, 167 million adults and children will have worsening health due to being overweight or obese. Consequently, regulatory bodies around the world are working to combat this issue. Professors Max J. Pachali, Marco J.W. Kotschedoff, Arjen van Lin, Bart J. Bronnenberg, and Erica van Herpen study such a regulation in Chile to develop a model that sheds light on the impact of warning labels on cereal prices. Their reveals a fascinating trend: Labeled cereals experience price hikes, while unlabeled products either witness a decrease in price or only marginal price increases. This intriguing finding presents compelling evidence that price-sensitive consumers remain within the unlabeled product category.

In 2016, Chile took a pioneering step by becoming the first country to enforce a mandatory, nationwide policy requiring nutrient warning labels on the front of product packaging (). Focusing on this crucial issue, the researchers delved deep into the multifaceted nature of the problem, with a particular emphasis on its impact on lower-income groups. Their study unveils the intricate dynamics between nutrition, economics, and consumer behavior, shedding light on a fascinating interplay. By peeling back the layers of this complex phenomenon, the article uncovers valuable insights that prove indispensable to both academic scholars and industry practitioners seeking a comprehensive understanding of how warning labels might influence pricing dynamics

Prices Align with Policymakers’ Intentions

The authors’ findings reveal an unexpected outcome in response to the warning label regulation: a price equilibrium that aligns with the objectives of policymakers. Notably, cereals deemed less healthy and labeled as such experience a significant loss in market share, whereas their healthier, unlabeled counterparts witness a substantial gain. In other words, firms increase the prices of unhealthier (labeled) products and drop or increase less the prices of healthier (unlabeled) products—a striking and perhaps unexpected pattern that is driven by the way different consumers respond to the warning labels.

Firms increase the prices of unhealthier (labeled) products and drop or increase less the prices of healthier (unlabeled) products—a striking and perhaps unexpected pattern that is driven by the way different consumers respond to the warning labels.

The adjustment of prices plays a pivotal role in this equilibrium. From a policymaker’s perspective, one of the most notable discoveries is the substantial impact of price changes on products with calorie and sugar labels. Furthermore, the study highlights that equilibrium price adjustments result in significant shifts in demand for unlabeled cereals. The research demonstrates that a mere .44% increase in market share for unlabeled cereals translates to a remarkable 12% of their total market share within the new equilibrium established post-regulation.

We had the privilege of conducting an insightful interview with the authors, who generously shared captivating perspectives on their research for this article. Brace for an extraordinary journey that unveils the covert strategies of the market, where labeled cereals encounter the daunting challenge of skyrocketing prices:

Q: Most research on nutrition labels in marketing has focused on changes in consumer behavior. What prompted you to study the effect of a warning label mandate on both consumer and manufacturer behavior?

A: The goal of the warning label regulation in Chile was to stimulate healthier product choices. In particular, policymakers targeted consumers with lower socioeconomic standards who often have less knowledge about a healthy diet and often have limited access to healthcare. However, the intended goal of the regulation may backfire if manufacturers responded by, for example, lowering the prices of labeled (unhealthier) products to compensate for the negative utility shock triggered by the warning label mandate. In this case, consumers with lower income (often more price sensitive) would face additional incentives to purchase unhealthier products. However, in our case, we find that the effect of the regulation is even amplified as more price-sensitive households updated more negatively on labeled products (referred to as a “composition effect” in the manuscript). Because of this, labeled cereals face a larger portion of less price-sensitive consumers than before, rationalizing raised prices after regulation. These price responses amplify the effect of the regulation as it becomes even more unattractive for low-income consumers to purchase unhealthy cereals. As the direction of price adjustments is usually unclear a priori, it is thus important to account for the supply-side’s adjustments of prices for judging the effectiveness of a public policy intervention, such as the warning label introduction in Chile.

Q: The U.S. is one of the countries with an obesity epidemic. Considering the cultural and socioeconomic differences between countries like the United States and Chile, do you think similar behavior would be encountered in the U.S.?

A: Our main finding that firms increased prices of unhealthier and labeled cereal products was derived using a structural model of optimal consumer and retailer behavior. Our findings thus provide guidance for predicting the likely direction of price adjustments in other markets if policymakers can, for example, anticipate which consumers will be most responsive to the introduction of warning labels: price sensitive (generally lower socioeconomic groups with lower income) versus less price sensitive (higher socioeconomic groups with higher income). To gain ex-ante knowledge of whether this might also be the case in a different market, policymakers could set up a choice experiment or conjoint analysis in their target population to investigate the likely price response. Thus, our results are generalizable beyond the Chilean case and may apply to countries like the United States as well.

Q: What do you think about consumer and manufacturer behavior across product categories? Cereal is a staple product, typically consumed daily, which makes the item (and consequently, the warning label) more salient. Do you think we would see similar effects across categories such as fast food, which people might consume outside the home and less frequently but with equally harmful consequences?

A: As other research shows (), consumers may not respond as strongly to introducing warning labels in categories where they expect unhealthy products, such as chocolates and cookies. The reason is that labels only influence purchase behavior if consumers’ beliefs about the healthiness of products were biased before the label introduction. Thus, our findings may not be generalizable to categories in which consumers are already aware of the unhealthiness of products regarding sugar, calories, fat, or salt. We cannot therefore say with certainty that our findings would also apply to the fast food category. However, in other categories where the healthfulness of products is less clear for most consumers a priori, such as bread, we would expect similar price responses.

Q: What are your thoughts on products that were reformulated to avoid the warning labels? What characteristics would you say prompted certain firms to make the change while others did not?

A: Reformulations are an important aspect for judging the effect of the warning label regulation as well (see, e.g., ). We expect products that reformulated their recipe below the critical thresholds to avoid warning labels to benefit after regulation, similar to what we indicate for unlabeled products in the manuscript. However, most prominent product manufacturers with high market shares did not reformulate their product recipes in the cereal category for one-and-a-half years after the warning label regulation. The reason is that manufacturers are more hesitant to change the recipe of successful products in the marketplace. For most manufacturers, the price is the most flexible marketing-mix variable to adjust after a warning label introduction.

Q: Chile was the first country to implement nutritional warning labels. Was this a reason to choose Chile to study the effect of nutritional warning labels on price? In 2020, Mexico enacted a law requiring warning labels on the front of food packages that contain “excess” sugar, calories, sodium, or saturated fat. How do you think the findings of this study apply in Mexico?

A: Chile was one of the first countries that adopted a warning label regulation. We chose Chile because a mandatory regulation creates a clean setting to evaluate the effect of warning label introductions on consumer behavior and retailers’ price setting. As mentioned in our response to previous questions, the consumer composition effect may apply in Mexico as well, depending on which consumers will be most responsive to the introduction of warning labels—price sensitive (generally lower socioeconomic groups with lower income) versus less price sensitive (higher socioeconomic groups with higher income). Please also consider our previous answer on how policymakers can ex-ante test whether this is likely the case using, for example, conjoint analysis.

Q: Since price is one of the most flexible marketing mix elements to adjust, how do you think promotional offers will influence the relationship between nutritional warnings and price for both price-sensitive and non-price-sensitive consumers?

A: As suggested by our results, unlabeled products face a larger segment of more price-sensitive consumers than before regulation due to the consumer composition effect triggered by the warning label introduction. This suggests that these price-sensitive consumers that also pay attention to the healthfulness of their consumption would be very responsive to temporary price promotions of unlabeled products. On the other hand, labeled cereal products that face a more price-insensitive consumer clientele after regulation may have fewer incentives to put their products on price promotions. This would be a desirable side-effect of our results. However, we agree that this is a very interesting aspect that should be analyzed in future research.

Read the full article:

Max J. Pachali, Marco J.W. Kotschedoff, Arjen Van Lin, Bart J. Bronnenberg, and Erica Van Herpen (2022), “” Journal of Marketing Research, 60 (1), 92–109. doi:

References:

AlĂ©-Chilet, Jorge and Sarah Moshary (2022), “Beyond Consumer Switching: Supply Responses to Food Packaging and Advertising Regulations,” Marketing Science, 41 (2), 243–70.

Araya, Sebastián, AndrĂ©s Elberg, Carlos Noton, and Daniel Schwartz (2022), “Identifying Food Labeling Effects on Consumer Behavior,” Marketing Science, 41 (5), 982–1003.

Taillie, Lindsey Smith, Maxime Bercholz, Barry Popkin, Marcela Reyes, M. Arantxa Colchero, and Camila Corvalán (2021), “Changes in Food Purchases after the Chilean Policies on Food Labelling, Marketing, and Sales in Schools: A Before and After Study,” The Lancet Planetary Health, 5 (8).

World Health Organization, “World Obesity Day 2022 – Accelerating Action To Stop Obesity,” World Health Organization, .

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At the grocery store, a customer may be willing to pay $18 for a bottle of Riesling when comparing it to a $15 bottle of Chardonnay. However, if that customer learns that the Chardonnay is on sale for $12, they may not be willing to pay $18 for the Riesling. Another customer may only be willing to pay $14 for the Riesling after comparing it to the alternative of not buying anything at all (i.e., keeping their money).

Whether selling consumer packaged goods, durable goods, or services, marketers have always confronted a critical question: What will a customer pay for the market offering? If a marketer charges too little relative to what customers are willing to pay, they risk missing out on profits that could otherwise have been earned. And if a marketer charges too much, an otherwise excellent product or service may fail to generate sufficient demand in the market. Because understanding how much customers are willing to pay for a product or service carries immense practical implications, marketers have sought measurement and analytical tools to capture customers’ willingness to pay (WTP)—a metric that helps them understand the maximum price they can charge for a product or service.

In a , we reveal limitations in existing methods of measuring WTP and caution that these methods can provide vague and/or inaccurate results. For example, the open-ended question often asked in surveys or focus groups (“How much are you willing to pay for X?”) makes no mention, nor offers the respondent any guidance, as to the relevant comparisons or the relevant context. Another popular method, choice-based conjoint analysis, presents possible comparisons but does not capture what the most relevant comparison is for a respondent.

Comparative Method of Valuation

We introduce a new methodology—Comparative Method of Valuation (CMV)—that integrates comparison and/or context and produces greater accuracy and insight. CMV can be thought of as a generalized and enhanced version of the classic methodology.

Context can affect WTP by changing how a customer values a product relative to a comparison or by changing what the relevant comparison is altogether. For example, WTP for a new car model may vary depending on whether the customer is upgrading to this model (comparison: old model), switching from a different model (comparison: other model), or buying a car for the first time (comparison: no car). This means that a valid WTP methodology must be able to not only capture a comparison but also different potential comparisons. However, existing methods often taken an agnostic stance on this matter.

While most researchers would likely agree that WTP can vary with the situation, our study reveals how situational factors can affect WTP via two distinct comparative mechanisms.

• The situation can directly influence a customer’s valuation relative to a given comparative option. For example, consider a beachside vendor selling two brands of beer—Corona and Miller Lite—and some nonalcoholic beverages. The customer wants an alcoholic drink and their preferred option among the alternatives is Miller Lite (priced at $5). However, if the customer has an enjoyment goal, they may value Corona more than Miller Lite, and their WTP for Corona would be more than $5. But if they have a diet goal, they may value Corona less than Miller Lite and their WTP for Corona would be less than $5.
• The situation can indirectly impact WTP through a change in the comparative option. Taking the previous example, if the customer moves from the beach to the hotel bar, Miller Lite is priced at $8 a bottle but their preferred option may now be a $20 cocktail. In this case, the customer’s WTP for Corona would be determined in comparison to the cocktail instead of Miller Lite. Thus, the situation affects WTP via the indirect pathway; that is, through a change in the comparative option.

Without capturing the specific comparison relevant in a given situation, existing methods inherently contain substantial ambiguity as to what is being measured. Moreover, existing methods cannot delineate the two distinct pathways through which a situational factor may affect WTP. By contrast, CMV offers more precise measurement of WTP and is able to capture the direct and indirect mechanisms through which situational factors affect WTP.

Our procedure allows marketers to move from attempting to measure WTP without comparisons and context to measuring WTP in a manner that integrates these critical factors. As a result, we offer guidance as to how marketers can improve their measurement of WTP and obtain more insight about customers’ WTP. Moreover, our studies also demonstrate how to apply CMV to solve common managerial problems. We show how CMV can be applied to price a premium version of a product relative to a basic version and how to use CMV to evaluate whether more or less of an attribute (e.g., warranty) should be offered.

From: Sharlene He, Eric T. Anderson, and Derek D. Rucker, “,” Journal of Marketing.

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Does competition make firms more honest? Over 50 years ago, the Federal Trade Commission (FTC) assumed the answer was “yes” when it stopped enforcing its deceptive pricing regulations. Since that time, competition has increased significantly, particularly in the crowded U.S. retail trade. However, contrary to the FTC’s hypothesis, deceptive pricing has proliferated during the same period.

There are thousands of articles, reports, and websites warning about deceptive pricing, showing evidence of it, or reporting news about multimillion dollar lawsuits. Consumers’ Checkbook and concluded that “most stores’ sale prices…are bogus discounts” because “at many retailers the ‘regular price’ or ‘list price’ listed is seldom, if ever, what customers actually pay.”

In a , we develop a descriptive model to explain why competition is more likely to encourage rather than discourage deception. We then propose a potential solution that would apply to firms using reference prices to promote a sale price for an item. That solution would be to require those firms to add to their price labeling the price at which the item was most frequently offered for sale in the previous business period—what we label its “true normal price.”

Our study starts by critically evaluating two assumptions that underlie the FTC’s “competition discourages deception” theory:

1. The first assumption is that inflated reference prices are largely ignored by consumers, who focus primarily on evaluating the actual selling price in a promoted deal. As such, price competition pushes selling prices lower and renders reference prices harmless.
   
   However, empirical research gives a different picture. A robust finding in the marketing literature is that the addition of a high regular price stated in a price promotion increases consumer willingness to pay. The research illustrates how much consumers value “getting a good deal,” leading to greater sales for the retailer when comparative prices are used.
   
   
2. The FTC’s second assumption is that competition drives out economic incentives to cheat; that is, more competition creates an economic incentive for firms to be truthful. Any temptation to stray will be constrained by natural market forces like consumer vigilance.
   
   However, a number of recent economic models show the opposite; that is, the greater the competition, the more likely the firm will offer “noisy” information in an attempt to shield itself from this competition and, in the process, increase its profits.

Three recent empirical examples support our overall model development, each of which show:

• Consistent seller use of high reference prices at which products are never or rarely sold
• Consumer choice being altered by these often fictitious reference prices
• Firms experiencing financial gains from posting inflated reference prices

All this leads us to conclude that there is a substantial negative impact of fictitious reference pricing on consumer welfare.

The Value of Firms Telling the Truth

After evaluating several regulatory options, we conclude the best way to create real change in firms’ behavior is to require them to tell the truth. The proposal is to require firms to disclose an item’s true normal price (TNP) whenever comparative prices are used in price communications.

To illustrate, let’s say that a furniture retailer puts a sofa on sale as follows:

Regular Price $1399

Sale Price $599

Let us further assume, as is common, that in the past three months the retailer offered the sofa for sale at a price of $1399 for just two weeks. For the other 10 weeks, the sofa was offered at $599. So, $599 is actually the price that is usually charged for the product.

Our proposal is that this “most regular” price be posted alongside the other two prices as a legally required disclosure when a firm wishes to have a comparative price promotion.

That is:

Regular Price $1399

Sale Price $599

True Normal Price $599*

*Legal Disclosure: True Normal Price = the price most often charged by this retailer in the past three months.

The leads to a question: Does providing TNP moderate the effect of a promoted Advertised Regular Price (ARP)? We examine this question through a controlled experiment with 900 participants, where the participants’ choices in the study determined their total expected compensation. We find that the presence of an ARP with a sale price significantly raises the chance that a consumer will buy. However, adding TNP information eliminates the effect of ARP.

Our results support the premise that TNP provision would reduce or eliminate firms’ incentives to give anything but honest information to consumers in their price promotions, and it would have an impact on average market prices, promotions, frequencies, and firm profits. We hope this study leads to a lively debate on the topic.

From: Richard Staelin, Joel E. Urbany, and Donald Ngwe, “,” Journal of Marketing.

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Pay-what-you-want is a pricing mechanism where consumers can decide how much to pay for a product or service. Variations of this idea have been employed widely over the years. Public museums, such as New York’s Metropolitan Museum of Art, have long allowed nominally free entry but with requests for donations at entry and/or exit. Panera Bread in the U.S. and the have both carried out pay-what-you-want arrangements in highly publicized campaigns. Public (public.com) offers brokerage services without a fixed commission rate and earns revenue from optional tipping. The Guardian newspaper website and Wikipedia have long upheld successful pay-what-you-want models: The Guardian received contributions from more than 1 million readers between 2016 and 2018, and the Wikimedia Foundation raised more than US$120 million in contributions in the fiscal year ending June 30, 2020.

Pay-what-you-want involves the consumer voluntarily paying the seller any (or no) amount of money in return for being unconditionally offered a product or service: an example of a social exchange. With the proliferation of business models based on social exchanges, where businesses refrain from charging fixed prices that might turn away customers who cannot afford them, the pay-what-you-want mechanism has become more prominent in recent years. However, the success of the pricing mechanism is not guaranteed. For example, Panera’s use of pay-what-you-want did not attain its desired results and was discontinued. Companies implementing pay-what-you-want pricing should carefully align factors that could psychologically affect payments.

In a , we study whether consumers’ payments differ depending on when they are asked to make their payment decision—before or after receiving the unconditionally offered product—and, if a difference exists, why it occurs and under what conditions. We propose that people pay different amounts depending on the timing of their payment decision, even when there is minimal change in uncertainty regarding the value of the product at different timings.

Timing Versus Value

Our study suggests that people pay more after receiving the offering when product value is high. Receiving the offering first makes the social exchange aspect of the transaction salient, which leads to buyers experiencing higher felt obligation toward sellers. However, the effect is mitigated when product value is low—when the social exchange is perceived as less substantive. In this case, the salience of the social exchange nature of the transaction after receiving the low-value offering highlights the fact that the exchange is not substantive, which leads to a lower felt obligation and lower payment.

We conducted a laboratory experiment in a large university in the United Kingdom where participants could pay any amount for an Amazon gift card with a specific value, as well as a field experiment at a restaurant in Nepal. Results from both experiments lent support to our predictions that consumers/participants pay more after receiving the offer versus before. The field experiment also provided preliminary evidence for the moderating role of product value; i.e., the effect of increased payment after receiving the product/service only holds true for items of higher value. We then tested our hypotheses with a large online study and found a reversal of the effect for low product value. In a final online study, this time in a charitable donation context, we again demonstrated the predicted payment decision timing effect for high product value as well as a mitigation of the effect for low product value.

Our findings offer two key takeaways for businesses that offer a voluntary payment element as well as for nonprofits, social enterprises, and charities where donations in exchange for a good or service are common.

Lessons for Chief Sales Officers

• If the pay-what-you-want product is of high value, the seller should solicit pay-what-you-want payment after the product has been delivered to the consumer.

• If the product is of sufficiently low value, the seller should solicit pay-what-you-want payment before the product has been delivered to the consumer.

For example, a community theater could employ a pay-what-you-want model when staging performances in an auditorium. The theater might opt to solicit payments before the performances at the entrance. However, if the community attendees tend to value the theater highly, it might be preferable to solicit payments from attendees after the performance.

Similarly, some eateries request that a payment be made before customers receive their order, and some restaurants request an upfront tip for large groups. Our findings suggest that if consumers perceive that the product is of high value (versus low value), it is more desirable to request a decision on a payment or a tip after (versus before) product delivery.

.

From: Raghabendra P. KC, Vincent Mak, and Elie Ofek, ,” Journal of Marketing.

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