A Business Case by Growaholic Lab
Growaholic Lab has recently consulted Locals Boardgames Cafe on how to successfully implement a "Pay What You Want" pricing strategy in their cafe. This might have been the very first time in the Middle East to implement such a strategy in the service industry, and it appeared to be a successful growth hacking strategy when implemented right.
Pay What You Want "PWYW" might seem to be a radical business model as it depends entirely on the goodwill of customers, but if you have established a trust-based relationship with your customers, the model could actually prove to be successful as was the case with Locals Boardgames Cafe
This business model is probably the ultimate representation of Value-Based Pricing, which is a strategy of setting prices primarily based on consumers' perceived value of a product or service. PWYW allows customers to choose the price themselves based on their own unique perceived value, instead of having to play the guessing game by the business to estimate the perceived value of their product in the eyes of their customers.
At Locals, customers were asked to evaluate their experience at the cafe, and pay what they want at the end of their stay. We've collected data from 208 customers, and we would like to share with you some interesting insights:
A) Revenue Per Customer
Since the PWYW model gives the freedom for customers to pay based on their own subjective perceived value of the product, we had to study not only the average revenue per customer, but also variance in the results. We've plotted the following graph based on a sample size of 208 customers.
Average= 3.83 JODs
Median= 4 JODs
Standard Deviation= 1.99
Locals Historical Average Revenue per Customer before PWYW= 4.05 JODs
1- People tend to pay integer numbers more often.
2- A payment of 5 JDs have been the most common. Having a single 5 Dinars bill may have contributed to this high number of occurrences. Also, 5 JDs cover charge system was implemented previously at locals cafe and people may have resonated with it. Nevertheless, those are just correlations, and it is not a cause-effect relationship. 5 JDs might simply be the actual perceived value of the experience at locals for lots of customers.
3- There has been roughly a 6% drop in the average revenue per customer, showing that the average perceived value of customers was close to the previous pricing at the cafe.
B) Profit Per Customer
Customers were informed that they are free to pay whatever they want for the experience. The experience includes not only the drinks, but also the games, the service, and the time spent at locals. Revenue per customer may have reflected insightful information on consumer behaviour, but profit per customer shows how healthy this business model is for the business. We plotted the following graph accordingly:
Standard Deviation= 1.83
Locals Historical Average Profit per Customer before PWYW= 3.28 JODs
1) The profit curve looked more like a normal distribution graph than the revenue curve.
2) A direct loss was recorded in only 3 cases out of 208.
3) There has been a 7% drop in the average profit per customer.
C) Word Of Mouth Impact
To grasp the marketing impact of this strategy, we had to control for other factors. Locals social media accounts have been inactive for the past month. We didn't even announce the re-opening after the lockdown. Messages and calls were answered, but without any mention of the new pricing strategy.
We looked at two metrics:
Locals' Instagram account gained a stunning 600 new followers (a 5% increase) without posting a single story or post. We can be certain that those followers came from either classical word of mouth, or from personal customers' stories which is just another digital form of word of mouth.
2- Google My Business:
The following table shows the traffic locals have received on google and google maps. The numbers show selected weekly data from the current month, the same month of the previous year, and the last month before the lockdown.
There has been a significant increase in the total number of searches and views that locals received in the month of June. Unfortunately, we cannot control for the post-lockdown factor. Nevertheless, the increase in direct searches shows that locals have been searched by name more often than any previous month. Word of mouth is going strong, but we cannot be sure of the impact of the PWYW model for this significant increase.
D) Repeat Customers:
The staff has observed that repeat customers tend to either pay the same amount or lower in their next visits. In other words, the average payment paid by the same customer decreases with time. This observation came in line with a study conducted by researchers of the Ruhr-University of Bochum that examined repeated transactions. This study also showed that the amount of the decrease declines as more transactions were made.
E) The Age Factor
The staff has also reported that some younger customers tend to pay less, or not pay at all, fully exploiting such system. Further analysis is needed to be made on the age factor. We looked at a single day data, and we realized that if we're to omit those who didn't pay anything at all from our sample size, the age factor won't have any significant impact on the averages.
The sky is the limit when it comes to business model innovation, and this is what we love doing at Growaholic Lab. We believe that any business decision should be backed by data. At the end of the day, data never lies, and our data analysis shows that Locals has been benefitting so far from trusting their customers to pay what they want. This exercise is more meaningful than just a business case. We could argue that our data analysis proved that Jordanians are good in nature, and when trusted by a business, they'll repay that trust with kindness... and money.