There are all sorts of after-Christmas sales to be found this week, but the one happening at Everlane has to be among the most unusual: The online store is inviting its shoppers to choose the price they want to pay. The popular Nubuck Street Shoe, for example, normally goes for $140, but should you purchase it this week, you will choose between one of three price points: $126, $91, or $76. Hover over each figure and you get an explanation for it — the highest price means $50 extra profit to Everlane, whereas the lowest only covers production and shipping.
Everlane is the latest, but by no means the first, company to try an experiment like this one. Panera Bread has tried it a few times, first in 2010 and then in 2013, and the most famous example may be Radiohead’s 2008 release of In Rainbows. Really, it’s not so surprising that Everlane would take on a pay-what-you-want promotion, as their entire ethos is about “radical transparency,” and it is pretty satisfying to know the reason why something costs what it does. And yet my own reaction to the sale surprised me. I have had my eye on the Nubuck Street Shoe for months, and was elated to find it included in the promotion. But after some deliberating, I closed my browser without making the purchase, which in retrospect feels like an odd reaction. Here are the shoes I’ve long wanted, and I can choose to pay nearly half the original price. Why didn’t I buy them?
It’s counterintuitive, but it’s also pretty much exactly in line with the current social-psychology research on pay-what-you-want pricing. Here’s the gist: People feel bad paying less than what they feel the item is “worth,” but at the same time they feel conflicted about choosing to pay more than they have to. And so the promotion, according to the research, often ends up backfiring, and people end up buying nothing at all.
Take a field experiment led by Ayelet Gneezy at the University of California, San Diego, which is recounted in a 2012 edition of Proceedings of the National Academy of Sciences. The setting was the dock of a tour boat, where they snap a photo of you and your group before you board and offer you the opportunity to buy it once you’ve disembarked. For the experiment, some people were told the photos were on sale, reduced from $15 to $5; others were given a pay-what-you-want option.
And here is, weirdly, what happened: The tourists who were told the price was $5 bought more photos than those who were told they could name their own price. The latter group could fork over a dollar, a quarter, or a dime — or nothing at all! — and walk away with a memory of their day at sea, but they didn’t; instead, they were more likely to simply walk away.
Okay, but you could argue that this doesn’t exactly apply to a sale at an online shop. Maybe the cruise-ship passengers didn’t want to appear cheap in front of their group and the cruise-ship employees. A second experiment covered in that same PNAS paper investigates that idea, of whether anonymous purchases make a difference with pay-what-you-want pricing. This one took place at a restaurant in Vienna, where food is served in a buffet style and customers are invited to pay whatever they felt their meal was worth. The researchers had some customers pay anonymously, by simply handing over an envelope and walking out the door; others interacted with an actual person when they made their payment.
If the pay-what-you-want pricing had indeed backfired in the cruise-boat experiment due to social pressure — that is, not wanting to appear cheap in front of other people — then you’d expect the diners in the anonymous condition to pay less than those in the non-anonymous condition. But that’s exactly the opposite of what happened. Instead, those who paid anonymously consistently paid more than those who paid in person. Not much more, granted — only about 75 cents on average — but still, this is the opposite of what you’d expect.
Taken together, these experiments suggest that people’s self-worth greatly influences their behavior when making a pay-what-you-want purchasing decision, the researchers argue. The cruise-boat experiment, for example, demonstrated that “when people believe that the ‘right’ price is high, they simply prefer to forego the opportunity to buy the product … rather than to appear cheap by paying too little,” Gneezy and her colleagues write in their paper. “When someone is willing to pay little but cares about maintaining a positive self-image, the best option is to not buy at all.” Back to the Everlane example: I’d really like to pay just $79 for the shoes, but knowing that I’d only be covering their overhead makes me feel bad, so I bought nothing. As the study authors phrase it, “better to lose [money] than a positive self-image.”
Likewise, the restaurant experiment went one step further, suggesting that people are less concerned about how other people view them and more concerned with the way they see themselves. This finding echoes a relatively new way of thinking about embarrassment, an emotion that has long been thought of as a purely social one — as in, your concern about losing your standing in a group is what causes the feeling of embarrassment after some social misstep. But, as Aradhna Krishna of the University of Michigan recently argued, people experience private embarrassment, too; it happens when you don’t live up to the standards you’ve set for yourself.
If a pay-what-you-want pricing strategy sometimes ends up backfiring from an economic standpoint, at least it’s a fascinating subject to explore from a psychological perspective. Something the authors of the PNAS paper don’t mention is the paradox-of-choice aspect — maybe another reason people walk away when given the choice of what to pay because the burden of decision-making is something they’d just rather not deal with. “Part of the problem is if you’re a customer and what you pay is voluntary, you’re under pressure to pay a lot of money. You do it once to prove to yourself and others how charitable you are, but how many people go back 17 times? I would find it a burden — my reputation is on the line,” George Mason University economist Tyler Cowen said in an interview in 2010. “What if I only pay $ 27 instead of $ 34? What does my date think? What does my wife think? You end up wanting to feel liberated and just paying a listed cash price.”