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“Name-your-price” approach boosts charitable donations and corporate profits

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person donating money will pay higher prices if they pay what they want, boosting profitsRecycled printer paper and fair-trade coffee might have higher prices at the register, but these feel-good products often fail to bring in big bucks for companies.

But a new, counterintuitive approach could be quite profitable for corporations—and for good causes: Let consumers pay whatever price they want and give away half of the profits to charity.

The concept has been dubbed "shared social responsibility" by a group of California-based researchers, led by Ayelet Gneezy, of the Rady School of Management at the University of California, San Diego. The team asserts that this approach can outperform traditional modes of corporate social responsibility (such as corporate giving or ecofriendly products). The results are detailed in a new study, published online July 15 in Science.

To test the idea, the researchers set up shop at a large amusement park, offering 113,047 roller coaster riders a chance to buy a fatuous photo of themselves taken during the ride.

About a quarter of the participants were offered the photo at full standard price, $12.95, but only about 0.5 percent of riders shelled out for the image. Another group had a chance to purchase the picture for the same full price with half of the proceeds going to a major patient-supported foundation. This only upped sales to about 0.6 percent, while cutting profits nearly in half (due to the charity donation).

The other two groups of participants encountered a pay-what-you-want option. One of these groups had the open-ended policy, with the company getting all of the profits. Although this generated the most photo sales—from about 8.4 percent of riders—the average payment was only $0.92, which hardly covered operating costs. Offering to give to charity half of whatever riders were willing to pay turned out to be the best option for both company and charity, with about 4.5 percent of participants buying pictures for an average price of $5.33.

Not everyone is sure, however, that this policy is best for the customer. Economist Stefano DellaVigna, of the University of California, Berkeley, was not involved in the research  and suggested that although some of these high-paying consumers might be motivated by pure generosity, many might also be succumbing to unpleasant pressure. "If consumers give because of social pressure, they will dislike being offered the photo with the charity option because this raises the social pressure to give," he noted in an essay published in the same issue of Science.

The researchers acknowledge that social pressure may well be a key to this approach’s success: "The cost of sending a bad signal looms large" when a charity donation is included in the chosen price. "So customers with a low value for the picture will prefer not to buy it over buying it either for a low price (bad signal) or for a high price (not worth it)," thus eliminating the low-payers from the buying pool and keeping the average price—as well as profit and charity donation—high. 

The findings add another dimension to the concept of the purely rational consumer. "If people only cared about money, they would pay the lowest price possible," the authors noted. "Yet in practice people frequently pay more." The addition of a cause-related donation increased the amount people paid by more than five times.

Some for-profit organizations, including cafes, restaurants and musical groups, are already using a pay-what-you-want scale, but pairing the policy with a charitable aspect helps to eliminate the free riders, DellaVigna pointed out. "When the photo company coupled pay-what-you-want with offering money to charity, these cheapskates abstained from buying rather than paying more for a photo and engaging in altruistic behavior," he wrote.

Standard corporate social responsibility approaches can raise suspicion among consumers, who might wonder about company motives—whether managers are trying to "greenwash" a company’s image, for instance. But "because the firm explicitly exposes itself to financial risk" by allowing customers to get the product for no or little money, "a customer is unlikely to infer sinister ulterior motives," Gneezy and colleagues explained.

If the amusement park’s photo-seller were to use this shared social responsibility plan full time, it could increase profits by more than $600,000 per year over the standard full-price photo offer, the researchers calculated. And the extra customer money didn’t seem to cut back on other park purchases, with souvenir purchases in the shop directly after the photo kiosk remaining stable throughout each photo purchase option.

"Our study suggests a method in which the pursuit of social good does not undermine the pursuit of profit," the researchers concluded.

Image courtesy of iStockphoto/Devonyu

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  1. 1. jtdwyer 6:29 pm 07/15/2010

    "Our study suggests a method in which the pursuit of social good does not undermine the pursuit of profit," the researchers concluded.

    Is is altruistic and socially responsible to manipulate wage earners out of their economic livelihood?

    Many poor people donate an inappropriate amount of their earnings to support scrupulous or unscrupulous religious organizations, either out of altruistic intentions and/or guilt instilled.

    One can even argue that ‘donations’ to lotteries is socially responsible if not altruistic.

    Why not combine these motivations: name your own price with half going to the purchase of lottery tickets in the purchasers name that also contribute to charities? What a great idea for everyone!

    Link to this
  2. 2. dalamode 2:51 am 05/25/2011

    A great site to donate new items to charity:

    Link to this
  3. 3. Bowl Weevils 10:21 pm 05/18/2012

    What is far more obvious than the increase in purchases due to charity is that this was a product that almost no one wanted, with a ridiculous price.

    People know that the cost of a photo with a digital camera taken by a bored teenager getting minimal pay is negligible. Charging $12.95 is price-gouging, an attempt to prey on a captive audience. This is why a tiny half a percent of potential customers bought it (and those who did were probably doing it to satisfy the demands of a child or a date, not because they wanted it).

    Charging $12.95 with half going to charity is still obvious price-gouging, and dragging a charity into your scummy racket is not going to bump up sales very much. I suspect if you asked people who didn’t buy what they thought of a charity that was willing to be associated with this scheme, they would not be very positive.

    Now with the pay what you want, we get something closer to the actual value of the service – 7% of the original price. But even here, only 8.4% bought the photo. This is a product that no one really wants. Do you think that a supermarket would keep a product on its shelves that had that kind of purchase rate?

    So add a charity. Now sales rates are down by almost 50% – people are still feeling that the park is using the charity to scam them. Nevertheless, some people still decide to donate to the charity.

    It is absurd for DellaVigna to call people “cheapskates” in this situation. This was people rightfully rejecting predatory pricing. If the $0.92 “hardly covered operating costs”, the asking price was at least 1100% more than operating costs.

    Let’s propose a different situation: the park provides transparent pricing. It states what it costs to provide the photo, it states what it thinks is a reasonable profit, and it says that any amount over the cost + profit will go to the charity. Now how many people will buy it? How much will they pay? Probably more than in any of the other scenarios.

    But let’s also remember, this is a service that almost no one wants. No one is a “cheapskate” or a “free-loader” for refusing to pay an exorbitant rate for an item they don’t want. The park could ask people whether they wanted a photo before it was taken. But they didn’t because they know it is a mechanism for increasing pressure to buy. Asking first would eliminate the supposed “free-loader” issue, since no photos would be taken of people who didn’t want them.

    Everyone knows that amusement parks take every opportunity that they can to profit from their captive audience, just like movie theaters, airlines, restaurants on toll highways, etc. People accept these prices because they have to, not because they think they are being treated fairly.

    These are not purely rational consumers. They are semi-captives with emotional children and romantic partners expecting them to buy them souvenirs of their excursion. When the children grow up and the romance has matured, there will be no more buying of photos by these people. Just new customers in the same unpleasant situation.

    Perhaps in some situations there is a genuine free-loader problem. But a price-gouging amusement park attempting to nudge you to buy something you never asked them to provide is not such a situation. The rational consumer would do everything they could to avoid buying anything at all unneeded at the park because they know that the prices are intentionally unfair.

    Link to this

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