Pay What You Want Pricing Scheme

Topics: Cost, Coffee, Variable cost Pages: 5 (1388 words) Published: March 19, 2014
‘No Price Is Right’

Rebecca Liyun Wiener
A0076432H
MKT4413 – Idea Assignment

I vaguely remember in my Junior College years (~2009), I came across a café in Dempsey Hill that utilized a very interesting pricing practice: a Pay-What-You-Want pricing scheme. In other words, they had no price for their coffee, but the restaurant charged for their food. Being a typical Singaporean, I was very skeptical over this practice and various thoughts flooded through my mind: ‘this would never work!’ ‘Is the coffee poisonous?’ ‘Free ah? Really? What if no one pays!’ My brain simply could not fathom how such a mechanism would work, and I sincerely believed that I could not possibly be the only one. I proceeded to make bets with myself that this idea would surely drown soon. Nevertheless, despite these many negative thoughts, I was drawn to the peculiar idea. Thus I sat down for a meal and yes, you guessed it, a cup of coffee.

1st reaction: ‘Nobody will pay for it!!!!’

We live in an age where the Internet provides free music, films and books at the tip of your fingers. DeNardis questions ‘what motivates people to pay for anything if there is a way to get it for free?’1 Could we turn into a society where the habit of practicing honesty fades into oblivion? The renowned behavioural economist, Dan Ariely, dismisses the notion of a pay-what-you-want system arguing that such practices will be the very cause to exacerbate cheating. 2However, I beg to differ.

One unique example would be from 2009 where the attorney general’s office in Indonesia opened thousands of honesty cafes as part of a national campaign against corruption. In a country where practices in both business and politics are not as transparent, it was hoped that such honesty cafes inculcate the right behaviour in the young and make honesty a conscious effort for the older. Though no results were released, but it was said that only 5% of the cafes had run into complications. 3

Furthermore, there are many examples of restaurants and cafes that have thrived on the pay-what-you-want scheme such as Panera Bread, Just Around the Corner and the Dock Café.4 However, one example that is closer to home is that from my own personal experience upon travelling in Europe where several public transport systems run based on an honour system, there must be a reason why the government has yet to have gantries for entry and I am betting that the overall is positive.

In particular, Singapore is a nation where crime rates are one of the lowest in the world with reports that it has reached its lowest in 30 years having fallen by 4.3% last year.5 We are a country of rules, regulations and an inculcated sense of pride, also known as face-saving. The location – Dempsey Hill – is an area that attracts mostly foreign expatriates and middle to upper class Singaporeans who have higher disposable income, higher willingness to pay and can be assumed to follow face-saving norms. Thus, I do not believe that the customers that frequent the particular restaurant will not pay for it.

2ND reaction: “They will just pay enough to cover costs!”

As the picture to the right illustrates, the actual variable cost associated with a typical cup of coffee is approximately 1.90 pounds = 4.03 SGD. I will take this as the highest cost possible as in actual fact a café would not have to pay for cups/stirrers because coffee would be served in cups and mugs, which are fixed costs. Furthermore, the tax and staff payment in the UK is much higher than that in Singapore. Therefore, it is conservative to label the variable cost at 4.03 SGD.

Next, I performed a short survey amongst my friends who are both male and female aged 22-26, and asked “how much would you pay for a cup of coffee at a nice café in Singapore? Please do not think so much and provide your top of mind.” I understand the limitations of such a survey (the sample size (N) is too small, respondents are not representative of the middle...
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