Pay What You Want - Is it Honor Code that makes this work, or is it something else?

95%+ students participate in some form of Plagiarism during their academic careers. This statistic holds across the globe. Some even argue that this number is in excess of 99%; honor codes exist in books, in real life it's a wishful thinking.

Wait a minute, I am not saying that Name your own price, which is more commonly referred to as pay what you want (PWYW) is a bogus concept. There are several examples of companies that have successfully used this approach; certainly there is more than honor code to it. Restaurants like Little Bay and Just Around the Corner in London, Pay As You Please in Ireland, SAME Cafe in Denver, One World Everybody Eats in Salt Lake City, or Annalakshmi in Perth, or Apparel stores like Brand Alley and LastWear, and many more companies across industries are successfully practicing the PWYW model.

People give money in charity, but not any charity. People always help each other, but not anyone who needs help. When buying a house, if the seller is asking for $500K, there will be many buyers who will try their best to have the seller lower the price down to $490K, even when the fair market price of the house is $510K. But a large majority of the buyers will not pick a $100 bill lying on the floor of the house being sold during one of their visits. These same people were trying to underpay by a much larger amount that $100, but this $100 bill that comes with no strings attached does not attract their love. Why?? (of course there will be some exceptions who will quietly pocket that $100 bill and will never show up again at that house, but we are taking about the majority who will not)

Honor code and personal references are very confused subjects. I showed the following set of gymnasium membership options to my students (Weights only for $20 per month, Classes only for $40 per month, and Weights and Classes both for $40 per month), and majority of the students opted for Weights and Classes both for $40; no one opted for Classes only for $40 per month. When I showed another set ofgymnasium membership option (Weights only for $20 per month, and Weights and Classes both for $40 per month) to another set of students, taking out the Classes ($40) option out as no one opted for it in the first set, this time majority of the students opted for the Weights only for $20 per month. What happened to their personal references???

More than the honor code, it is the embarrassment of being seen as misusing an offer that makes people pay an non-unreasonable price at PWYW avenues. Let's say you go to one of these restaurants on your first date, you don't want to be seen as a mean person, so you'll try to be fair. If You know that the place gives money to charity and at the time of payment people are watching you (some of these places even announce your name when you pay a good price), you don't want to go through the embarrassment of being seen as a mean person in society. I bet, at the very same place if no one is watching, customers will pay much less amount than what they pay when they feel that someone is watching'em.

It is the fear of embarrassment that makes most people pay a fair price, honor codes were buried way back in school days!!

Retail Pricing 101

Retail pricing is one of the most challenging pricing arenas. Here one has to simultaneously deal with huge amounts of investments in inventories, limited display space, seasonality and fashion trends, macro economic factors, competition, and consumer behavior. Those retailers that have mastered pricing have a strategic advantage over competition and are better positioned to weather fluctuations in economy.

Here are three rules of thumb for excelling in retail pricing
a. Beware of the FISH!!
b. Use signpost items as ambassador
c. Drive consumer choice through price optimization

In retail, FISH is first-in-still-here. Retailers need to churn their inventories quickly to maximize their GMROI and GMROF. If there is inventory that's moving at a rate slower than originally planned, it leads to blocked capital and blocked shelf space. A proper markdown pricing strategy ensures that inventory is clearing at the right rate.

"Signpost" items are those handful of items that are bought most often and carried by most retailers, and consumers have a good price recall on these products across retailers. Consumers will typically associate a retailer's price competitiveness across products based upon the how the prices on the signpost items compare against other retailers. Retailer have an opportunity to drive a value pricing message through these signpost items. Wal-mart is one retailer that executes this strategy very well. It has identified some 25 items (Milk, Bread, etc.) and it ensures that its prices on those items are lowest in the market. This helps Wal-mart strengthen it's "Every Day Low Pricing" positioning in the minds of the consumers.

When a consumer makes a decision to purchase an item, not only that particular item's price plays a role in shaping his/her behavior, but his/her behavior is also influenced by the prices of the other similar products available at the retailer. In this situation it is very important to make sure that your low profit products are not cannibalizing the sales of high profit products. Price optimization here focuses on pricing the entire portfolio of products simultaneously, thereby taking into account the resulting relative prices and substitution effects, with the goal of maximizing the overall profits.

Retail pricing practice needs a robust system support to manage and execute the entire strategy. The systems typically focus on three key areas:
- Data management (product attributes, competition prices, landed costs, product hierarchy management, etc.)
- Analytics (trends and predictive modeling/forecasting, supply chain snapsnots, customer voice, sales history, etc.)
- Work flow / Execution (Approval processes, Price publication, etc.).

In my next blog I will expand upon the different functional elements of pricing systems.