Humble Bundle and the concept of Pay What You Want

Launched in May 2010, Humble Bundle is a semi-regular flash sale (each unique bundle is available for two weeks) of digital software (mostly from independent developers) bundles which are sold using a ‘pay what you want’ (PWYW) scheme.

The pay-what-you-want pricing scheme gained prominence after Radiohead released their “In Rainbows” album on their website, allowing customers to pay what they deemed appropriate for a digital copy of the album. As opposed to traditional pricing schemes, where sellers first have to costly gauge (through e.g. surveys) the optimal pricing for each market segment depending on their price sensitivity to develop a suitable price discrimination scheme, PWYM solves this problem by permitting buyers to pay the desired amount for a certain product resulting in a (in theory) win-win situation. Related to IS theory, PWYM especially affects the commodity segment: Since the commodity segment will engage in a stronger trading down behavior with increased price informedness, having a PWYM strategy should boosts sales, as it allows buyers to undercut the normal retail price.
Yet, all that glitters is not necessarily gold: Research showed that (as somewhat expected) the average paid price drops significantly (even below production costs), tying PWYM to charity substantially increases the paid amount and that PWYM can deter buyers from a purchase, as individuals feel remorse when paying less than the ‘appropriate’ amount.

How does Humble Bundle then integrate PWYM?
Based on aforementioned study results and online marketing research, Humble Bundle uses an ‘enhanced’ form of PWYM: First of all, it adds a time-scarcity element to each bundle. Since people perceive less attainable products to be more valuable, this might increase the price each customer is willing to pay. Second, they make use of observational learning by displaying the amount of bundles sold, which is a positive signal proven to increase purchases. Third, Humble Bundle allows customers to contribute to charity, which has been confirmed to increase the paid amount. Last but not least, Humble Bundle releases amongst others the average purchase price, which a) serves as an anchor as to what is the ‘appropriate’ amount b) can be seen as a positive word of mouth (‘The bundle must be worth it, otherwise people would spend the minimum amount of $0.01 instead of $6.22’) which has been linked to sales increases and c) allows Humble Bundle to launch their ‘Beat the Average’ program (users will get additional software if they pay more than average), incentivizing users to pay more than average.

What are your thoughts on pay what you want? Will it become more prominent or remain a niche market phenomenon?

Sources:

Bilog,I. (2013) Are “Pay What You Want” Models the Road to Success? Available at:< http://spinnakr.com/blog/ideas/2013/05/pay-what-you-want-pricing-model/>, accessed 27.09.2014.

Gneezy, A. et al (2011) Pay-what-you-want, identity, and self-signaling in markets. Available at: < http://www.pnas.org/content/109/19/7236.abstract>, accessed 27.09.2014.

HumbeBundle (2014) Humble Bundle. Available at:< https://www.humblebundle.com/>, accessed 27.09.2014.

Xie, J. et al (2011) Online Social Interactions: A Natural Experiment on Word of Mouth Versus Observational Learning. Available at: http://journals.ama.org/doi/abs/10.1509/jmkr.48.2.238, accessed 27.09.2014.

Zhang,Z. & Jagmohan,R. (2010) Smart Pricing. Available at <http://books.google.co.uk/books/about/Smart_Pricing.html?id=7MmfAioL0voC&redir_esc=y>, accessed 27.09.2014.