Digital media retailing: can a ‘pay what you want’ pricing system replace fixed-cost retail?

The rise of MP3s and eBooks has meant a move from fixed cost to variable pricing models. So, does it still make sense for retailers to charge a fixed price?

Recent examples of media products using a pay what you want pricing system have delivered impressive results and retailers of digital media content should consider whether using this alternative promotional strategy would work for them.

Pay what you want (PWYW) – the theory and some examples

The PWYW pricing system is not a new concept and has been trialled by a variety of businesses, with varying degrees of success. Ultimately, the retailer/manufacturer allows the consumer freedom to choose a price and relies heavily on the consumer’s altruistic intent.

However, retailers and manufacturers of media products have been plagued by a decade of piracy and digital rights management technology has ultimately failed to prevent consumers from downloading pirated material. Under a PWYW system, these same consumers would contribute some revenue, an increase on the current revenue generated from them. So is this bold pricing system the answer?

There have been a variety of examples of PWYW in the music industry, the most notable of which featured the English alternative rock band Radiohead. In October 2007, the band launched its seventh album on its website using a PWYW system and managed to generate an average price of £4 per download.

Whilst this price was somewhat lower than the normal retail selling price, it turned out to be a successful strategy due to increased volume sales and later became a number one album in the UK.

The video games industry has been the latest to trial the PWYW system. In December 2010, Humble Bundle, a small independent digital distributor of video games, launched the ‘Humble Bundle 2’, a collection of five games which it sold through its website.

Consumers could not only choose the price that they wanted to pay but could also decide what proportion would go to the distributor, games publishers and charity. The PWYW offer was only valid for two weeks and managed to generate over 200,000 purchases, an incredible number for an independent distributor.

Global – Channel sizes – Constant 2010 Prices – Fixed 2010 Exchange Rates

Source: Euromonitor International, Retailing.

Impact on retailers

Different media product categories are at different transitional stages of their digital lives and so the impact on retailers will differ from category to category. Most music is now distributed in electronic format, primarily through downloads but also through monthly subscription services.

Books are beginning their transition into the digital era in the form of eBooks which are downloaded via digital retailers. A PWYW system could work for both these categories through the existing downloads infrastructure provided by retailers and not only generate higher volume sales but also more web traffic.

Premium video games and video content are likely to be streamed rather than downloaded due to their higher product value. However, lower value video games and television shows have the potential to also successfully adopt the PWYW system. Overall, retail margins on products sold using PWYW will undoubtedly be reduced due to the expected lower selling price, but the sheer increase in the volume of sales should increase value sales.

Impact on manufacturers

One of the major worries for manufacturers with regard to using a PWYW pricing system is the possibility of cannibalising sales from other channels and potentially damaging relations with other retailers.

From the few PWYW retail experiments conducted since 2007, the evidence appears to point in the opposite direction, with a boom in sales seen across several non-participating channels. Games publisher, ‘2D Boy’ trialled a PWYW strategy on its website to celebrate the organisation’s birthday and recorded week-on-week sales growth of 40% and 9% from its other retail channels, Steam and Nintendo’s WiiWare, respectively.

The PWYW system offers the potential for smaller independent manufacturers to promote their products in mainstream retailing channels.

Finally, retailers should focus PWYW on lower value products and bundle items together to create a greater sense of value for the consumer. One product at £10 will lose a significant share of its original retail price, but five bundled products valued at £2 each may well generate revenue in excess of their original value.