This is a hosted (zero-install) web application. You create and account and stuff happens. The unattended costs (ignoring tech support, ads, etc) are easy to compute per customer.
Here's the idea: Every month, show the customer how much it (honestly!) costs the company this month and all months prior. Then ask the customers to pay whatever they want.
I'd like little startups with no money to use it, but when a little money is freed up they might pay a little. Bigger companies might pay double cost (or something).
Is this blind faith in human guilt and decency ridiculous? Or is this a really interesting way to price-segment the market?
The creators of World of Goo, a game for the Wii, PC, and other platforms actually ran the experiment you're talking about. They published the results on their website. It's a fascinating read.
It might work. Radiohead tried a similar experiment in 2007 with decent results (and ample free publicity from the stunt, admittedly), and I know a few bloggers who received single donations in the thousands to tens of thousands from readers who found certain posts particularly valuable.
If your target audience is enterprise or mid-sized businesses, however, their approval process may not be able to handle a "name your own price" format, so I would only try this experiment with a B2C product or a service for small, tech-savvy businesses.
It is an interesting concept.
If one has deep pockets, a great product and some time to hook customers, it is possible to become invaluable to businesses. When those businesses grow and realize that the "Free" or "nearly free" service that is vital to them may be at risk because of low revenue, they will do at least one of the following:
(I am using "you" in the general sense)
In short, I think it is very viable but you need to ensure that users know the business model and that cash will ensure the company's survival.
I would add that in your monthly email you provide the menu of pricing options/suggestions:
In between programming jobs (after the company I was working for went out of business) in 2001 I drove a pedicab in downtown Denver and used this exact pricing strategy! Other drivers always quoted 2 dollars per block, but that was too rigid. I just wanted to get people in my cab and give them a fun ride. This was not just transportation! Whenever I was asked "how much?" I would always say "whatever you think it's worth!" It gave people the freedom to be generous. The most memorable one was a lady who gave me $50 for a ride that would have been maybe $10 normally!
For those people who were cheap, I didn't care because other people would see me busy and not just sitting around on the corner. In slow times I would even offer free rides for that same reason.
I've never thought about using this for a web application, but I like the idea! Seems like it would make sense for all the same reasons.
Interesting question. I'd say it will probably work in your special case, but it will not work, in general. Here are the factors I'd consider.
Costs vs. Expenses Effect: Several sites use a "donate-what-you-like" model which is quite similar to a "pay-what-you-like" model. Wikipedia, for example, does it twice a year. It seems to work but I think there's a very important factor: These campaigns emphasize expenses. However, every business guy knows that's not the same as costs.
Unfortunately, people seem to make a distinction between these two cases. Asking for money to cover your expenses seems acceptable; asking for money to cover costs seems less acceptable.
For example, the developer of Ardour, the leading Digital Audio Workstation for Linux, started to ask for donations to cover his costs of living back in 02/2009. There's no history but I think he didn't make reach the requested amount of US$4500 at least in March. He also needed to employ additional "tricks" to make people pay: For example, offering the option to sponsor issues, and a friendly reminder to Apple users during the download, etc.
Another example is the GNOME desktop project. There's also a donation campaign, called Friends of GNOME. One thing that seems to pop up whenever the program is discussed elsewhere, is the income of the director. People write things like "I'm not willing to donate because her income is way to high."
Another way to put it: People seem to be willing to help you prevent losses. But they are less willing to help you make an income (or profit).
Free Rider Crowding Out Effect: There will always be free riders. Essential for success, however, is to never let people know how many free-riders exists. Otherwise, their example will crowd out the Payers. This is basically the negative effect of social proof: "If the majority doesn't pay, why should I?"
Unfortunately, this sort of information will always spread. After all, companies compete and one way to do so is by lowering prices. That requires to lower costs, so they will stop paying the pay-what-you-like services, first. When the information is shared, people will stop paying.
The Dog-Bites-Man Effect: Today, these sort of models make headlines, especially because the Intellectual Property/Piracy discussion is in full swing. Thus, Radiohead and the World of Goo owners have no problems raising attention and money. It's exceptional. However, the more people or companies use such a model, the more common it will become. The amount of free riders will increase.
Overall, these reasons will make a pay-what-you-like model unfeasible for businesses, in general. But for keeping a small web site running, it could work.
Hope this helps.
Is this a great way to get publicity and goodwill, and karma points? Absolutely.
Is this a great way to screw up your finances, by having zero fixed revenue? Also yes.
If you're willing to absorb a lot of cost with no guaranteed income, then it's a cool thing to do. I just don't see it as a viable business model.
Pricing at "whatever you think its worth" also worked well for wine.
As for showing your customers what the service costs you, that depends on your costs. If your costs are high, you might guilt them into paying your costs and a bit more. If your costs are low, then you might make more money by having them estimate what the product is worth to them.
Bottled water always costs far more then the costs associated with producing it, and if you were to sell it in the middle of the desert, the price would go up even more.
SMS text messages are free for the cellular company as long as they are withing their network, and you still see them charging more for it since it is worth more to their customers.
Your users must be passionate about your product to pay anything at all. I didn't pay anything for Radiohead album because I downloaded it out of interest, and I'm not their fan. However, now I like this album enough to pay something next time they release an album this way.
You are in a better position here – your users will have enough time to become passionate about about your product (while they use it and if it's really great) before they are asked to actually pay anything for it.
However, be sure that on average you will get paid less than what you ask for because many people will pay nothing and few will pay several times more than you ask. Be sure to include opportunity costs of your time and some margin maybe, not only server costs. Also, if you're selling it to companies, be sure that in most cases the person who will decide how much to pay is the person who actually uses your product. Because by default people aren't passionate about random software that others use and they are asked to pay for.
Regarding World of Goo: note that they did not launch with such pricing – they offered it far later, when most of the people who would have ever bought it have already done so, and when there was already little hype about their game. I bet their sales were already so low that they just decided to squeeze the last juice from the market. So that's not like Radiohead.
The largest problem with whatever you think it is worth is that people are lazy. Most people won't pull out the credit card if they don't have to!
There are a lot of good thoughts here but I'd like to expand on raquo's point above. Once he knew more about Radiohead he was willing to pay more for it. I think if you have a application you have to be careful of when you ask a user to pay.
If you ask to pay before starting to use the application the user will probably be willing to pay much less that once he's using it effectively and it is adding value in some way. Only once he's proficient can he really assess the value.
In the web context this would equate to giving someone a free trial period and then asking them to pay for it. I think if you require people to determine the value up front you will be disappointed with how much they value your application. If you never let them re-evaluate that decision it will be a problem.
People buy products at different income levels differently:
Your problem is similar to the one faced by those fighting for energy conservation. Most people understand the costs financially and environmentally, yet are reluctant to make dramatic changes.
It might work if you created an inherent competition. A company called oPower (formerly Positive Energy) is testing a hypothesis that people will change given the competitive social power.
"There are these signs in hotels that ask people to reuse their towels to help save the environment.A second one that we created specifically informed guests that the majority of others did reuse their towels sometime during their stay."
The result of that message? Twenty-six percent more recycling. And when Goldstein and his colleagues tweaked the sign further to say the majority of guests in that particular room had re-used their dirty towels, recycling improved 33 percent. Goldstein says it's an adaptive, herd-like response.
"If you go to a cafeteria and you've never been there before and nobody is touching the ham and everybody is touching the turkey, it's probably effective for you to go for the turkey sandwich instead of the ham."