The last time I had a yard sale, the point was more to get rid of the stuff in my basement than to raise revenues. After a couple of hours of slow moving, I changed my price policy to “Free or Best Offer.” Although a rational choice model probably wouldn’t see this as doing very well financially, several people dropped wads of cash on us as they hauled away bags full of stuff from children clothes to mismatched coffee mugs to old VHS tapes. Now why would they pay anything, I wondered? Guilt? Soon after, a friend of mine involved in community theater told me of a similar “pay what you think it’s worth” pricing scheme that they often run, which is basically “free or best offer.”
It occurred to me that it might not be a bad way to low marginal cost items with low or highly-uncertain demand where the idea is to make a sale. Obviously, this isn’t an original insight, as there are many cases where firms bolster revenues through some sort of two-part tariff scheme. In the theater case, they were going to do the production, so, ceteris paribus, I would think they would prefer to have some crowd rather than no crowd (especially if they have concessions). In my yard sale case, my costs increased if I didn’t get rid of the stuff.
Now, there seem to be a number of restaurants implementing this sort of pricing logic, yet this pricing logic doesn’t seem to work for restaurants, does it? If the reasons aren’t obvious, check out this interview with economics pop star, Tyler Cowen, over at Salon.com.
Meanwhile, I recommend you get out there and take advantage while these places are still in business. Consumers often benefit tremendously from competition like this — many of my favorite restaurants weren’t in business very long at all. While they were in business, I sure enjoyed eating there. In this case, however, even if you pay them what you think it’s worth, I don’t think they are going to be around for long.
Tags: Strategy & Management