The pay it your way model

Last summer, with the help of two interns, I put a pretty progressive business model into action.  It was a complex “pop up” food and beverage operation with a minefield of issues: unskilled employees, fierce competition in a saturated market, little to no advertising efforts – and let’s not forget about the child labor laws I was breaking. 

Wait…the what?

It was my kids’ first attempt at a lemonade stand.

My 6-year-old, a budding business tycoon, suggested we charge a quarter for the drink and $1 for each cookie.  “The lemonade is priced to sell, but you’re gouging ‘em with the Toll House!” I warned, sounding more like Alec Baldwin’s character in Glengarry Glen Ross than Mommy.  She stared at me blankly and shrugged her shoulders.

Locked in a pricing stalemate with a kindergartener, an idea sparked.  Jumping into action, the metal cash box was replaced with a pickle jar.  We wrapped the glass in neon construction paper, and Sharpie’d Harvard Fund.  Despite our questionable business plan – one without a traditional pricing structure – we made a killing that day.  “ABC, kid,” I said to mini-me, patting her on the back, “Always be closing.”

The “pay what you want” model is catching on.  In some cases, it’s a philanthropic positioning to give people a break.  Last week, I had a tasty lunch at SAME Café.  This little gem on East Colfax is open 11-2 six days a week.  The décor is sparse, the menu is limited, and the price?  Well, that’s up to you!  Pay what you can.  Pay what you want.  No money?  No problem!  You can work off your lunch by volunteering: bust some suds, wipe down a few tables, take out the trash – that kind of thing.

The “pay what you want” model, like my kids’ lemonade stand, can be quite profitable.  Recently at DIA I had some time to kill. I looked down at my chef clogs, grimaced, and marched myself over to the shoe shine. 

After 10 minutes of buffing, polishing, brulee-ing, and chit-chatting, my Danskos were as shiny as black olives. 

“Looks great,” I said. “What do I owe ya?” 

“Oh, whatever you like,” my shoe-shining wizard coyly smiled. 

Of course I took care of her; I imagine most customers do. Based on my behavior, as well as the habits of wing-tipped business travelers on expense accounts, I’m sure she cleans up (ba-dum-tsh!)

This got me thinking.  What if more businesses used this pricing strategy?  As a consumer, I know I love to get a good deal.  Women practically treat bargain-hunting like an Olympic event when bragging to their friends about their fabulous savings on a pair of Jimmy Choos.  “She stuck the landing in stilettos!”

But then again, we tend to value things we spend more on.  I don’t think I’d brag to my gal pals about a great “deal” I got on diamond studs, or a (real) Louis Vuitton purse.  Sometimes we enjoy parting with our hard-earned cash because what we’re buying is special.  Would we be able to self-regulate and balance our inner thrifty shopper with “spendy shopper”?

In America, we’re more comfortable with the traditional MSRP structure. Even the “honor system” seems to make us hesitate – think of the “coffee fund” in the employee lounge, or the famed “Cookie Lady” in the Republic Plaza.  Take what you want, pay the posted amount in an unmanned basket, end of transaction.

When asked, the folks at SAME Café said, on average, customers spend $4-$5 for lunch.  The generally accepted formula for setting menu prices in the food service industry is: food cost multiplied by three.  Looking at my meal of a slice of pizza, a cup of soup, and a side of mixed greens, I would say $5.00 would just barely cover the profit margin in my industry.

So maybe we could handle the “pay what you want” structure.  Sometimes the company would get a little more, sometimes they’d get a little less, but overall it would balance out, right? 

It’s helpful in business, as it is in checkers, to know if you’re operating in the red or the black. The sustainability of this model is shaky at best when it comes to forecasting the all important profit.  I’m no Alan Greenspan, but paying what you feel like is probably a recipe for economic collapse. 

Well, summer is fast approaching, and the natives want to rock the lemonade stand again — with a few changes.  There’s talk of brownies (a questionable choice in Colorado) and two competing tables: One with the traditional cash box and prices set by my youngest, and the other one with the pickle jar inscribed I need braces. 

My money’s on “Bucky”.    

Categories: Company Perspectives