Pay What You Want and the Four Currencies

Cross-posted on gamasutra

Today I'd like to apply my "four currencies" model to the "pay what you want" phenomenon.  Like piracy, this is a case where the results we observe don't match what conventional wisdom says should happen, and I use my "four currencies" theory to explain the discrepancy. 

A quick summary for new readers:

In my first two articles, I explain that while piracy costs no "money-dollars" ($M), it still has "time-dollar" ($T) and "pain-in-the-butt-dollar" $P costs, ie, the time and hassle of tracking down a torrent, as well as the risk of malware, especially for non-techies.  There's also an "integrity-dollar" $I cost, ie, piracy makes some people feel guilty, and adds a small risk of legal trouble.  So, although piracy costs zero $M, it has non-zero $T, $P, and $I costs.

Raising large hurdles lowers sales

Image courtesy of haven't the slightest    

The legitimate product has no $I cost, and with a quick and friendly purchasing experience, it will also be "cheaper" than piracy in terms of $T and $P, making the customer more willing to spend $M. On the other hand, DRM and treating players like criminals raises both $T and $P, and makes players feel less guilty about piracy, lowering its $I cost.

This is a super quick and over-simplified summary. See the original articles for more details.  

The Pay-What-You-Want Paradox 

Conventional wisdom suggests that customers who are free to pay what they want for something will pay as little as possible.  This was widely repeated before RadioHead released their In Rainbows album as PWYW, and again when the first Humble Indie Bundle was announced.  In both cases, the conventional wisdom was partly right - lots of people did pay only the minimum amount.  But many paid more, and by any measure both sales were big successes.

Before we get into that though, let's look at a model where the conventional nay-saying wisdom matches reality - voluntary donations for software downloads.

Donationware Doesn't Work

image courtesy of MindfulOne

Donation-supported software rarely works.  There's a few outliers but for the most part it's a terrible way to fund a project - but why?  Let's apply the 4-currencies model.

When a developer offers a free download link on her website with an optional donation button, she is legitimately offering the game for two different minimum "prices":

The 4-currency "costs" are always relative to each individual.
This is just a theoretical "average person" example. 

The $M price of donation is as low as possible - any positive value will do, so why don't most people donate even 1 cent?  Because they can already download the product quickly ($T) and painlessly ($P) for free ($M).  Since the developer herself provides the free option, most people don't even feel guilty ($I) about it.

Pulling out a credit card, typing a number into a paypal window, etc, is too much bother ($P+$T),  especially when the developer provides a legitimate option to skip all that.

Raising NO hurdle lowers sales

Image courtesy jim.rocco

Now, what if there was a minimum price?  Let's go with 1 cent.  Let's temporarily ignore the fact that transaction fees for such small amounts would actually cost the developer money.  With a 1 cent minimum, the two "prices" now look like this:

By removing the "don't pay" option, all we have left is paying any amount, or piracy.  Piracy costs no money, but takes time, is a pain, and makes many people feel guilty. The only low $I cost option left is buying legitimately.  If the developer makes the experience quick and painless, she lowers the $P and $T costs sufficiently that many would-be pirates become customers instead*.

*Some will always pirate, because their personal valuations of the $P/$T/$I costs are different from those shown above.  These players will likely never be customers, so there's no point in worrying about them. 

Raising a tiny hurdle raises sales

Image courtesy of sombraala

Since there's no option to download both legitimately and for free, the small $P and $T cost of pay-what-you-want won't seem too bad for most people, especially if the payment page is slick, professional, and user-friendly.  Once these customers are over this initial barrier, purse strings will open, because the real obstacle was $P and $T, not $M*.

*For some people, such as those who don't have credit cards, or who live in countries not serviced by the payment processor, any amount of $M results in an insurmountable $P barrier, because there's no way for them to send the developer money.

There are some for whom money will still be an obstacle - this is the group that's paying only $0.01 or $1.  For those with a little more to spare, however, the results speak for themselves - people are more than willing to part with their $M, giving $5, $10, $100, or even $1000+.

Making it work for you

All this is simply to show how - and more importantly, why - the Pay What You Want model can work.  This doesn't mean it works in all cases.

The most successful variants of this strategy exhibit the following features:

1. Limited time
2. Product of significant value
3. Generates goodwill

The limited time is important, because it serves as a call to action - get it now while the price is incredibly low.

I have to admit that although I bought the first few Humble Bundles, I haven't bought some of the latest ones.  This is mostly because I simply don't have the time to play all those games, and I have pretty particular interests so what's on offer isn't always interesting to me.

I did, however, pay $10 for both Proun and Sleep is Death as PWYW because they caught my interest and were well worth the amount I paid.

The last point is the one I want to explore a little before signing off.  I believe people are more likely to behave cynically - that is, to pay the minimum amount, the more impersonal and detached their relationship is with the creator.  The more they see the creator as a real person with real needs, and the more they develop a personal connection with your work, the more likely they are to reward you with more than the minimum amount. This is why building a community around your game is very important, and why it's also important not to be a huge jerk, because it makes it easier for people to justify pirating your games.

The Humble Indie Bundle generated goodwill through its charity drive, by offering cross-platform versions of the games on sale, and through the sheer novelty of the promotion (which by now has worn off).

Also, anyone who tried to donate less than $1 was greeted with this picture before their order was finalized:

This likely had the effect of raising the $I cost of any transaction less than $1.

So, those are my thoughts on PWYW and the four currencies. I think the PWYW model is here to stay and can be successful in the future, but the novelty factor has now worn off.  That being said, PWYW seems like a much better option for generating revenue than an optional donation.

Part 4 : "Free-to-Play and the Four Currencies."