“Shared social responsibility” as a path to greater profit?

by on July 17, 2010 at 4:14 pm in Economics | Permalink

At a theme park, Gneezy conducted a massive study of over 113,000 people who had to choose whether to buy a photo of themselves on a roller coaster. They were given one of four pricing plans. Under the basic one, when they were asked to pay a flat fee of $12.95 for the photo, only 0.5% of them did so.

When they could pay what they wanted, sales skyrocketed and 8.4% took a photo, almost 17 times more than before. But on average, the tight-fisted customers paid a measly $0.92 for the photo, which barely covered the cost of printing and actively selling one. That’s not the best business model – the company proves itself to be generous, it’s products sell like (free) hot-cakes, but its profit margins take a big hit. You could argue that Radiohead experienced the same thing – their album was a hit but customers paid relatively little for it.

When Gneezy told customers that half of the $12.95 price tag would go to charity, only 0.57% riders bought a photo – a pathetic increase over the standard price plan. This is akin to the practices of “corporate social responsibility” that many companies practice, where they try to demonstrate a sense of social consciousness. But financially, this approach had minimal benefits. It led to more sales, but once you take away the amount given to charity, the sound of hollow coffers came ringing out. You see the same thing on eBay. If people say that 10% of their earnings go to charity, their items only sell for around 2% more.

But when customers could pay what they wanted in the knowledge that half of that would go to charity, sales and profits went through the roof. Around 4.5% of the customers asked for a photo (up 9 times from the standard price plan), and on average, each one paid $5.33 for the privilege. Even after taking away the charitable donations, that still left Gneezy with a decent profit.

The full article is here and I thank Michelle Dawson for the pointer.

1 TA July 17, 2010 at 4:49 pm

Supposed they’d priced it at $5 or $6 — no mention of charity. Wonder what would have happened. Would they reach 4.5%?

2 Rahul July 17, 2010 at 5:09 pm

I think this study overstates its conclusions. I’d only agree about shared social responsibility bringing greater profits if the study had shown that less than 4.5% customers asked for a pic. had it been plainly priced at $5.33. Even that is conservative since in the current situation even if the study charges $5.33 the manufacturer only gets $2.66. The other half goes to charity. So this so-called profit boost by using the charity excuse is actually competing with a sale price of $2.33. I bet the sales then would rocket even higher than 4.5%.

The glaring mistake in the study is that they are using totally unrealistic pricing in the control-cases. How can you ever use $12.95 as your baseline? This seems almost intentionally selected so high as to give them the conclusions they want.

3 Alex F July 17, 2010 at 5:18 pm

Rahul: Fair point. Taking the article at face value, *one* gimmick improves profits over *one* fixed price. But if you give the theme park the benefit of the doubt, perhaps the park had already tested other prices informally and found this to be profit-maximizing out of fixed prices.

4 Ray July 17, 2010 at 5:40 pm

Thoroughly interesting.

5 persiflage July 17, 2010 at 7:39 pm

Allowing people more choices, and the freedom to act voluntarily in a charitable way at the same time, results in people demonstrating higher individual social responsibility.
In this research, that behavior just happened to be linked to picture purchases in a theme park.
“Shared social responsibility” is an ideology stuck in the heads of some researchers. I am doubtful that this study demonstrates anything conclusive about that ideology.

6 Bernard Yomtov July 17, 2010 at 10:17 pm

The experiment would much improve if the baseline included other prices. Clearly 12.95 is too high. In fact, why isn’t that all the experiment really proves?

I don’t know. Ask Tyler.

7 Bill July 17, 2010 at 11:27 pm

This is consistent with other Pay What You Want pricing research.

This effect–contribution to others as part of community support–also showed up in Pay What You Want pricing study involving a restaurant which also served low income customers as well as higher income customers, where lower income customers could pay less. Higher income persons, when they perceived that the restaurant owner might be at risk, overcontributed.

PWYW pricing raises some real interesting issues concerning the rational economic man. How do you explain altruism, particularly altruism that is annonymous.

Think about your contribution to Public Radio where you can pay what you want and your contribution is annonymous when you pay online and there is no disclosure of what people pay.

8 Nic Smith July 18, 2010 at 4:10 am

This reminds me of the Wolfire/EFF/Child’s Play Humble Bundle from a few months back, which also tied a donation to a pay-what-you-want model. Despite the fact that participants, IIRC, could get the bundle and say that they wanted any amount up to _everything_ to go to either the EFF or Child’s Play, the game developers got more money overall (although both 501s got more money than any individual dev.)

9 anonymous July 18, 2010 at 10:10 am

The above also suggests that Radiohead did the right thing by NOT including a donation to charity in their album sales campaign.

Their goal, presumably, was not to maximize profits on the sale of that one album, but to put their music in the hands of as many people as possible, in the hope of converting each listener into a potential concertgoer, and make money from touring and merchandise.

10 Sbard July 18, 2010 at 12:15 pm

@Andrew: Most NPR stations let you do this. Both of my local stations have a section on their online donation form where you can target your pledge towards a specific program if you wish.

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