Pay what you want in the hospitality sector

Pay what you want, honestly

I’ve never been to Dublin airport. If I had I might have encountered their new café. It’s a modest sandwich and soft drinks establishment; except there’s a twist. For the month of June, the café was unmanned. No staff meant passengers were left to tap themselves through a self-checkout.

This wasn’t a mistake, this was a continuation of an experiment that began in 2014, with bottles of water displayed in the gate areas. An honesty box and €1 signage lead to 92% of customers paying. With Irish retail thefts last estimated to cost the country half a billion euro each year, the pay rate seems good — until you realise passengers were still willing to steal within such a secure environment.

So what of the 73 products in the new café? The airport claims there’s more to the experiment than the passengers see; including testing catering and restaurant software with fluid pricing abilities.

A fair exchange is no robbery

There’s a similar revenue system called Pay what you want. For the hospitality industry, this structure invites a greater risk. A catering operation must pay more attention to customer psychology than for instance, pricing a menu. It must also eliminate anything that gives the appearance products having no value. To solve this, the system works best with anchoring — offering a ‘suggested’ price.

As author William Poundstone wrote, “prices are a collective hallucination”. By using ‘suggested’ prices customers will not only feel empowered to make choices, but it also gives an opportunity to overpay for items they particularly enjoyed. Poundstone argues this frequently occurs without customers realising. Using the system can stop guests using vouchers and cuts advertising costs. In terms of microeconomics; separating the decision to buy (choosing the restaurant) and what to pay (at the end of the meal) accelerates the initial choice.

This doesn’t always work in the wider world (example; outside an airport environment), especially when there’s a persona that will never pay. Take, for example, the American quick-casual bakery chain Panera Bread. In 2010 it opened a charitable offshoot, named Panera Cares. The location mirrored the restaurant design and products at its other 2000+ locations; with the only visible difference being a Pay what you can option (‘want’ for businesses; ‘can’ for charities) when making an order.

For eight years, the branch not only broke even but turned a small profit. Although below the chain’s ideal margins (85% paid full price) it shut in January. The chain claimed its closure was due to investment requirements that didn’t match its month-to-month lease. Investigating the branch website, coupled with anecdotal evidence does provide clues that the business model was frequently strained. Rules were introduced in its final years, including the introduction of a one meal a week limit for those consistently underpaying; and donating time for vouchers aimed at guests needing their food for free. Because the chain purposely put little effort into differentiating the look and feel of the restaurant (to protect vulnerable guests) this generated complaints from tourists familiar with the brand — including some that felt ‘slowed down’ by having the contrasts explained to them each visit and their apparent proximity to people with a history of food insecurity.

A rewarding venture

Going against the grain of a traditional pricing structure is a risk that can potentially pay-off if well planned and designed. There are frequent parallels between the Honesty box system and Pay what you want. Whilst the Dublin Airport story highlights the service benefits (such as reassigning staff to help customers and the speed of paying) it skips over the business benefits:

  • Those reassigned staff have more chance to upsell.
  • Fewer overall staff members can mean lower overheads that will offset retail shrinkage.
  • Going cashless lowers theft risk, ultimately lowering insurance costs.
  • Customers will drive your pricing intelligence, especially when used with the correct technology mix.
  • Using software that helps stock management and streamlines finance and forecasting will help build a promotional sales structure into genuine customer loyalty.
  • When correctly anchored, a well-designed Pay what you want system can encourage higher spending. Be cautious; losing suggested prices can equate to lower spend. Marketed correctly, risk of shortfall can be mitigated through an overall rise in sales.

Whilst adopting these structures continues to create headlines, we perhaps look to Amazon’s checkout-free convenience store for the best balance of honesty and technology. Whilst customers honestly make their selections, the store trusts their technology to bill customers when leaving through the heavy glass gates.

James Waldron is Content Manager at Zupa

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