To pay or not to pay?

The Panera bread counter at the Spring 2009 Mercedes-Benz Fashion Week held at Smashbox Studios in Culver City, Calif.

TEXT OF INTERVIEW

Steve Chiotakis: Here's a question: How much would you pay for a sandwich? Not just any ol' PB&J, I'm talking about a sandwich you could typically buy at a restaurant. The St. Louis Bread Company, known to the rest of us outside St. Louis as Panera Bread, is finding that out.

They've eliminated the prices from their menu, asking customers instead to pay what they want. You can imagine, there were some
different responses.

Rachel Epstein: I ordered a Greek salad. I paid $5.79 for the salad. If I paid less, I would be cheating. I did think about the fact that lettuce and olives and onions don't come to $6 -- y'know, when you add up all the ingredients. But that's what you expect when you come to a cafe.

Lloyd Walker: Nothing. Absolutely nothing. I got some electric bills and some gas bills. I've gotta to pay my own house. I know bread shouldn't be no $2 for a roll, nowhere. I don't care what they put in it.

Robert Coffer: I ordered a soup and sandwich, and I gave $15. The extra I paid probably would've helped for someone that couldn't afford whatever they ordered.

That was Rachel Epstein, Lloyd Walker and Robert Coffer. Yeah, there's a suggested price on the Panera menu or even an option to volunteer at the store. But the idea of allowing customers to think about what they'd pay -- or not pay -- makes us think...

Comedian: What the hell were you thinking?

We offer you our series about why we do what we do with our money. And to help us out with all that is Vicki Morwitz. She's a consumer psychologist and marketing professor at New York University. Welcome to the show!

Vicki Morwitz: Thank you.

Chiotakis: So, we just heard from a bunch of folks who set their own price. People really ran the gamut. Some overpaid, some went with the suggested price, others didn't even pay a cent. I mean, a lot of people were like Rachel, who paid the suggested price for her salad. Why are there a lot of people in that camp?

Morwitz: Well, a lot of people don't know. They feel a little uncomfortable with the situation, so they're looking for some clue about what's an appropriate price. So when there's a suggested price and the suggested price is in line with what they would typically pay for a sandwich, that's an easy way to come up with a solution, and it also avoids any perception of doing something that's inappropriate.

Chiotakis: Then there was Robert who actually overpaid quite a bit. He said, he paid, what, $15 to cover those who might not be able to pay that much. Why do that?

Morwitz: Well, in this particular case, the chain is acting as a nonprofit and it's donating any extra money after they cover their costs to charity. And so, I think because it's a good cause, people feel charitable. But that could happen in other situations too. People might simply round up, they might want to appear as a good customer, a good person. They may overcompensate for worrying about the perception that they're cheap.

Chiotakis: Let me ask you this, because I'm wondering if because you have an audience there in the form a line behind you, as you're paying what you want to pay at this Panera store -- you think people take into consideration "what are these other folks going to think if I don't pay enough?"

Morwitz: I think that's a huge influence on people. I think they care what these strangers next to them in line think. We're also worried about what we think about ourselves, and those other people remind us of that.

Chiotakis: Why do they care about that?

Morwitz: We're social beings, and by changing this to a pay-your-own-price, it's changed from a purely economic transaction to also a transaction that has a social component.

Chiotakis: What if no one else is in line?

Morwitz: Don't forget, there's still that cashier who's still a human being, who we're still going to look in the eye at that moment when we have to announce the price that we're going to pay. So we worry about that person too. But Radiohead did something similar when they offered an album for sale online. And when people are purchasing online, they're in the privacy of their own home, and interestingly in that case, there were some people who paid zero, even though they could've paid just a penny.

Chiotakis: We had Lloyd, of course, who we just heard from who didn't pay anything for his bread. I sensed a bit of anger coming from Lloyd. What do you think is going on there?

Morwitz: So I think people also in deciding what to pay think about what was the experience like? Was it a good sandwich, was it a bad sandwich? They also think about what's a fair price, and so, if they're suggesting a price that seems outrageous, once you think about the cost of a sandwich, then they might take that opportunity to pay less or pay zero.

Chiotakis: Do you think there's sort of a conscious deal-making going on in one's head? Is there a lot of that going on?

Morwitz: I think there's a tension between... The economic answer is pay nothing, that's the answer that's sort of best for the consumer. But then, they're trading that off against the perception of feeling cheap, and some of the customers that might be repeat customers, who might be loyal to the chain, are also thinking about that issue of next time. Maybe I'll make it up next time or maybe I don't want to appear cheap, 'cause I'm going to come back here next time, so I better always pay a higher price.

Chiotakis: I want to think about the business model too, because Panera's not the only company that's tried this. I know there are several across the country. But is this something that's sustainable?

Morwitz: It is. I think to be successful, you have to have relatively low marginal costs, so the cost of serving each additional customer can't be too high. So you wouldn't want to do this for cars, for example. But for a sandwich, if somebody pays zero, as long as other people are paying enough, it can work. I think it's also something that's unique and stands out there in the marketplace, and so that may attract new consumers.

Chiotakis: Vickie Morwitz is a professor of marketing at the Stern School of Business at New York University. Vickie, thanks.

Morwitz: Thank you.

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