We have been talking about pay-what-you-want as one of the options that gives creates more commercial flexibility. Content producers are understandably nervous about the possibility that customer could choose to pay nothing.

Smashwords, a company based in SiliconValley, creates and distributes ebooks for self-published authors and small publishers. With only a Microsoft Word file, their publishing engine can convert the document into nine different ebook formats and in recent months, they have built distribution relationships with more retail outlets including Barnes and Noble.

Smashwords CEO Mark Coker published some interesting data last week. When an author publishes work on the site, they have the option of choosing a fixed price or pay-what-you-want. Coker pulled a sample of 353 purchases made with pay-what-you-want pricing and here is what he found:

1. 85% of customers choose to download their purchase for free. That is not a huge surprise. The comScore data from Radiohead’s In Rainbows experiment put free downloads at 62% of the total. This data is spread out across multiple titles and authors with, I think safe to say, weaker brands.
2. I summarized the paid data in the chart below:

   

   The sample set of 54 points is on the smallish size to draw conclusions, but we can say customers favored a price point under $4 with that accounting for two-thirds of the purchases. The sub-$4 price point account for 44% of In Rainbows paid purchases.

3. The total revenue for 353 purchases was $173. This again shows business models involving free require a high volume of prospects and customers to generate meaningful revenue.
4. I wonder if the pay-what-you-want model needs an anchor. The In Rainbows experiment was able to generate higher chosen price pointsin response to past Radiohead purchases and the established pricing from the iTunes music store. The publishing industry is still in the process of establishing their ebook pricing and that could have a positive effect on these pricing schemes over the long run.

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You’ll find more detail about Radiohead’s In Rainbows pricing experiment on page 18 of the ebook Free to Flexible: Four Simple Lessons About Cost, Price, Margin and The Options Available to The 21st Century Business. You can download it here.