One of the most profound changes brought about by the Internet Revolution is product pricing. For example, Priceline.com pioneered the idea that prices might be set by buyers rather than sellers, eBay brought auction-based pricing into the mainstream and Spotify charges people to access rather than own music. Elsewhere, many online providers from LinkedIn to the New York Times use a “freemium” model, where the basic service is free but you pay for premium content.
How about a pay-what-you-want pricing model? It sounds risky to rely on the goodwill of customers to pay more than they have to – i.e. nothing – but it seems to work for some. One early pioneer was the band Radiohead, which reportedly made US$3 million (£2.4 million) in a year from asking customers to pay what they wanted to download their album ‘In Rainbows’. Many restaurants, musicians and charities have experimented with their own versions of this model.
But how far can the pay-what-you-want model be stretched? Does it only work for digital products where the marginal cost of production is zero? Or is there room to try it out in a more traditional industry setting? That was the question a group of executives from Swiss healthcare company Roche asked themselves. The group involved Jan Schreiber, Katarzyna Stadnicka, Maik Roeck, Rae Ann Farrow, Raj Harapanahalli and Jean Eric Charoin.
In 2016, Roche piloted a pay-what-you-want scheme in some German pharmacies and Italian GP surgeries. The experiment had some fascinating and surprising results that raise important questions about how certain types of healthcare services are provided. The idea came from an executive development programme which Roche launched with London Business School in 2015.
“I had read an article about new types of pricing models and how they might influence companies, especially in the digital world,” explains Roche’s Jan Schreiber. And around the same time, I had a discussion with a colleague about a diagnostic product they wanted to launch in Germany, where they were worried about how to price it. So when I talked to my team members, we had this crazy idea – why not test a pay-what-you-want model in a diagnostic setting?”
The diagnostic product in question was a point-of-care blood test for two issues related to the body’s cardiovascular system: lipid levels and average glucose levels (HbA1c) for a three-month period. In Germany, these tests traditionally involved the GP taking blood from a vein and sending it off to a lab for testing. Now, using a new device to prick the patient’s finger, a blood sample is taken and the results are ready 15 minutes later.
While it’s a neat innovation, getting doctors to adopt it has been difficult – not least because of the limited financial incentives. Health insurance covered the costs of lab tests, but small devices like these received small reimbursements. “The GP industry in Germany wasn’t interested, so we planned to target pharmacies and the growing market of people looking after their own health with an innovative pricing concept,” explains Schreiber.
Roche’s team identified 10 suitable pharmacies in Germany and appointed two sales reps to train the pharmacists in how to use the new device for blood tests. Letting people know they could choose what to pay for the test was fine. But the pharmacists were asked never to describe the test as a free service.
The device was loaned to the pharmacies for free so that Roche could quickly understand how patients behaved when offered a pay-what-you-want option. Roche’s hypothesis was that while the device might bring in less revenue per test, it would be used more frequently – which, for a product designed to forewarn people about risk conditions, was a good thing.
As people in Germany aren’t used to paying for diagnostic tests, the Roche team offered two anchor prices: €15 and €25 (£12.9 and £21.5) to five pharmacies each. The pharmacists were told they could reveal the fee to any customers asking how much the test usually cost.
Did the experiment work? Over the three-month test period, 235 people used the service on the pay-what-you-want basis. While 15% offered nothing, the other 85% paid between €1 (80p) and €25, or €6.65 (€5.72) on average.
“For us it was very interesting that people paid almost as much for one test – either lipids (€6.47/£5.57) or HbA1c (€5.01/£4.31) – as for both tests together,” Schreiber says. “So doing only one test each time has the potential to increase sales significantly, plus it reduces the time from taking the test to getting the results by about 50%.” The anchor prices also played a part, with 25% paying €25 – significantly more than the average price that patients paid.
The team carried out a similar experiment in Italy, this time with GP surgeries because of the country’s different rules for reimbursements. Some 86 people used the service across eight GP surgeries. The anchor price was €35 (£30.1), “as Italians generally pay €60 (£51.6) or more for these types of services as part of an annual check-up,” Schreiber says. Of this sample, 23% paid nothing. Those who did pay offered €5 to €35 (£4.3 to £30.1), or €19.25 (£16.5) on average. In Italy, people are generally charged €23 (£19.8) for blood tests.
So what did the team learn? Perhaps unsurprisingly, the pay-what-you-want model resulted in a slightly lower price being paid, because some people chose not to contribute. The team also learned much about framing the pricing decision. “We sought feedback from the pharmacists and GPs in terms of the right words to use,” Schreiber says. “Some people were a bit too shy to sell the extra service, so our salespeople showed them how to do it.”
But the whole point of the experiment was about increasing the accessible market. Schreiber noted that Roche was excited about the positive results for a pricing model that “no-one had used before”. While it’s unlikely that a pay-what-you-want model will work in the long term in Germany, a freemium one – that offers a basic test for free and charges for the more complete service – may prove more successful.
There is a bigger picture here, with Roche aiming to help people take responsibility for and understand their risk conditions – and adapt their lifestyle accordingly. Schreiber says: “We had 24 people (8%) in our study for whom we detected high levels of lipids or glucose levels, but they hadn’t known about it. They wouldn’t have taken the test with standard pricing, but now they are empowered to take the next steps to reduce their cardiovascular risk. Imagine rolling this out, and testing not just 300 people but 30,000 people. The benefits to society are potentially huge.”
So how is Roche using the results of this experiment? The team is working with executives in its diagnostics business unit to see if a version of this experiment can be trialled more widely. Clearly, this pricing model only works in certain parts of the healthcare system, but the core idea – that novel approaches to pricing can have a significant effect on customer behaviour – is one that can be applied for a huge range of medical services.
“Don’t try to figure out, at your office desk, what a good price is,” Schreiber says. “Go to the market, experiment and get a result. You might be surprised by what you learn. Then adapt your price accordingly.”