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Pay What You Want

by Elaine Schwartz    •    May 23, 2010    •    276 Views

The place is the SAME Cafe in Denver, a “pay-what-you-want” restaurant. Recently, one person paid $5 for a large soup and coffee and a second individual left $7.50 for 2 slices of pizza, a large soup, and a salad. Then, a third person decided $7.00 was a fair price for a slice of pizza, a salad, and an iced tea while someone left $1.50 for a large soup, a salad, and a slice of pizza. I checked out the reviews for the Cafe and they are overwhelmingly positive. Good healthy food, great atmosphere.

I don’t quite get it.

Yes, as a concept, “pay-what-you-want” has benefits. Those who cannot afford the price of a meal pay less but can volunteer time instead to compensate for their purchase. Those who can afford it pay more, enjoy a meal, and also know they are helping others. Based on SAME Cafe’s reviews, most experiece a communal pleasure. In addition, because the business is a non-profit, it pays no income tax and enjoys all nonprofit perks. With a semi-volunteers workforce, their labor costs must be diminished.

But I still have many economic questions. Demand/supply graphs tell us that price is determined by the intersection of what buyers are willing and able to spend and the amounts, at different prices, that suppliers can provide. Here, the costs of the supply side seem distant from price determination. If their variable costs such as the food, are not covered, then how can they stay in business? How can they plan for the future? Does it matter that government gets no revenue?

In a recent NY Times article, a similar venture from Panera Bread was described. Through a non-profit subsidiary, Panera Bread is trying out the “pay-what-you-want” concept. Here though, they provide patrons with a suggested price. I wonder whether a chain can generate the same spirit as a local establishment like SAME.

Another question: Does anyone leave a tip or is there no wait staff?

The Economic Lesson

I suspect we are not talking about a new business model. Instead, these are non-profit charitable ventures, just like Ben & Jerry’s had a charitable foundation that functioned with their for-profit ice cream business. Also, we are looking at the fallacy of composition which states that what is good for one becomes dysfunctional when everyone does it.

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