21 January 2014

The pay-offs and perils of pay-as-you-wish

By Sara Eckel

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Repeat customers: Average payments of 5 to 6 euro ($6.84 to $8.21) help Der Wiener Deewan in Vienna bring in a profit. (Courtesy: Andreas Zeitler)

Natalie and Afzaal Deewan had a dilemma. It was April, 2005, and they needed to find ways to bring customers into their new restaurant, a Pakistani buffet near the University of Vienna.

Lacking the money to spend on advertising or other promotions, and unsure of what they should charge for the food, the two restaurant novices decided to try an experiment.

Natalie took a marker pen and on the shop window wrote “ALL YOU CAN EAT. PAY AS YOU WISH.”

“I liked the idea because it had a funny side and it was easy. The response was good from the start, so we thought okay we can keep going until further notice.”

They never had to stop.

More than eight years later, the restaurant, Der Wiener Deewan, still lets customers set their own price; those who insist on a number are directed to a take-away menu with prices ranging from 4.5 to 9.5 euro ($6.12 to $12.92).

The three-room, 75-seat restaurant serves five curry dishes, rice, salad and dessert. When customers are ready to go, they pay the cashier, stating what they had to drink (alcoholic beverages and packaged soft drinks are a fixed price) and what they want to pay for the food. The philosophy is simple, Natalie explained: “They should choose based on how much they ate, how much they liked the food and how much money they have.”

Der Wiener Deewan is one of a growing number of restaurants that allow customers to choose their own price. Among them: Pay As You Please in Ireland, Lentil as Anything’s four restaurants in Australia, the Seva Cafe in India, Annalakshmi’s two restaurants in Singapore, and five Panera Cares cafes in the United States.

It might seem like a recipe for financial disaster. Why pay if you don’t have to? But the vast majority of customers do pay — a study of the restaurant by economists Gerhard Riener of the University of Dusseldorf and Christian Traxler of the Hertie School of Governance, both in Germany, found that only 0.5% of patrons didn’t pay anything for their meal.

With an average payment of 5 to 6 euro ($6.84 to $8.21) per person for food, the Deewans aren’t getting rich, but they are serving a packed house of about 500 customers a day, enabling the owners to meet their expenses, pay their 15 employees and realise an annual profit of 30,000 to 40,000 euros ($41,043 to $54,724).

“Since we have a lot of customers who are quite regular they somehow choose a fair price that keeps us running,” said Natalie.

Successes…. and failures

That’s a common theme. Pay–as-you-wish restaurants rely on their customers’ sense of goodwill and fair play to remain financially afloat. Some are successful, while others end in disappointment.

In December, the owners of the pay-what-you-wish Five Loaves and Two Fish in Fuzhou, China, announced that the venue has lost the equivalent of $41,000 since it opened last August, with an estimated 20% of customers eating for free. Several US pay-what-you-wish restaurants have shut their doors in recent years, including Terra Bite Lounge in Seattle and Santorini Grill in New York. Panera Bread has had success with its non-profit Panera Cares cafes, but the for-profit Panera Bread restaurants recently suspended a pay-what-you-wish offer on turkey chili, after a disappointing response from customers. The program, though self-sustaining, was mostly ignored by patrons.

Ayelet Gneezy, associate marketing professor at the University of California San Diego in the US, believes that cultural factors may influence a pay-what-you-wish restaurant’s success, noting that the model appears to do well in countries with high taxes and strong social welfare systems. The culture of an individual shop is also important. That may be why Panera’s chili offer failed even as the non-profit cafes have done well, she said.

“If you go into a Panera Cares cafe, you know what it’s about. When you go to a regular [Panera Bread] cafe in a mall, you don’t know what it means,” said Gneezy. “It’s not in keeping with the identity of the store, so maybe you don’t pay attention to it.”

Appealing to a higher cause is one way that many such restaurants encourage generosity. In addition to Panera Cares, the United States has several independent non-profit restaurants that employ the pay-as-you-wish model.

In Melbourne, Australia, Lentil as Anything restaurants also operate as not-for-profit enterprises that are staffed by volunteers and a smaller number modestly paid employees. There, better-off patrons are encouraged to pay a little more so that customers of lesser means can have a meal more cheaply — and the restaurant can still stay afloat. Payments are anonymous, slipped into a black box at the front of the restaurant.

Founder Shanaka Fernando said the 14-year-old establishment is self-sustaining and all of the profits go toward building more restaurants — there are now four, all in the Melbourne, Australia, metro area. The busiest Lentil As Anything, located in a former 1850s convent, serves 1,500 meals day. In addition to the chain’s 120 volunteers, the restaurants are staffed by 40 employees, though their pay (from $65 to $120 a day) is often more a stipend than a salary.

When customers take advantage

But sterling intentions don’t always guarantee success. A Lentil as Anything restaurant in a primary and secondary school canteen closed after 18 months because students didn’t respect the system; a take-away restaurant also failed to inspire generosity.

“We found that they have to feel the experience,” of sitting in the restaurant said Fernando.

The same goes for Killarney, Ireland, Pay as You Please owners Rob O’Reilly and Barry McBride, who see their share of free riders. Teenagers, in particular, can be a headache.

“They don’t know any better about the hard work that goes on in the background, so they pay 20 cents or something for loads of stuff,” said O’Reilly.

The owners responded such antics by displaying a small sign saying that customers 18 and under must be accompanied by an adult, though O’Reilly stresses that most of their teenage customers do not abuse the system and are very welcome in the restaurant.

As with Der Wiener Deewan, Pay As You Please makes up for the occasional freeloader with volume. In Killarney, a tourist town with more than 100 restaurants, media attention, word of mouth and sheer curiosity keep Pay As You Please bustling during the summer, when outdoor seating enables them to serve as many as 120 meals a day (the restaurant itself seats 25). The restaurant makes enough to provide salaries for themselves and six employees, as well as pay all the restaurant’s bills.

The restaurant gives customers a list of suggested prices and a tin can at their table in which to deposit the payment of their choice.

The loose system, O’Reilly hopes, creates a more relaxing experience for the customer, who won’t have to stress about adding extras.

“Normally, you want more cake or more coffee you’re thinking ‘All of this is going to add up to a lot.’ We wanted it to feel more like you were in someone’s house. The whole vibe is a giving vibe and hopefully they will give back.”

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