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Pay-what-you-want restaurants have seen a surge, but the risks are real and the success rate not very high

Innovation is the key to surviving today’s economy. There are still principles which are timeless that will survive and which should always be held to, but finding that “something new” that will grab customers’ attention and draw them in is a never ending quest for companies trying to set themselves apart.

Although it’s not a brand-new idea, with the rise of social entrepreneurism and global “do good” movements, pay-what-you-want dining is seeing a surge in recent years. The question is whether or not this model is viable long-term or if it will be a flash in the pan.

Is Human Nature Inherently Good?

That’s the concept that most of these restaurants are gambling on, the idea that by going with an honor system for payments those who are in need will be subsidized by those who have enough or excess.

Panera Bread is leading the charge when it comes to chains, opening their first pay-what-you-want Panera Cafe in 2010. Today there are 5 of the cafes around the country, and so far they have seen success. Three years in, their numbers reflect that 60% of patrons pay what would be considered full price, 20% pay less or nothing, and 20% pay more. In Panera’s case, the model seems to be working fairly well, but that’s not the story of every such experiment.

Win Some, Lose Some

The oldest pay-what-you-want restaurant was run in London within Peter Ilic’s Little Bay restaurant group. Just Around the Corner restaurant opened in 1984, and the next year moved to the flexible pricing model. It ran that way for over a decade successfully, but has now closed. After the global recession, however, Ilic decided in 2009 to experiment once again with the model in his Little Bay chain of restaurants in order to woo customers hit hard by the credit crunch and economic downturn.

Ilic was obviously not soured by the experience with Just Around the Corner, but he does offer advice to other restaurant owners who may want to try the model. “If you open in a student/tourist area, it’s not going to work,” he told The Guardian earlier this year. Other owners who have tried the model have discovered that this is indeed the case.

The Dock, a pay-what-you-want restaurant in Belfast, has been open for over a year with this model and is still doing well. In a newly renovated tourist spot and located across from a college, it shouldn’t be doing so well by Ilic’s advice, but The Dock is not necessarily your run-of-the-mill restaurant either. It was started by a chaplain and continues to be an outreach ministry in many ways.  As usual, even a simple restaurant POS system will help you analyze the numbers to see if this model will work.

A blog post on their site asks the question “what is The Dock?”, with a series of possible answers: a cafe, an art gallery, a church, a museum, a market, a charity thing. Each of these is answered with “Yes – well, sort of…”, which gives a different dimension to the place beyond a simple eatery. Chris Bennet, the chaplain who started The Dock, admits that when the college is in session there is a noticeable spike in freeloading, but they are determined to keep their “honesty box” system in place.

Worth the Risk?

One of the oldest running foundations that supports this model is One World Everybody Eats in Salt Lake City. They saw challenges with staying afloat with the flexible pricing over the years and is run by a non-profit group. In many if not most cases, similar to The Dock, the restaurants supported and promoted by this organization have become more charity than business.

Many take labor and volunteering as payment, which is a great deal for those who are down on their luck but not necessarily a great model for a profitable business. Then again, that doesn’t seem like what these cafe’s are aiming for. They have a guide for anyone who wants to start a pay-what-you-want cafe and a long list of existing cafe’s including Table Grace Cafe in Omaha, S.A.M.E. Cafe in Denver, Potager in Arlington, Texas — the list goes on.

Many point to pay-what-you-want models in other industries as proof that it can work, but the comparisons are not necessarily apples to apples. The rock band Radiohead had success with releasing their 2007 album, In Rainbows, this way. However, the band (like most popular acts) makes the majority of their money on touring, not album sales. The pricing scheme for the album increased their popularity, which in turn increases the turnout at concerts.

In an interview with Salon magazine, economics professor Tyler Cowen expressed that the model was unsustainable in the broad scheme and long-term. However, as a small niche it could feasibly survive under the right conditions, as other examples have shown, although for most this has not been the case. The right community and the right support network are key to these conditions. Many of the “restaurants” above also see themselves more like community kitchens than actual restaurants.

Ervin Peretz, a lead technical designer at Google, started the Terra Bite Lounge in Kirkland, WA in 2006 and used the pay-what-you-want model for about a year, but switched back to fixed pricing citing that because it’s in a neighborhood that is popular with teenagers, the freeloading factor was too great. It’s now closed.

The Java Street Cafe in Kettering, Ohio, closed within a year of adopting the model. The Tierra Sana in Queens, NY likewise closed shop, although they only offered the model one day of the week. The Santorini Grill in Brooklyn has also closed, according to Yelp. They adopted the model in November of 2011. Their most recent Yelp reviews, being in February of 2012, reflect that they were charging fixed pricing again at that point, only a few months out from the experiment.

The Takeaway

With the exception of charity-based organizations and Panera Bread, the model has not been very successful. It is also important to keep in mind that Panera has the corporation and their other fixed-price outlets to provide support, financially or otherwise, to the Cafe locations for as long as they choose to operate them.

It appears that under just the right conditions and with the right support, pay-what-you-want dining can be a promising endeavor. However, that’s a pretty slim set of circumstances to navigate as a small local business owner. Even though it is sure to bring publicity in the short term, it remains to be seen if any significant number of restaurants will find success with the honor system.

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