Panera Bread’s “pay what you can” business model

Guess what! Entrepreneur offers a free lunch and still keeps afloat: true story. The US breakfast and lunch diner chain Panera Bread started with an experiment in 2010, called Panera Cares, which let’s customers determine themselves what they pay for the meal they choose. The idea is charitable by nature, aimed at helping US families that are struggling to piece together their daily bread. People who can pay a little more are requested to leave some extra cash to support people who are short some.

The program currently runs in 3 full-concept dedicated restaurants, serving about 3500 people a week. The results so far are very surprising: 60%  of the customers pay the amount the cashier suggest them to pay, 20% pay more, and the remaining 20% pay significantly less. Each store has been earning its keep so far, covering its’ own expenses.

Panera’s CEO Ron Schaich took charge in developing the concept himself, working in store to understand the model, and contributing to development of a working prototype. (He talks more on the development of business model in the video below) In working out the business model, the following hypotheses were taken to the test for validation:

  1. Dignity to the people who cannot pay for their meal will be the key driver to the success of the concept. Stores should therefore have no cash registers, to provide the required atmosphere of dignity
  2. The concept will thrive if it is community driven; people from the same neighbourhood supporting each other. Stores are therefore best located in economically diverse neighborhoods, where one group can directly support another.
  3. It is confusing for customers to walk into a store without prices. Therefore communication on the concept should be made as clear as possible to customers.

This is a very interesting case, not because of the potential this business model might have for Panera Bread itself, because it doesn’t. Panera Bread is a $3 billion a year publicly listed company with 1600 restaurants and 7 million guests each week. The “pay what you can” model just simply is not the revenue driver that will satisfy its’ shareholders (all the more recognition to Schaich for standing his ground in providing the space for this business model innovation).

Rather, this is an interesting case, because it tells of a corporation that looked at its’ own core, and came up with a business model prototype of how it could leverage that core to come up with a higher impact alternative to the 150 million dollars a year is was spending on gifts and donations to a mix of charities before. And, what it has come up with is a highly innovative revenue stream, which other organizations can use too, namely a stream that fuses consumption and charity.

Imagine what more you could do with this. Perhaps you could pivot the model and try it out in customer communities which are less economically divers (at the Bottom of the Pyramid) and see how it works out there. Or, more radically, you could try it out on virtual communities through the web, overcoming geographical restrictions between rich and poor. There’s no telling what might happen there, you might upend international aid as we currently know it! Me and the guys working at TiP4Change really got a kick out of this case, that’s for sure!

(PS. This is sure to be overkill for regular readers, but TiP is currently contending for spot at the Unreasonable Institute startup mentoring program and could use a boost. Click to Launch!)

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Post publication edit:

A recent study describes a case study of a Pakistani restaurant in Vienna, where the same Panera business model principles have been applied. The Harvard Business Review quote of the study mentions:

Only 0.5% of patrons take advantage of the opportunity to eat for free at the pay-what-you-want Wiener Deewan self-service Pakistani restaurant in Vienna, say Gerhard Riener of the University of Jena and Christian Traxler of the University of Marburg, both in Germany. Over the course of two years, customer payments stabilized at an average of 5 euros, well above the restaurant’s costs, while the number of daily guests increased by more than 50%, boosting revenue. The restaurant also benefits from fixed prices for drinks.

 

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