For more complex games that require more work (and possibly investment), it's questionable that this model could be relied upon. Still, as an old-timer who seldom plays anymore (#53596), I have huge admiration for the Asymmetric team for carving out an awesome niche gaming community with non-exploitive business model.
KoL's donation revenue is currently sufficient to support a full-time staff and a second team working on a new game. I feel like we were extremely fortunate to have launched when we did and to have gotten the critical mass in the beginning that makes it possible for this to be a career instead of just a hobby.
As far as choosing the business model, I'm not sure there was ever a moment when I made a choice about it. A couple of months in, the hosting bills were starting to cost more than I was comfortable paying out of pocket, so I put up a link to ask for donations to offset the cost. A player suggested, "Hey, why don't you give donators an in-game reward?" and I figured "Hey, why not, it couldn't hurt." To my surprise and delight, it was pretty much instantly profitable. I was still processing the donations by hand for quite a while -- the revenue model was really kind of an afterthought.
After it got to the point where I was able to comfortably and safely quit my day job (and finally start paying Josh, who had been diligently working for free for several months), I started offering the monthly specials, which caused another surge in income and allowed me to hire an office manager, another writer/designer, and another programmer. Since then we've added a full-time customer service/abuse-tracking position and part-time forum and chat-moderation supervisors.
What I do know is that it was enough for the two initial guys to now do it full-time and they now also employ something like 4 additional people full-time (I think its 4 additional).
Nothing even close to a major studio adapting an old hit to mobile platforms to squeeze out as much profit as possible.
When I found out that there was a mandatory quest at the altar of literacy to gain access to the chat channels of kingdom of loathing, I knew I was hooked. I even learned haiku to be able to chat on the haiku chan. http://kol.coldfront.net/thekolwiki/index.php/The_Altar_of_L...
It is not a pay-to-win type of scenario because it is a single player game (with one minor PVP minigame element). It also never feels scummy because you can do basically everything in the game without ever paying a single cent. Even 'premium' content that is unlocked by purchasable items is generally tradable and purchasable with the in-game currency (meat) that drops from the monsters.
Thus you don't have to pay up front... But you do end up donating some money for interesting items at some point due to the game being great, current, funny, having a great community, etc.
The business model probably wouldn't work for most, but in the case of Kingdom of Loathing it works really well.