Monday, January 6, 2014

"E-Books Are Reading You" -- How That Enables a New and Far Better Economics

"As New Services Track Habits, the E-Books Are Reading You." While some view this as creepy, it offers powerful benefits that are yet to fully emerge. Wouldn't it be good to pay for books depending on how you read them?

This recent NYTimes article by David Streitfeld highlights the instrumentation behind e-books and other digital media, and how distributors, publishers, and authors can use it to better understand their markets. People are talking about how Big Data enables "The Quantified Self" -- think of this aspect as "Quantified Media."

With the FairPay pricing model, this gains far greater potential -- and clear benefit to the reader. How much you have to pay for a book can depend on how you read it -- how much, how long, how deeply, how repetitively. That data is indicative of the value you receive from the book. Why should what you pay to read it not depend on how you read it?

Start a chapter or two and quit, and pay nothing -- just like a Kindle free sample. Skim the whole book in 15 minutes and pay little or nothing -- much like Amazon's "Look Inside." Read a novel all the way through and pay a normal price. Read it three times and pay a bit extra. Study a how-to book, highlight sections, and go back regularly over many months, and pay accordingly (but with a volume discount). Use six travel guides on four countries during a one-week cruise and pay the equivalent of buying one travel guide (a detailed example is in this older post).

Already, individual reader usage data is affecting pricing between distributors and publishers (as Streitfeld notes for book subscription offerings):
On Oyster, once a person reads more than 10 percent of the book, it is officially considered “read.” Oyster then has to pay the publisher a standard wholesale fee. With Scribd, it is more complicated. If the reader reads more than 10 percent but less than 50 percent, it counts for a tenth of a sale. Above 50 percent, it is a full sale. 
Offering a subscription service "introduces a sort of interesting business opportunity to collaborate with publishers rather than be at odds with them.”        
Distributors collaborating with publishers instead of being at odds with them? What a thought! Of course that can lead to win-win pricing models.

With FairPay, a similar win-win collaboration involves the reader as well. FairPay lets readers pay whatever they think is fair for books, based on how they read them. If the distributor agrees that is fair (including consideration of any explanations offered) their subscription or buying privileges are continued (but in any case the buyer's price is final for the current transaction). This removes the barrier of price from reading a book.  It invites anyone with an interest to try a book, and only pay to the extent that they feel they got value from it. It allows those on limited budgets to apply discounts, and business readers to be expected to pay more, having derived greater value. It also strenghtens the bond between the reader and author, where readers feel an obligation to pay to authors who give them a valuable reading experience (especially if they know a fair share goes to the author). It also strengthens the bond between the reader and a publisher/distributor who gives them the kind of e-books they value, and supports authors they value.

Such ideas of variable pricing are unfamiliar in most consumer markets, and take some getting used to, as the Times article (and some thoughtful comments) make clear. However, we can look to the proven success of "performance-based pricing," which has seen growing acceptance in B2B markets.  As outlined in a Harvard Business School article by Benson Shapiro, current performance-based pricing strategies offers win-win benefits and reduced risk, but are primarily suited to high-value B2B situations, in which complex joint pricing analysis can be done for each customer situation. FairPay takes similar performance-based "dialogs about value" and streamlines them for a consumer e-commerce setting, with a high degree of individualized automation that can work on a much more intuitive and fuzzy level.  This offers a way out of the digital pricing dilemma that has brought book publishing and other content industries (music, journalism, etc.) to the brink of disaster.  (See many related posts on this blog.)

Monday, November 18, 2013

HBR Blog Post on FairPay: "When Selling Digital Content, Let the Customer Set the Price"

If you read the HBR Blog post that I co-authored with Marco Bertini (11/18/13), the sections below will suggest some links for more information on FairPay.

If you have not read that Harvard Business Review Blog post, it offers a summary of some of the ideas behind FairPay, and how they fit into a flexible architecture for better pricing that moves the exchange between seller and buyer from the transactional to the relational. We hope you will comment on that HBR post, and let us know what you think.

Marco and I are collaborating on a longer article that explores the principles of this architecture more fully. Marco is Assistant Professor of Marketing at London Business School, a prolific author in HBR and other leading business and academic journals, and has been working for some time on many of the strategies that FairPay builds on. (More background on Marco and his work.) My background is as a practitioner in online media and e-commerce, and the technologies that drive that.  Our collaboration has been very rewarding, and we are very pleased that this HBR Blog post will bring these ideas to more people.

To dig deeper on FairPay:

--Details on the FairPay Web site.

--Video and slide introduction.

--Process overview and diagrams.

--Blog Posts:  This FairPayZone blog explores FairPay at various levels and in various business use cases. The following posts may be especially helpful to HBR readers:
Strategy and behavioral economics methods
Journalism and similar content businesses

Posts address other businesses, including music, video, books, games, and software apps, as well as related experience with pay what you want pricing.  (Try the search box.)

I offer free consultation to those interested in evaluating and applying FairPay, and am happy to address questions. Please contact me at fairpay [at] teleshuttle [dot] com.

Tuesday, November 5, 2013

Pierre Omidyar: Adventures in New Business Models for Journalism ...and FairPay


As a follow up to my post on Jeff Bezos and The Washington Post, I turn to another exciting entry into journalism by a top-tier e-commerce innovator with very deep pockets, and how the new FairPay business model can work for that adventure as well.

Pierre Omidyar, billionaire founder of eBay, also considered buying The Washington Post, but revealed in his blog that he decided instead to actively participate in developing an entirely new media platform intended to support and empower independent journalists. 

Such a platform is especially well suited to the use of the FairPay architecture, with its ability to engage readers to partner with journalists, by serving as patrons for work that they value.  My earlier post on Bezos and The Post outlines the fundamentals of how FairPay addresses this business challenge.  This post builds on that.

***Second in a series on tech billionaires (Bezos and Omidyar) reinventing the business model for journalism, not as their personal charity, but by creating a new kind of reader/patron empowered by e-commerce technologies.***

In tune with Bezos, Omidyar points to the primacy of customer relationships in e-commerce  (in his interview by David Carr):
Technologists understand our users and break down how user engagement increases from somebody that maybe just tries your product once and then goes away, to a different kind of person that progressively gets more and more engaged and then becomes just totally locked into your product. That’s something people in Silicon Valley spend a ton of time analyzing, working on and thinking about.
FairPay integrates this kind of engagement directly into the value exchange process (as described in my Bezos post). Here I highlight additional aspects of Omidyar's focus on "elevating and supporting" individual journalists, and how FairPay supports that.

Omidyar says (to Jay Rosen) he wants to run his venture as "a company, not a charity." That means generating a revenue stream (presumably from readers, not advertisers). Rosen describes this as "the personal franchise model." The ability to engage readers to serve as patrons is essential to that. 

FairPay naturally integrates the reader's evaluation of a journalist's value directly into the pricing process.  It engages the reader in ongoing "dialogs about value" on how the reader values the work of each journalist over the course of their relationship.  Readers intuitively recognize many dimensions of value, and the dialog can easily be structured to elicit pricing that factors in this judgment with regard to such dimensions as quality, style, investigation, reader value, and social value .

With FairPay, an Omidyar media platform can get direct feedback from each reader on the perceived value of each article, the body of work by that journalist, and the media service as a whole. 
  • This can be directly linked to compensation for each journalist, thus increasing engagement and the quality of the relationship on both sides. 
  • Readers will know that a significant portion of their payments go to the journalists, and that their feedback bears directly on how journalists are paid (and what investigations are funded).  
  • Conversely, journalists will be motivated to create a body of work that readers recognize as valuable by voting for them with their wallets. 
This gets to the issue of "Creating Shared Value," as described in the influential 2011 HBR article by Porter and Kramer, which suggests the need to "reinvent capitalism" with broader ideas about value creation that will "unleash a wave of innovation and growth." They propose that "creating shared value represents a broader conception of Adam Smith's invisible hand." Another of my earlier posts  shows how FairPay operationalizes that idea to reflect judgments of shared social value directly into pricing dialogs, creating that broader conception of the invisible hand.

FairPay is uniquely focused on creating the multidimensional dialogs on value that are needed to turn readers into patrons of important journalism. It not only supports the journalistic effort, but guides it to the tasks that the reader/patrons consider important. 
  • It builds a deep relationship with readers that can feed directly into the key editorial processes that determine which journalists to support, in what investigations, and how they are paid. 
  • It builds a value discovery engine into the heart of the media platform, to drive it toward work that is good and important, and to get readers engaged as patrons who pay for that, both for themselves and for the common good.
And given a model in which (as Rosen reports) "all proceeds...will be reinvested in journalism," readers can be strongly motivated to be generous patrons. Omidyar is quoted as saying he started eBay on the premise that "people are basically good." Modern behavioral economics demonstrates that his faith is well founded. FairPay offers a way to apply that virtue to support a wide range of valued services, including support of quality journalism.  In doing that, it leads to the answer to Jeff Bezos's central question: "Why should I pay you" (see previous post).

Wednesday, October 30, 2013

"Why should I pay you?" - Bezos' Washington Post - Mapping a New Business Model for Journalism

Jeff Bezos' central question about The Washington Post, is stated in his recent interview: "Why should I pay you for all that journalistic effort when I can get it for free?”

I suggest a process that can generate the answer.

***First in a series on tech billionaires (Bezos and Omidyar) reinventing the business model for journalism, not as their personal charity, but by creating a new kind of reader/patron empowered by e-commerce technologies.***

In his letter to Post employees, Bezos said "There is no map" -- but I suggest this process provides a map -- it may be crude and in need of some correction, like early maps of "The New World" but, like them, it is good enough to start a journey in the right direction, even if that journey may take some unexpected turns.

As Bezos encapsulated it in his interview:
The Post is famous for its investigative journalism. It pours energy and investment and sweat and dollars into uncovering important stories. And then a bunch of Web sites summarize that [work] in about four minutes and readers can access that news for free. One question is, how do you make a living in that kind of environment? If you can’t, it’s difficult to put the right resources behind it. . . . Even behind a paywall [digital subscription], Web sites can summarize your work and make it available for free. From a reader point of view, the reader has to ask, "Why should I pay you for all that journalistic effort when I can get it for 'free' from another site?"
"Why should I pay you?" is the central dilemma of Internet content, and exactly the question the FairPay process is designed to answer. There is no one simple answer, but I suggest the general shape of the answer is this:
  • We ask you to pay only what you think fair for the value we provide you -- isn't that fair? The quality journalism we provide is expensive to produce, and if people like you who value it do not pay a fair price, how can we continue to provide it?
  • We will treat you as an individual patron -- we will listen carefully to what you want, and you will get our best efforts to produce and deliver it to you.
There is no one simple answer -- but FairPay offers a reasonably simple process for seeking the answer in all its complexity, by fully applying the one-to-one power of the Internet:
  • The answer is an individual one.  It will vary from person to person, from day to day.
  • Finding that answer requires an ongoing, individualized process.
  • It also requires individualized pricing, a concept that is challenging as well.
This is a problem that was made difficult by the Internet, as Bezos observes, but it is also a problem that can now be solved using methods enabled by the Internet. 

So "Why should I pay?" -- The essence of this FairPay process is to undertake deep, computer-assisted dialogs with the reader on just that question
  • The answer must be individualized to pin down what value The Post actually delivers to me.
  • It must structure a dialog to learn what I think The Post is worth to me -- and to help frame my evaluation to fully appreciate the value I receive.
  • It must close the loop to drive toward a fair exchange between me and The Post over time.
  • The first cycles of this dialog may give poor results, but with good feedback and direction, this can drive an emergent process that delivers value, sets prices for that value, and converges toward a fair value exchange.
Bezos emphasizes that there is a need for experimentation and patience -- FairPay offers a structured process for ongoing experimentation that can be expected to move toward convergence, and to provide data to shed light on any rough spots so the process can be altered to work even better. Think of it as an adaptive value discovery engine:

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FairPay centers on the idea of customers as patrons who have only to be motivated.  It provides a mechanism for them to be patrons of journalism.  (It works similarly for patrons of books, music, video, apps, and other digital offerings.)

The essence of FairPay is in the workings of this engine:
  • to view transactions not as ends in themselves, but as steps in a process that builds a relationship based on fair value exchange
  • to let you learn and adapt, to provide what your patrons value
  • to let the patrons learn pay according to the value they perceive, and to be fair about that
  • to guide these dynamics, to motivate both the patrons to pay a fair price, and your efforts to seek to delight them
FairPay draws on three main enablers:
  • Modern behavioral economics that shows that people are not heartless profit maximizers, but can be motivated by a sense of fairness and related aspects of reciprocity, altruism, and self-image to pay more than they have to (share their "value surplus"), when given a good reason.  Supporting the quality journalism of The Post, for my own benefit, for the common good, and out of fairness, is just such a reason -- if given in terms that are specifically relevant to me and responsive to my concerns. Think of me as a patron, and make me want to be a patron.
  • Computer-assisted dialog, and the growing ease of use and power of such dialogs to inform the process of understanding what I value, and to help me to recognize what value I have received. Engage me as a patron and show that you understand what I care about.
  • Predictive analytics that can help The Post to shape both the service it offers me and the dialog it has with me in a way that gives me what I really care about, and makes me want to pay a fair price for it. I will be a patron if I feel what I patronize is worthwhile and respects my desires.
How much should I pay? FairPay treats that as a matter for dialog.  Only I can determine what I value, and what price I think fair for it.  FairPay lets me pay what I think fair. ...But it does not stop there.

Why should I pay fairly? FairPay enables The Post to suggest what I should pay, track what I do pay, understand why I think my price is fair, and tell me whether they agree it is fair. All of this is specific to what I read, how often, how much, for how long; whether I read it for business or pleasure; how affluent I am; and many other details. The Post can measure and report that to me, consider what I say about the value I perceive, and factor that into their suggested price. They can tell me they think I am being unfair, and limit what they offer me, or they can tell me that I am being generous and enrich what they offer me. If The Post plays this game well (mostly carrot, a little bit of stick), they can give me what I value, and motivate me to pay a fair price for it.

These enablers and this value discovery engine inform a new invisible hand, one that can entice readers to happily pay a fair price for the content they consume. It gives the reader the power to set a price they are comfortable with, but gives the publisher the power to nudge that to a level the publisher is also comfortable with over time (or to cut back on what is offered).

That new dynamic balances my goals and The Post's. The Post can gamble on my fairness for a time, to see if am willing to be a patron. (Doing so costs them almost nothing.) If not, it can leave me to deal with a conventional paywall subscription, or to fend for myself. If I am willing to be a patron, The Post can serve me at whatever level I justify that I pay fairly for.

I suggest this fits perfectly with the guidelines Bezos outlined in his letter to Post employees:
"We will need to invent..."
...this map is both an invention and a framework for continuing invention
 
   "...which means we will need to experiment"
...FairPay is a method for experimentation in the form of structured dialog with readers, for dynamically learning what they value, at what price, and for guiding the Post's adaptation to provide it.
 
    "Our touchstone will be readers, understanding what they care about .... and working backwards from there"  
...that is the touchstone of FairPay, turning the invisible hand to drive just that, in a new kind of emergent pricing process.  
(More details are provided in the sidebar, other posts on this blog, and on the FairPay Web site.)

***First in a series on tech billionaires (Bezos and Omidyar) reinventing the business model for journalism, not as their personal charity, but by creating a new kind of reader/patron empowered by e-commerce technologies.***

Thursday, May 30, 2013

BitTorrent's "Gated" Torrent Bundles -- Just add FairPay Gating

BitTorrent has introduced "Torrent Bundles" a new "relationship based"content superdistribution bundle.  This is a move very much aligned with the relationship-oriented monetization strategies of FairPay. Both exploit free and gated offers, and both go beyond freemium by doing it in a way that is relies deeply on partnerships with artists and other creators/producers of content.  Torrent Bundles and FairPay are both great ideas, and the combination promises to be even better.

  • Torrent Bundles provide a viral superdistribution technology designed to work with various forms of gating, in a way designed to build a relationship.  
  • FairPay offers a totally new kind of gating that is based on reputation for fair payment over the course of a relationship, one that can fit very nicely into such bundles and increase their effectiveness in a way that dynamically seeks payment levels that work for both the buyer and the seller.

BitTorrent Bundles are described on their blog as providing a viral download that combines a portion of free content with a portion of "gated" content that can be unlocked.  More background on the business model and planned features is in the Wired interview with marketing head Matt Mason:
The BitTorrent Bundle is described ... as an evolution of the torrent file concept. The user downloads the Bundle, which contains not only free content — in the case of the first Bundle, the Dada Life remix of the Kaskade track “Dynasty,” as well as the trailer for Kaskade’s Freaks of Nature tour documentary — but also a gateway to premium content, as well.
How you open that gate is determined by the creator of the content. For this launch Bundle, it’s simply by sharing your email, but alternatives include pay gates, pay-what-you-want gates, or even links to outside sites like Netflix or iTunes. BitTorrent Bundles, in other words, gives musicians, moviemakers and artists of all kinds more control over how their work gets shared and sold.
 As noted by Mason, Torrent Bundles have Pay What You Want offers in mind.  FairPay is short for "Fair Pay What You Want."  FairPay takes the concept of buyer participation in pricing and building relationships to embed relationship-feedback-based gating directly into the pricing process.  This is described more fully in the sidebar and elsewhere in this blog and the FairPay Web site.

Briefly, the idea is that FaiPay tracks how buyers set price, asks them why they set a high or low price, and uses that information to develop a Fairness Reputation.  It then extends the social contract with buyers, by offering some content only to those who establish a reputation for fairness.  This gating based on Fairness Reputation can apply to premium content, or can apply to all content after an initial period of relationship building.  The result is that the natural human drives to be fair, to reciprocity, to altruism, to confirm to social norms, etc. are reinforced by the incentive of continuing and better offers.  This gives buyers a strong incentive to not try to free ride, and enables sellers to learn what the buyers value and how to deliver it.

Mason's book, "The Pirate's Dilemma," talks about reinventing capitalism, and how enlightened businesses can compete with pirates and gain internal efficiency while bringing greater value to society.  FairPay provides a highly automated adaptive engine designed to do just that in a systematic way.  FairPay solves the price-setting dilemma. (It also changes the game regarding piracy "When buyers set prices, no man will be a pirate.")

I am seeking to reach out to BitTorrent to suggest that it would make eminent sense for them to create a FairPay pricing option within their bundles, and would be happy to assist in that.    Any reader who can assist in making a connection to them (or others with compatible ideas) is invited to do so.  (I can be reached at fairpay [at] teleshuttle [dot] com.)

This is the first I have written here about the use of FairPay in a viral superdistribution context, but that is one of the ways FairPay was designed to work.  Anyone can redistribute bundles that contain FairPay offers, and the recipients can begin to establish their own FairPay relationships (and reputations) to get the added content (if not already in a FairPay relationship).  Of course criteria for pricing of content received virally would be expected to be relatively lenient, to encourage risk-free sampling, so that both senders and recipients feel well treated.)

FairPay is designed to coexist with, and even mimic, other pricing models.  It can operate along a spectrum of free, free for feedback information (including just an email, as in the Ultra Torrent Bundle), conventional non-gated Pay What You Want, and reputation-gated Fair Pay What You Want.  It offers the free plus paid mix of freemium, but in a way that provides a flexible boundary between free and paid, customized to each buyer.

Also relevant to BitTorrent, by creating a platform that supports FairPay, a byproduct is building a FairPay Reputation Database. This can be used to enable any producer of content on that platform to make offers to new buyers based on the reputation they have gained with other sellers, and thus make better offers to those having a reputation for being reasonably fair. (This can be done is ways that do not compromise privacy.) As owner of this database, BitTorrent would build a valuable asset (one that works much like a credit rating database).

BitTorrent Bundles seems to be pointing the way to a more enlightened and efficient model of content distribution. As people begin to see the merits of these ideas, the value of the FairPay pricing strategy will be increasingly clear.





Friday, March 29, 2013

Paywall 2.0 ...and Paywall 3.0 -- Focus on the Customer!

Recent presentations by Zuora, the champion of The Subscription Economy, and its president Tien Tzuo, describe "Paywall 2.0," as "why focusing on customers is the only way to win" in a blog at The Guardian, "The Reinvention of Media" on Slideshare, and "The Future of Publishing" in a longer white paper.  There is also a 20 minute video.

This as an excellent foundation for what I see as the next step, FairPay, which I am suggesting as Paywall 3.0.  Zuora is right about Paywall 2.0, and FairPay builds on that to deepen -- and center on -- the customer relationship. 

[Update:  But I should be clear from the start that The first rule of Paywall 3.0 is that There is no Paywall -- as will be seen below, there is a FairPay Zone in which readers may pay or not ("fair pay what you want"), and publishers decide case by case, and month by month, on what basis to maintain the relationship with each reader. This goes way beyond "soft" and "porous" and brings in aspects of a membership model.  (added in response to feedback 3/29/13)]

As noted by Zuora (in The Guardian version),
...as the demise of Variety shows, paywalls are not enough. That's because it's never been just about the paywall – it's about publishers viewing readers not as anonymous demographic statistics to sell to advertisers, but as customers who are willing to pay for something of value. In this changing customer-centric world, media and publishing companies need to adopt a more data-driven approach to understanding customers, design bundles and pricing plans that meet their needs, and strengthen their relationships with customers to ensure a they'll keep coming back for more. Let's call it Paywall 2.0...
Now starts the hard road to recovery. And that recovery will come from a truly customer-centric approach. It is about building customer relationships, finding ways to build loyalty, having a range of offerings from free to paid-for that make sense...
Paywall 1.0 was a good start, but isn't enough. Publishers need to move towards the second iteration...
I firmly believe we live in a world where success is not about how many products you ship. It's about how strong your customer relationships are, and how well you are monetising those relationships. 
As described in this blog and related Web site, FairPay reinvents the architecture of digital commerce to focus completely on the customer relationship.  It does this by shifting from a short-term transaction view of pricing to a long-term relationship view, and empowering the customer to engage in meaningful "dialogs about value."  It is this FairPay dialog that generates the price, with deep participation by the customer.  FairPay works as an adaptive value discovery engine that sets the price -- and how the product is offered to the customer -- to match what the individual customer wants and values.

Zuora rightly focuses on the many challenging aspects of subscription operations and how to build a business around ongoing subscriptions.  FairPay is fully consistent with that. In fact Zuora has expressed an interest in adding FairPay into their offering, as an alternative approach to pricing that their clients can apply as an option.

Paywall 3.0

FairPay can be viewed simply as just another pricing model that Zuora's subscription services can offer (one based on pricing and payments in arrears, with a decision process for renewals based on user pricing behavior).  That is fine, but consider how FairPay points to deeper strategic opportunities.

I suggest the historical perspective is:
  • We shifted about a century ago from negotiated (participatory) prices to seller-imposed prices that enabled efficient mass marketing, but distanced the seller from the consumer.  The costs of that have been lack of knowledge of the customer and lack of loyalty from the customer that have been hard to compensate for (such as with remedial market research and loyalty programs).  
  • Now the new phenomena of digital products and networks have disrupted commerce again, with movements to free, "freemium," and even "pay what you want" and "name your own price."  Businesses have found it challenging to adjust to this, and no current models really do the job well (most obviously in information and content industries).  The Subscription Economy can help (as for Netflix and Pandora), but getting consumers to pay for information and services that obviously have near-zero marginal cost remains very problematic (and relationships are critical, as Tien had previously observed with regard to Netflix's serious pricing missteps).
From that broader perspective, FairPay is a radically new architecture for deep two-way relationships between consumers and businesses - dialogs about value, as actually realized by each buyer in their specific, day-to-day contexts.  This is done by applying a structured balance of powers in an ongoing relationship (such as by subscription), in which:
  • the consumer sets an individualized price they think fair, after use, and 
  • the business continues to permit FairPay transactions/renewals as long as they agree that consumer is "fair" about the price (in their individual context). 
  • this continues in an ongoing and adaptive process.  (Unfair buyers are downgraded to lesser offers or conventional fixed-price--providing an incentive to be fair.)
The overall impact is that:
  • FairPay participatory processes can bring in far more customers (over a wide range of price points), increase profits (by capturing more latent value), and empower win-win relationships based on fair value exchange. Think of a privilege that is earned and maintained - a zone of pricing freedom, a "FairPay Zone."  
  • Much like custom negotiation (but with important differences), this participatory process can also be far more economically efficient than set prices, by including flexible consideration of all relevant dimensions of value, usage, context, ability to pay, etc.

As noted above, Zuora has expressed an interest in adding FairPay into their offering, as an alternative approach to pricing that their clients can apply as an option.  Building a FairPay offering to customers on a strong infrastructure base like Zuora's makes a great deal of sense.

We are looking for companies interested in trying this new step forward.  (Please contact us if you have an interest:  fairpay [at] teleshuttle.com)

Tuesday, November 27, 2012

Value2Me -- The Heart of a New E-Commerce

In the quest to introduce a new way to think about commerce and transform our economy, I am considering a new name that might better capture the heart of the strategy that I have been calling "FairPay." That new name is "Value2Me" -- suggestive of the core pricing issue facing the consumer:
    What is the value to me? (and why?)
Does anything else really matter?

The Value2Me process builds on the Value2Me in each transaction -- as the basis for a dialog about value between the buyer and the seller -- in the context of an ongoing relationship.  That dialog, as it unfolds in a series of transactions, serves as a price discovery process that seeks economic efficiency, in a relationship that is beneficial to both the buyer and the seller:

1. The buyer side driver:
  • What is the Value2Me (as experienced, after trial)?
  • Why should the seller accept that as fair compensation from me?
2. The seller side counterbalance (which the buyer must also consider):
  • Agreeing to treat each transaction as a trial offer, in which any Value2Me price I (the buyer) choose to set is final.
  • Deciding based on my Value2Me price--and the reasons I give for it--whether I am being fair enough that the seller should continue making such offers to me going forward.
This balance -- of buyer-set Value2Me versus seller-controlled judgment of the buyer's fairness as the condition for continuing the relationship -- provides the central dynamic for a new invisible hand. All else is implementation details.

****PLEASE TAKE OUR SURVEY ON THE NEW NAME****
 
Renaming FairPay? This new model has been widely discussed under the name FairPay (derived from Fair Pay What You Want), but it seems Value2Me may more positively capture the focus on value as it is uniquely perceived by each consumer.  This post seeks to test re-casting the concept in those terms, and to request your opinion on that.  "Value" is the core of all economic value exchange -- we all want value.  "Value2Me" focuses that on the individualized, personalized nature of value perception.


Value2Me for B2C! 

I submit that value to me is the essential criterion for economic exchange, and that the Value2Me process dialog is the best sustainable basis for a new economics.  Value2Me is the best possible sustainable price -- free or other lower prices are nice for consumers, but not sustainable. Seller-set prices almost never reflect Value2Me -- they are usually either too high or too low for most buyers.

The digital economy helps make Value2Me feasible because it enables infinite replication of products/services at almost no cost ("value"), and facilitates mass-customization ("2me").
  • Sellers can afford to continue to make Valeu2Me trial offers to a buyer as long as the buyer does not exploit them unfairly. Any revenue above marginal cost is profit. The only limit needed is to nudge each buyer to pay a price that fairly reflects their personal Value2Me, for that transaction, even if other buyers have a higher or lower Value2Me. 
  • The dialogs are designed to elicit that Value2Me, and to make it clear that it may differ from the value to other buyers due to different contexts:  different usage levels, features, needs, benefits, and ability to pay. 
  • This can be done by presenting usage reports, so buyers appreciate what they received (to focus them on experiential utility)
  • Suggested prices based on that experience can also be provided, so buyers have some guidance of seller expectations (an "anchor" in behavioral economic terms).
  • Cost data can also be provided (as it depends on usage), so buyers can factor in a fair profit level.
  • The "Why" of the buyer's Value2Me response would be relative to the usage, the costs, and the corresponding seller-suggested price.
  • Buyers who stretch the limits of fairness in setting Value2Me can be warned that if they are not more reasonable in the future, they will lose the privilege of paying based on Value2Me, and will have to buy at a conventional fixed price.
Value2Me enables totally adaptive and dynamic pricing in a way that enables a new kind of buyer-sanctioned "price discrimination" -- it is not imposed on the buyer, but actually set by the buyer.  This reaches new levels of economic efficiency by allowing sellers to reach every potential customer who values the product above its marginal cost of production (see The Long Tail of Prices).  Yes, many will pay less than under fixed pricing, but some will pay more, and large numbers who would not have paid at all can now buy and pay enough to expand the total profit. Fixed prices may provide a higher average price, but for a much lower volume. (Free and freemium have similar problems and more.)

Making this work as well as possible will take sophisticated automation to track buyer Value2Me, and "choice architectures" that apply behavioral economics to nudge buyers to fully recognize that value--with consideration to the costs of providing it (and to a fair profit). That is outlined elsewhere in this blog and the FairPay Web site. But the core idea is simple, and the process can be made simple and intuitive.

The term "Value2Me" also helps in emphasizing how this new perspective on commerce not only makes pricing and marketing more efficient, but can empower more effective product design and development. It focuses sellers on measuring perceived value, and on seeking to deliver maximum value to each of their customers on a customized basis. It facilitates a more adaptive and dynamic product development process that seeks to offer each customer the features and services that he needs to maximize his Value2Me.

In the past commerce relied on fixed prices that had to dance around the question of Value2Me -- now it can zero in on it. Value2Me for B2C!
 
All of this is consistent with previous discussions using the term FairPay. It is just a subtle shift of emphasis -- a use of words that may have a more positive appeal to consumers, and a more direct suggestion of the basis in value as perceived by each buyer.

Comments are invited! And please take our survey on the new name.

Monday, September 24, 2012

Beyond the Ad Model - A New Economics for Media

(This was published earlier today as a contributed post on Media Magazine's Future of Media blog)
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Facebook lost half its market cap because of doubts about the viability of ads as the world goes mobile. Advertising has its place, where it is non-intrusive, and when it provides valued information relevant to my current context. But that is unlikely to fully pay for the services consumers want. Similar problems are at crisis level in newspapers, video, and music.

It is time to rethink payment for media in the digital age. Most users of Facebook, or any media service, would be willing to pay a fee -- if it were commensurate with the value they actually perceive, and their ability to pay. Charging for Facebook seems impractical only because we have not figured out how to create a payment model that works for a wide range of consumers.

Instead, we look to advertising, or to selling data about consumers, both of which are largely opposed to the interests of the consumer. But consumers are coming to realize that "if you're not paying for something, you're not the customer; you're the product being sold." I suggest that by rethinking how we pay for services, we can find a much better solution.

Freemium offers a hint of the answer-- give away some product to get users to see the value and agree to pay for a service they find useful. But this still fails to match widely varying usage patterns, value perceptions, and abilities to pay.

How can a vendor understand the right price for each user, at each point in time? This seems intractable until we consider letting the user tell us -- the user knows.

The concern is that the user will not be fair, and will understate what he is willing to pay--or will fail to appreciate the cost of service. But we are in an era of relationship commerce – now we can build personalized relationships on mass scale. The solution is to build relationships with customers based on dialogs about value -- so that we can maintain relationships with those that set values fairly, nudge them to recognize the value, and cut off relationships with those who are unfair. The same technologies that enable ad targeting, individualized merchandizing, and automated customer service can enable this too. I have been talking to companies of all sizes about just such an approach -- I call it “FairPay” (short for “fair pay what you want”).

Advertising and data sales can still have a significant place in adding economic value, but can be limited to not detract from the core value proposition between the consumer and the business. The same FairPay process can let users individually determine what level of advertising and data usage they will tolerate, in return for reduced payments.

All it takes is some willingness to empower your customers, and some experimentation. Is that any more than we should expect in this new age?

Monday, July 23, 2012

Free AND Paid! -- To Each His Own Price

The current hot debate in the blogosphere on free versus paid really points to the failure of our current models.  Dalton Caldwell's "Announcing an audacious Proposal," is an eloquent cry for services that serve their users, not advertisers.  Fred Wilson has countered with "In Defense of Free," which champions the value of a mass audience that seems only reachable by free and freemium.  And often neither paid nor free works very well -- just look at the newspapers on the ropes and the musicians eking out a living selling teeshirts instead of songs.

Yet we are in a new age, and new thinking can provide a way to have it both ways, and to do even better at it.  It is time for the invisible hand to meet the cloud.  Free is just another price.  Why why can't we build services that dynamically customize both the service and the price?  We need a new approach to pricing that looks beyond the scarcity of pre-digital times, and that exploits the new abundance, applying the dynamic intelligence of the cloud that can enable a single service be both:
  • free for those who want free (and are willing to "pay" with ads or content submission), and/or 
  • paid for those who place value on getting what they want.

The FairPay pricing strategy that I have been developing is an attempt to rethink how we set prices to do just that.  FairPay provides a new process for setting prices individually and dynamically.  It does this through a "dialog about value" between users and service providers (services, platforms, creators, authors, artists, editors, producers, etc.).  It applies an automated price discovery engine to manage that dialog and nudge it toward fairness.

Because it is dynamic and individualized, FairPay services can transcend all pricing options to find the one that works for a each user.  
  • Those who want an ad-free service can work out pricing that buys out the ads.
  • Those who create user generated content can obtain pricing that factors in the value they contributed (and maybe even make money at it).
  • Those who want if free can get an ad-supported package
  • Those who want to save just a bit can get a light ad + paid blend
  • Those who want to try a no-ad version can try it, with no obligation to pay more than they find it worth--after they try it, and know the value.
  • Those who do not play nicely can have their privileges withdrawn, and be offered just fixed price or ads.

FairPay combines an architectural framework that can include all of these models, with a dialog process that allows both buyers and sellers to reach a fair equilibrium, based on the actual perceived value, considering any and all factors.  Free and paid can coexist in the same service.  Caldwell is concerned that prices should be based on use, and that "the definition of use is very complicated." Smart dialogs about value can simplify that to the degree desired, and yet reflect any variable that each buyer and seller agree is important. (And most of that can be automated by sellers--and eventually by consumers as well).

The core idea is to view pricing not in terms of single transactions, but as a joint decision process that develops over the life of the relationship.  Sellers can lose revenue on some of the abundant product, as long as they converge on a fair price over time (in money, ads, or services), for each customer.  Customers who do not play nicely lose the privilege and must pay what and how the seller demands. 

This relationship view can turn the invisible hand to find the optimum value exchange, now that the cloud can provide abundance and manage the dialog about value.  All we need to do is let go of our old ideas about pricing, transactions, and scarcity, and develop a new and far more flexible process.  We need not force all users into one model.  One-size-fits-all pricing is wrong most of the time, for most of the users.  Lets' find an architecture that seeks the right size for each user!

Details of how this can be done are elsewhere in this blog and related Web site.  It is yet to be refined in practice, but isn't this the kind of economy that is best for society?  One that maximizes production, rewards producers fairly, and makes the abundance they create available to everyone on a fair basis?  Isn't this just the kind of smart economics the network economy was supposed to enable?

Wednesday, March 21, 2012

Turning the Invisible Hand to Create Shared Value -- The FairPay Strategy

"Creating Shared Value," the influential 2011 HBR article by Michael Porter and Mark Kramer, points to the need to reinvent capitalism with broader ideas about value creation that will unleash a wave of innovation and growth. They propose that "creating shared value represents a broader conception of Adam Smith's invisible hand."

I suggest that the FairPay revenue model provides a new market regime that reorients the invisible hand toward shared value, one that can be operationalized in business today, to offer an entirely new micro-economics for profit-seeking business transactions.

Porter and Kramer nicely draw the big picture for shared value, noting that, unlike calls for "Corporate Social Responsibility" that are at odds with profit motivations,
Shared value focuses companies on the right kind of profits - profits that create societal benefits rather than diminish them. ...
The moment for an expanded view of value creation has come. A host of factors, such as the growing social awareness of employees and citizens and the increased scarcity of natural resources, will drive unprecedented opportunities to create shared value.
We need a more sophisticated form of capitalism, one imbued with a social purpose.
They suggest what we need is not "a redistribution approach," but one for "expanding the total pool of economic and social value.

FairPay takes this CSV big picture and provides methods for "doing business as business" that support that vision. These methods can be applied now, in a wide range of businesses, and will point the way to applying similar new thinking more generally. (FairPay was designed for, and clearly applies now, in markets in which marginal costs are low, such as for digital products or services. Digital markets, especially for content, are widely recognized as being markets in which traditional capitalism has been unable to adapt effectively to the new digital economy, and new business models are urgently needed.)

FairPay turns the force of the invisible hand to span ongoing relationships. It guides pricing to create shared value between customers and businesses over long-term relationships (in which customers have a say in the creation of shared value). It looks beyond one-time transactions, to ongoing dialogs about value.
  • Adam Smith's invisible hand works at a transaction level:  it optimizes the balance of  supply and demand in terms of prices for large numbers of individual transactions.  Transaction prices drive supply and demand into balance, by shifting supply or demand until balance is achieved. This invisible hand does not know or care about repeat business or shared value (except as it affects demand in aggregate).
  • FaiPay turns the invisible hand on its side, to work over time, at the relationship level: it optimizes the balance of supply and demand in terms of prices over time, with respect to individual customers. Relationship pricing is balanced through an ongoing series of pricing conversations, to achieve an agreed upon level of shared value in each of a multitude of ongoing buyer-seller relationships. Shared value is integral to these pricing conversations.
The invisible hand of FairPay creates a new kind of balance that emerges over a series of transactions, with a simple balancing dynamic:
  • For each transaction, the buyer is given the full power to set prices based on the value actually received (Fair Pay What You Want). This is done retrospectively, when the value is known to the buyer.
  • The seller must accept the buyer's price for that transaction, but the seller holds the power to decide if the buyer's pricing is fair enough to want to extend the relationship by continuing to make FairPay offers for future transactions (considering what has been learned about the buyer's pricing behavior and reasons).
This leads to an ongoing balancing process based on longer-term considerations of shared value:
  • Buyers have full freedom regarding the pricing of single transactions, but have the incentive to be fair to sellers and divide the shared value surplus in a way that is fair to the seller. They are also invited to give reasons for their pricing that indicate why they think their perception of shared value is more or less than the seller has suggested. Based on guidance from the seller on suggested prices, costs, usage, social norms, and the buyer's reasons, both sides can learn whether and how they can agree over time on criteria for fair pricing that creates the maximum shared value (even if they do not agree on each transaction).
  • Sellers yield power over a limited number of individual transactions, but gain new power to truly understand the value they provide to individual sellers in each transaction, and to engage in a substantive dialog with their customers about that value and how they should share in it. Sellers manage the "choice architecture" that frames the value proposition and the factors to be considered, and can signal what buyer pricing behaviors they accept as fair or unfair. The seller learns how loosely or rigidly to manage each customer relationship to create profit and grow its share of the pie.
The new invisible hand of Fairpay emerges from this balancing mechanism for discovery and maximization of shared value between buyers and sellers over time.
  • FairPay pricing can be used in combination with conventional pricing as a back-stop, and positioned as a privilege offered to those who desire a relationship based on shared value and respect for the obligations of fairness that entails. 
  • Sellers can manage the "choice architecture" by using premium tiers and perks as rewards, and the threat of withdrawal of such premiums as penalties, to nudge buyers to price at the highest levels the buyers consider justifiable.  Sellers also hold the threat of complete withdrawal of future Fairpay privileges (returning an "unfair" buyer to fixed pricing for future transactions) as a powerful incentive to deter abuse. 
The essence of Fairpay is that buyers and sellers engage in a continuing individualized dialog about shared value--both at a personal and a social level--as actually realized in every transaction
  • FairPay seeks maximum shared value for each customer, by being specific to the value sought and received by that consumer, at that time, in that context. 
  • It reflects individual variations in need, value perception, willingness to pay, ability to pay, and all relevant criteria. It provides sellers with fine-grained, in-context "market" data for segments of one, that enable the sellers to fully understand market needs, and learn new ways to meet them, and to delight their customers, one by one. 
  • It naturally reflects broader considerations of shared social value beyond the individual customer, by sharing responsibility with the customer for the social valuation process. Buyers are free to consider whether a seller is socially responsible in the larger sense, and to factor that into their willingness to pay (to whatever extent they desire). What might have been an externality to the seller may be internalized by the buyer, so that the seller must internalize it as well. Social values shift from external constraints at odds with profit maximization to natural subjects of the value dialog with the buyer.
  • It changes the equation from a zero-sum game of buyers shopping around for the lowest prices and sellers seeking to be the low-cost provider, to a win-win collaboration for achieving shared value. 
  • Instead of consumers seeing profits as coming at their expense, profits are framed as a valid and deserved sharing of their value surplus with a company that is a respected partner in value creation. This gives a new legitimacy to profit-seeking, as integral to collaborative creation of shared value.
Traditional transaction-level pricing models foster a purely price-based race to the bottom, which makes it hard for a company to see at a micro-economic level how social responsibility to their customers and the larger public can benefit their bottom line, well intentioned as they may be. We can talk of shifting the view to long term profit maximization, but how do we do that? The ongoing, relationship-based structure of FairPay micro-economics directly considers shared value, at both the individual and larger level, in a way that removes the conflict.  It aligns profit maximization for the firm with maximization of social value (at least as perceived by individual buyers). Thus Fairpay provides a new micro-economic mechanism to seek long-term profit maximization in ways that directly align with social value maximization.

Where and when can FairPay fit in? It is most clearly applicable to businesses in which marginal costs are low. A major segment is in markets for digital products and services. Such markets already make extensive use of free trials, freemium models, and even pay what you want promotions. These markets already exploit the low incremental cost of producing additional (marginal) items, to give away some product in order to sell more in the future. FairPay can be introduced immediately, to do this in a much more economically efficient way. Some controlled level of zero-revenue transactions are accepted as a market learning cost, in order to discover what buyers are willing to pay and whether they are good partners. With FairPay, instead of "free" offers, the offers are value-based (but are similarly risk-free to the buyer). Similar immediate opportunities for FairPay arise in markets where physical goods and services are perishable (such as those currently addressed by Priceline's "name your price" model). As businesses and consumers get used to FairPay, opportunities to exploit it will expand.

Turning the invisible hand to the broader aspects of shared value. FairPay naturally guides better economic efficiency, while significantly reflecting the broader context of shared value. When this new turn of the invisible hand gives consumers a say in pricing, social values will be served as just another corporate profit opportunity, not a "Corporate Social Responsibility" cost.
  • Price efficiency and legitimacy:  FairPay provides a structure for pricing that is dependent on buyer acceptance in a way that legitimizes differential pricing - to efficiently address varying value perceptions, usage patterns, and abilities to pay. Price "discrimination" becomes an equitable method for maximizing shared value when the buyer participates in the discrimination and accepts the rationale for paying more or less than other buyers. This can enable usage-based and other value-based pricing in ways that buyers can agree to and temper as desired (such as paying little extra for an unintended and atypical overage in usage). Many current markets are very inefficient because of consumer aversion to metering and other rate discrimination. "All you can eat" pricing plans have popular appeal to narrow customer interests, but their wastefulness and inequity will become very apparent when customers participate in pricing decisions.
  • Disadvantaged markets: This buyer acceptance of "fair and reasonable price discrimination " also enables new ways to efficiently address low-income and disadvantaged markets at a profit (and social benefit).  For example, it becomes clear that those who can afford to pay more than others should do so. Information and digital services that may expensive in high-value/high-ability-to-pay markets can fairly be offered far more cheaply in disadvantaged markets without cannibalizing the markets where buyers know they can and should fairly share their large value surplus. When treated as partners in shared value pricing decisions, consumers will recognize that companies should be able to profit more (and recover more of their costs) from those who can afford it than from those who cannot, and companies will be able to expand and differentiate their markets accordingly.  
  • Innovation and productivity: FairPay's individual dialogs about value give companies both the incentive and the market information needed to innovate to better serve existing and potential customers, and to communicate how they offer value to different customers. FairPay pricing dialogs will capture rich and detailed transaction level data on individual buyer value perceptions, needs, and desires. They can re-conceive products and markets, identify new needs, create efficiency, and expand markets, in a natural partnership with their customers.   
All of this can start now in markets that Fairpay is particularly well suited to:  those in which marginal costs are low, such as for digital products and services, and for perishables. As such uses of FairPay develop, our concept of how to think and talk about pricing will change, and our understanding of business as a game of relationships, not just transactions, will grow.

From there we can learn how extend the principals underlying FairPay to other markets, and perhaps develop similar models of relationships and of dialog about value that can work even for products and services where marginal costs are not low. We will enter a new era in capitalism as a way to collaboratively create shared value, guided by a new and broader sweep of the invisible hand.

Thursday, February 9, 2012

Thinking Fast and Slow about FairPay: A New Psychology for Commerce in a Networked Age

Nobel Prize in Economics winner Daniel Kahneman's new book, "Thinking Fast and Slow," presents a wide range of insights into how we think and make choices.  These insights--mostly established in the past few decades--form the groundwork for the new field of behavioral economics.  Much of this is highly relevant to the radically new FairPay process and how it can shape a new economics to enhance value exchange in our increasingly networked economy. (FairPay is described extensively on this blog, and the related Web site.)

Kahneman's book is all about choices, and shows how greatly they are influenced by framing and anchors.  While our decision processes are wonderfully rich and nuanced, they are highly susceptible to influence. Much of our decision making is based on the fast, intuitive, but error prone processes Kahneman calls System 1 -- with reluctant intervention by the slower, more deliberative and "rational" processes of System 2, which is often lazy, and also subject to systematic errors.

The basic opportunity in FairPay is that it changes from a model in which prices are imposed on buyers (take it or leave it...or shop elsewhere), to one in which the buyer chooses the price, but with incentives to consider whether the seller will judge it to be fair, in that particular context. This may seem to take all power from sellers, and expose them to buyers being unfairly cheap, but there is a counterbalance: The seller has the ultimate power to motivate fair pricing by controlling whether future FairPay offers will be made to that buyer. That gives buyer an incentive to price fairly, to gain the best future offers, and to avoid losing the FairPay privilege. The seller can also frame the offer, and set a suggested price as an anchor.

By applying the principles of behavioral economics as outlined by Kahneman, the seller has many opportunities to nudge buyers to price fairly and even generously. Many of the lessons of the book are very relevant to FairPay:
  • Framing is very powerful and applies to both System 1 and system 2. Choices can be altered very dramatically by framing the choice in different ways. Framing of offers is central to making FairPay work effectively. The core objective is to make buyers feel the seller deserves a fair price, and to find incentives for pricing generously.
  • Nudge is the title of another recent book on behavior, by Thaler and Sunstein, that makes much of choice architectures that can nudge behavior in very powerful ways.  (Kahneman refers to this, noting his collaborations with Thaler.)  A choice architecture is a systematic process for framing choices to induce desired behaviors. FairPay sellers can use such choice architectures to nudge most buyers to set prices to desirable levels.
  • Anchors are an aspect of framing, in which a reference point for a price or other parameter to be chosen. Even where the individual is free to ignore the anchor entirely, it tends to have a surprisingly strong influence on the choice. FairPay exploits the power of suggested prices as psychological anchors to nudge buyer pricing choices.
  • Intensity matching is one of the things the intuitive and automatic System 1 does easily. Matching prices to one's happiness with a product is easy. Thus choosing prices that match to perceived value is easy, and the desire to pay fairly for being delighted by a seller can be harnessed just as well, and perhaps better, than the competing desire to find bargains.
  • WYSIATI (What You See Is All There Is) -- people (especially their System 1), tend to make choices based on just the factors they see, and even System 2 is lazy and tends not to search for other factors that may be missing. A key aspect of framing and choice architecture is to present those factors that cause buyers to notice what they should value (and to forget or discount any negatives) in order to nudge toward desirable pricing choices. 
  • The laziness of System 2 is perhaps most strikingly evident in the use of opt-in versus opt-out choices to set desirable defaults. Kahneman cites organ donation rates of 4% and 12% in two European countries where donation is opt-in, compared to rates of 86% and nearly 100% in two countries where it is opt-out. Thus making acceptance of a suggested price an opt-out choice (such as for ongoing subscriptions) might lead most buyers to be compliant, most of the time (especially once a comfort level is established).
  • Decisions are affected by distortions in psychological weighting.
    --Loss aversion is stronger than gain seeking. Losses from an established position tend to be weighted more heavily than equivalent gains.  Once a buyer has the privilege of setting prices under FairPay, they will be averse to losing that privilege (by pricing unfairly low just to get a small gain on one transaction).
    --Fear of disappointment also tends to be overweighted. The pricing-after-trial feature of FairPay eliminates the risk of buyer remorse, and that fear can be a significant barrier to buyers accepting a price corresponding to full value up front. So conventional prices are implicitly discounted in the buyer's mind to allow for the risk that the hoped for value will not be realized. FairPay removes that significant discount factor.
  • Perceptions of fairness and entitlement are inherently frame-specific and not underlying. Kahneman gives an example where wages have declined in a down economy--most people view it as unfair for an employer to cut the pay of an existing employee (viewed as having a personal entitlement), but perfectly fair to fill an vacancy at the lower rate by a new employee (viewed as lacking that personal entitlement). By framing fair prices as being context dependent, such as based on usage, value obtained, ability to pay, and other factors, buyers can be nudged to accept prices that are different from those for buyers in different circumstances. Those who pay a higher price need not feel regret if they learn that another buyer paid less, since the fairness of the price depends on the circumstances (different entitlements in different contexts).
Building on how System 1 and System 2 partner in making choices, an objective of FairPay choice architecture is to make it easy for the buyer to accept seller-suggested prices so that both buyer and seller maintain a happy and mutually valuable commercial relationship.

Kahneman refers to cognitive ease as a key factor in how we make choices. When things are going well, with no surprises or threats, System 1 does its automatic control -- but when there is cognitive strain, System 2 reluctantly jumps in. Obviously, FairPay pricing processes should seek to maximize cognitive ease, as they nudge buyers to fair pricing. More guidance on the issues in achieving cognitive ease is shown in Kahneman's figure below:
  • Repeated Experience: As buyers become familiar with FairPay, and with a given seller, they will gain comfort and ease.
  • Clear Display: Offers and pricing requests should frame the offer and the suggested price as simply and clearly as possible
  • Primed Idea: Offers and pricing requests should frame the value proposition, the relevant context, and the suggested price to most effectively prime the buyer to accept it as fair.
  • Good Mood: FairPay aligns the motives of the seller and the buyer -- if the seller delights the buyer and positions himself as a positive and deserving partner and provider of value, the buyer will find it easy to reward that (just as most people give good tips to delightful and effective waiters, and pay premiums to companies that delight them--like Apple).
  • Feelings of Familiarity, Truth, Goodness, and Effortlessness will accrue and reinforce desired behaviors in continuing FairPay cycles.
All of this suggests that effective choice architectures can be applied to make FairPay very effective for most buyers -- if the seller really seeks to deliver what the buyer values, in return for a fair profit for doing that. Isn't that the kind of economy we all seek?

Speaking of the kind of economy we seek, some of this choice architecture may smack of exploitation of buyers by manipulative businesses, but remember -- this is in the context of a system in which buyers have complete power to set any price they think fair. The choice architecture is just a defensive tool for sellers to nudge buyers toward fairness in choices they have full freedom to make. The nudging of a choice architecture may be "manipulative" to a degree, but in the context of an unprecedented level of buyer freedom. Sellers need to have some compensatory powers (and it seems that abuse is unlikely and easily countered). The ultimate objective is to align buyer and seller behaviors toward achieving a mutually beneficial value exchange.



Tuesday, January 17, 2012

PIPA and SOPA -- FairPay and the Death of Piracy

Sabers are rattling this week with the consideration of seemingly draconian measures to stop Internet piracy of copyrighted materials.  The FairPay model for monetizing content puts this issue into interesting perspective. It suggests the way to end piracy is not to reduce the supply, but to reduce the demand.

Basic objectives:

First, let's get back to basics. What is the real objective here?  Copyright and ownership of intellectual property are not ends in themselves, but means to a larger end.  This larger end, is clear in the Constitution: "To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries."

  • Thus copyright is clearly only a means "To promote the Progress of Science and useful Arts." 
  • It would be foolish to apply measures to protect copyright that impede "the Progress of Science and useful Arts" more than they promote it.
The problem with PIPA and SOPA is that they seem to overstep the objective, and to enhance a means at potentially high cost to the desired end.
  • The real issue is that the Internet has facilitated piracy to the point that it threatens the ability of creators of writings and other arts to earn reasonable compensation for their work, and thus threatens the progress we seek for society.  If creators lack fair compensation, fewer will create, and society will lose.
  • We (society) support IP ownership to the extent that it is good for society, not the other way around. 
So the challenge is to find better ways to ensure the fair compensation of creators for the good of society. The Internet is a tidal change, and we must learn to channel the tide, and harness it, not try to stop it.

Fairness and Piracy:

Robert Levine's "Free Ride" provides a nice summary of many of the issues of piracy, and makes it clear that some level of piracy is inevitable, with a level that depends on a number of factors, including:
  1. The ease and effectiveness of piracy relative to any issues of quality and risk.
  2. The ease and effectiveness of legitimate sources.
  3. The cost of legitimate access (relative to piracy)
  4. Social and ethical factors relating to the legitimacy of the IP owner, and the fairness of stealing from them (stealing service, not bits).
It is well known that the Internet has shifted at least #1 and #4 toward piracy.

I suggest the real solution is not laws and other efforts to shift #1 (although some modest improvement may be gained), but to shift #2-4, and especially #4.  The value of shifting #2 and #3 are well known, and summarized by Levine.  What is less clear is how important #4, fairness, is.

Robin Hood, FairPay, and the death of piracy

As described elsewhere on this blog, FairPay is a new model for transactions related to copyrighted content that lets buyers pay what they think fair, within limits.
  • When buyers can buy legitimately for a price they accept as fair, the cost becomes a non-issue.  Those who have limited means or get little value can still buy for a price that considers those factors fairly.
  • When buyers can buy legitimately for a price they accept as fair, the fairness of piracy becomes clearly insupportable for all but the most sociopathic. It is hard to argue that "information wants to be free" (as in free beer), when it is free enough.
Piracy is a tax imposed by the people on sellers of IP, a Robin Hood tax. When the price of content seems onerous, people feel they should not have to pay for it, and piracy appears justified. It is seen as noble for the poor to steal from the oppressive rich.

Killing the demand for piracy, not the supply

As with any illegitimate product, it is generally easier and more effective to reduce demand, not to choke off supply.  That is best done not by legislation, but by making the legitimate alternative more attractive.

There are a number of interrelated levers to move in that direction:
  • FairPay pricing is a significant step in the right direction, one that also supports the following steps. It makes prices more suited to individual buyers needs, values, and ability to pay. Copyright owners are given the right to extract "monopoly rents," but must balance that with the quid pro quo of society's desire to benefit from their creations.
  • Making sellers more legitimate in the eyes of consumers is also a major factor. To the extent the IP owners are seen as evil and rigid, faceless corporations that exploit their consumers (and their creators), it is easy to justify stealing from them. Showing that they listen to consumers and can be flexible in pricing will greatly increase perceived legitimacy and deservedness.
  • Getting sellers to be more clearly respectful of creators can also have a big effect. Many studios (such as music labels) are perceived as sharing little of their profit with their artists. While they do have real costs of nurturing, marketing, and managing, clearly the Internet is shifting that toward what Seth Godin calls "skinnier" models. IP aggregators must either get skinny, or demonstrate why they deserve the share they get, and be transparent about how much they share with the creators.
FairPay is not essential to all of these levers, but it can contribute significantly to all of them.

When buyers set prices, no man will be a pirate. That may not be true in every case, but it is true enough.

Monday, January 9, 2012

Price Discrimination Can Be Good!

An interesting NYTimes report by Nick Bilton talks about the Uber online service for ordering a car service, and how the workings of supply and demand can seriously disrupt customer relationships. The issue was a "surge pricing" feature that raised the cost of a ride to a New Years party, which cost $27 to get there, to make the ride home cost $135. Bilton nicely summarizes the issues in dynamic pricing.

I posted a comment on that article suggesting that FairPay provides a solution to this problem -- a solution based on using the Internet to facilitate a relationship view of price negotiation, instead of a single transaction view. This post elaborates a bit on my comments, and highlights one of the major advantages of FairPay that make it more attractive and more economically efficient than conventional methods.

The real problem of dynamic pricing (described in the article) is one that can now be fixed in a “post-modern” economy. The problem with dynamic pricing is that it is set unilaterally by the seller, and imposed on the buyer  on a take it or leave it basis. This is also called price discrimination (and in some cases, price discrimination is actually illegal). But as Bilton says, such discrimination is economically optimal. That is why it is widely used in the hotel, airline, and car rental businesses. There buyers do live with it -- but still with considerable resentment. I suggest the way to make it acceptable to buyers is to involve them in the pricing decision.

That is one of the key features of FairPay.  FairPay sets prices based on a dialog with the customer, and uses Internet tracking of such prices to manage fairness over a long-term customer relationship.  The long term relationship view is as suggested by Liran Einav (a Stanford economist) in the article). With FairPay, customers have significant participation in pricing, and can be asked by sellers to include a dynamic premium (such as for peak time surges) -- but they can decide just how extreme that premium should be. Sellers get to determine if the buyer is generally being fair about that, and continue to allow FairPay pricing in the future to those who are reasonably fair. True, few buyers might accept a price of $135, but many might accept $50-75 and some even more. The seller can also be more restrictive during peak times, offering surge period FairPay pricing only to those who who have a history of agreeing to a reasonable level of surge premium, while let less flexible users might be permitted to use FairPay pricing only during times of normal demand. Thus "discrimination" can be good, when done within reason, at agreed-upon levels, based on mutually understood reasons.

Another factor in customer acceptance is predictability, as in the cited quote of Dirk Bergemann (economist from Yale). I suggest this is really a problem with unpleasant surprises, and with price changes that seem unfair.  The perceived unfairness of dynamic prices and discrimination, such as with the New Year's surge, or for snow shovels or flashlights after a storm, is the "unfair" external imposition of higher prices. Here again, when the customer gets to set the level of dynamic premium, that changes it to a fair process.

Of course dynamic discrimination should also apply in the other direction, to provide discounts at slow times, as well! That is an equal part of fairness, and FairPay can provide that too. When there is lots of supply and little demand, the customer should be given the freedom to set a lower price (within reason). FairPay brings that kind of sensibility back into pricing. The time-honored practice of individual negotiation allowed such issues to be factored in as appropriate and agreeable. We lost that in 20th century mass-marketing, but the Internet now lets us regain that in a new and better way. That is described more fully elsewhere in this blog, and the Web site.

I suggest FairPay could be a very effective solution for Uber, and for many others like them.

Wednesday, December 28, 2011

The War over the "Free Ride" (Robert Levine's Book), and the FairPay Win-Win Solution

Robert Levine's "Free Ride" is an important study, but a partisan one, as you can judge from its subtitle: "How Digital Parasites are Destroying the Culture Business, and How the Culture Business Can Fight Back."  It explains that competing interests are at war, old business models for creator's and seller's rights have been disrupted, and new business models are needed.  However, it is unable to offer much satisfying guidance to a solution.

This is a very valuable book (with more balance than one might expect), and a very good history and economics lesson. Levine provides a good grounding for "how to fight the last war"--a war of creative rights versus technology (and the double edged sword of new freedoms it offers). It does provide some of the balance we need to accept that both sides are legitimate (to a degree). Levine warns that "over the nest decade, we will chose between two competing visions for the online world...more like cable television ...[or] more like the Internet. ...It is really about commence or chaos. ...A completely closed system would indeed defeat the purpose of the Internet...But so would an absolutely open one...  We'd have a twenty-first century communications infrastructure supporting a seventeenth-century economy, where artists need patrons and only physical items have value." A very good statement of the problem...

He offers only one potential solution:  a compromise, and one that is old, awkward, and unappealing in many ways. What we really need is something new, a twenty-first century synthesis, one that offers a win-win solution, not just variations on the old zero-sum battles.   I suggest FairPay offers the kind of forward-looking synthesis we need, as I will explain in a moment.

For an excellent review of "Free Ride" by an expert in the space, check out "Robert Levine Tells the Rest of the Story" on Bill Rosenblatt's blog.  As Bill says:
If Jaron Lanier’s You Are Not a Gadget from last year is the philosophical tract on which a new movement in favor of content creators’ rights has been founded, then Free Ride provides the  factual foundation on which such a movement should be based. ...
Yet Levine is hardly an apologist for the media industry.  For example, he agrees that the term of copyright and statutory damages for infringement under U.S. law are way too long and large, and he finds the media industry just as guilty as anyone else of funding “research studies” that produce blatantly biased results.  In fact, Levine’s journalistic instincts often get the better of him as he feels compelled to balance every factual assertion that bolsters his point with a counterfactual that softens it; the book ends up being far more balanced than its polemic subtitle suggests.
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My interest here is in looking forward to a better solution. As Levine explains in depth, we have been facing a problem that has had no well-balanced solution in sight.  He presents a strong case for the rights of creators, and the practical necessity of incentivizing costly creations.  He recognizes that piracy is hard to stop, and that part of the cure is to make it easy for consumers to buy what they want in the form they want, and he gives an excellent history of failed attempts to find better business models. "The real issue is how to establish a functioning market for content online."  "A decade after Napster, labels of all sizes are still struggling to reinvent their businesses." Quoting Jeff Zucker, on "Business models to support the digital revolution...we are still very much in the beginning."

It seems that no one has yet found the right synthesis.  Levine does take a a bit of a stab at it, presenting a case for blanket licensing (or collective licensing), much like the model used for licensing music rights on radio via ASCAP and BMI, as the only viable way to address the current dilemma.  I, too, have for many years seen it as the only systematic compromise in sight. But there are serious problems with it, as nicely summarized by Rosenblatt:  "...the many shortcomings of copyright and content licensing under such systems in Europe (and elsewhere): inequitable royalty distribution, irrational levy schemes, opaque accounting, inefficiencies, resistance to new business models, cross-border chaos, and more."

From the perspective of FairPay, the fundamental problem with blanket licensing is that it is not grounded in the dynamics of market forces, but is clumsily pre-set by bureaucratic mandates that cannot adapt to varying real-world contexts.

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In contrast, FairPay applies the power of the networked digital marketplace to bring twenty-first century solutions to the very problems it creates.  FairPay offers not a compromise within the old paradigm, but a radically new kind of synthesis -- one that changes the fundamental nature of sales transaction and the play of  market forces -- to find a dynamic, adaptive, and nuanced solution to the problem of balancing creator and consumer rights. FairPay changes the rules to create more win-win marketplace, that expands the digital economy, and the opportunities for both creators and their consumers.

FairPay provides an institutional framework for deep two-way connections between consumers and creators/businesses--in the form of individual dialogs about the value of offerings, as actually realized by each user in their specific contexts. This can be done with a structured balance of powers in which the consumer sets an individualized price they think fair, and the creator/business continues to permit such transactions as long as they agree that consumer is "fair" about the price, using the power of networked markets to make that assessment. That can improve margins and market efficiency for creators/sellers, and can empower relationships based on fair value exchange (a buyer-agreed-to form of price discrimination). Think of a privilege that is earned and maintained -- a zone of pricing freedom, a "FairPay Zone." The details of how FairPay does this are in the sidebar, the related Web site, and the many posts here.

FairPay is not the answer for all offerings in all markets, but I think it can pervade many segments--and that its more collaborative model for marketplace relationships will fundamentally change a large segment of our economy. I suggest, that just as mass marketing changed the fundamental nature of commerce a century ago-- and disconnected sellers from buyers--relationship dialogs of the kind used in FairPay can remedy that and create a new and higher level of engagement.  That dialog and engagement create and guide a new force for funding "The Culture Business" that Levine is rightly concerned about -- a new paradigm for the invisible hand.