Wednesday, August 16, 2017

The Missing Piece of the Membership Puzzle -- Agreeing on Value for Each Member

Journalism and many other digital content services face an existential threat to sustainability, and are rightly looking to membership models as a possible solution. Consumers are questioning their value propositions, and advertising and sponsorship models are highly problematic for quality journalism as well as many other kinds of creative content. 

This post looks at the membership puzzle and suggests that the missing piece is a new economic logic for membership that personalizes individual member value propositions. I write in terms of journalism -- as a special, and especially urgent use-case -- but similar logic applies to many other forms of creative content as well. As you read "journalism," think also of music, literature, video, art, or any form of content as a service. Similar models are also referred to as patronship models, and often make use of crowdfunding platforms (like Patreon and IndieGogo) that support ongoing creative efforts
[Update 8/17/17: NiemanLab reports on Press Patron, a patronship platform that is specific to journalism.]

The economic logic of membership sustains ongoing value creation efficiently if and only if each member feels that the price he or she is asked to pay for membership tracks well to the value he or she gets from membership. No matter how great and how engaging the value of membership, if the price to each member is not reasonably well aligned with that individually perceived value (as a fair share of wallet), the solution is ineffective.

The survival of journalism -- a guiding principle
The survival of journalism is too important to be left to the journalists! ...unless they refocus on the business and individual value propositions of journalism.  
Journalism is a service -- to individuals and to society. The current existential crisis in journalism is primarily a crisis in the economics of that service. The solution is not just better journalism (important, especially in the age of "fake news") but better economics (essential).
Finding the answer to this crisis is complex, with numerous pieces to be fit together. Many are considering this puzzle and seeking new paradigms, including "membership" -- a more relationship-oriented view of recurring subscription services that focuses on supporting them primarily by member payments (often voluntary payments) -- which requires making these services smarter, more cooperative, and more customer-first.

These efforts have identified many important pieces of the puzzle, but there is a unifying piece missing. I center on the economics of individual member relationships as the unifying piece that aligns the other pieces into their proper place, and outline some strategies for shaping that central piece.
Value exchange is core to the missing piece. That it is not simply a matter of making journalism more valuable. When a value exchange relationship involves a price, value is sustainably exchanged only if the price is right for the individual customer. That requires that value be quantified into a price, and that price be tailored to that customer. 
The missing piece is to build a process of co-creation that looks beyond the co-creation of "valuable" journalism as a thing in itself, to the nature of the co-creation of that value in economic terms, and to use that to continuously optimize the pieces to be offered to each member. The currency for this economic value of journalism is money. Creators of journalism need fees from their members to survive and continue to co-create journalism with them. Each member is different. The fundamental economic question is what should the fees be for each member, as that varies over time. It is widely recognized that trust and transparency are key elements of membership services, and I suggest that financial trust and transparency are critical to that.

For each member, we need to find a balance of value received and value given -- and to do that by adjusting the amount of any monetary payments made.
  • Without a clear understanding of the value each member perceives from the features and activities of their membership, managers of member organization are flying with blurred vision and disconnected controls.  
  • Value varies from member to member and from time to time.
  • Individual member value perceptions are determining factors in how all of the pieces should fit together for each member.
This question of individual value underlies all the decisions of what journalistic value to create, who to deliver it to, and how to manage that.
  • The old walls between the business of journalism and the craft of journalism were relevant to advertising-based journalism that needed so-called walls between "church and state" to protect journalism from pressure from advertisers.
  • Those divisions are now impediments to a reader-supported journalism business that needs to understand the dynamic and individual value exchange with the readers (members) who it asks to sustain this deeper co-creation.
While much is changing as journalism seeks to reinvent itself for the digital era, this division is deeply entrenched -- both in large established publishers, and in newer "membership"-oriented publishers.

Large news publishers are beginning to take a more business-like view of value, but often not in a very customer-first or relationship-oriented way. Directions such as those outlined by David Skok's astute NiemanLab prognostication -- and being pursued by many large publishers -- view journalism as a product to be priced using a dynamic meter, at a transactional level (often per article), drawing on the lessons of analytics-based dynamic consumer-goods pricing. While effective in many contexts, this zero-sum game is antithetical to trust and transparency, and a dead end for journalism. It may help bring in revenue from a diversity of very occasional readers, but does not build real relationships with the regular readers who are the main reservoir of sustaining support.

The membership model moves toward a more member-first, relationship-centered, co-creative view of the value proposition, but does not yet give that a necessary grounding in the core issue of member-specific value exchange. Much attention is being given to what pieces to offer and how to fit them together, to make them most valuable -- but this key piece seems to be largely missing:  value propositions have two sides: what value, for what price.
  • High value at a price that is not perceived to be commensurate to that value (for a particular member), is not really high value. 
  • Member programs are still mostly based on a one-size-fits-all price (even if that price is voluntary). Sometimes membership plans are tiered with different prices for different packages of services, but still that is generally a given package for a given price. 
  • Data on how individual members perceive those prices is very limited, and there seems to be little attention to developing that data on an ongoing basis so it can be used to continually and systematically refine what product mix is offered, to which members, when.
Membership models are based on the understanding that readers (at least a significant portion of them) should pay for the journalism they want. We can do a great job of identifying who to engage about what, and what to offer them -- but if it all devolves to a single pre-set price of membership (even if it is voluntary), we have failed to find the right value proposition.

To solve the member puzzle we need to do the best we can at managing the value propositions offered to each member -- and that centers on managing prices individually:
  • knowing how each member values each available piece/service, as well as the synergistic values of the ongoing services more broadly
  • letting the members select the pieces/services they most value (with respect to price)  
  • adaptively and dynamically adjusting the prices to meet the desires of each member (to the extent they can be profitably served), as they change over time
  • and, whether or not payment levels are voluntary, intelligently nudging each member to be appropriately supportive.
No matter how well you solve the membership puzzle, sustainable success will be all about the value that members feel they are getting -- and whether they feel they are paying a fair and affordable price for that. Some will be generous patrons of journalism, not just for themselves but for the community -- while some will be less generous, depending on their desires and means. With digital content that can be replicated at negligible cost, even those who are just marginally supportive can add sustaining profits.
  • If the price for the value proposition seems too expensive (too much share of wallet), a prospective member will not join or pay (or if they do join or pay, will not be retained) and their contribution will be lost. 
  • If the price for the value proposition is too low for a given member (less than their fair share of wallet), sustainability will be starved. 
What I propose is a new perspective on the economic aspects of the membership relationship. The core of that perspective is that (1) the basis of the journalistic relationship must be economic, and (2) that economic part sustains ongoing value creation if and only if each member feels that the price he or she is asked to pay for membership tracks well to the value he or she perceives from it. No matter how great and how engaging the value of membership, if the price to each member is not reasonably well aligned with that individually perceived value (as a fair share of wallet), the solution is ineffective.

I describe methods for continuously seeking to maximize that alignment in this blog, and in my book. More on that below, but first, some background on membership models.

The Membership Puzzle Project -- a social contract based on trust and transparency

The Membership Puzzle Project (MPP) is a new and important effort to solve the problem of finding a sustainable path for journalism. It seeks to learn from a growing body of success stories in which publishers seek deeper relationships with their readers by becoming "customer first" and seeking new, more cooperative, and more individualized ways to co-create value. I have exchanged emails with the MPP team (an extract is below), and hope to meet with them soon. I have volunteered to contribute to that effort because my work on advanced, adaptively win-win forms of subscription/membership models is very relevant to the project objectives.

The MPP is a laboratory project led by Jay Rosen's team at NYU (along with De Correspondent, an innovative Dutch publication looking to create a US edition) -- supported by $515,000 in funding from three prominent foundations. While this project is specific to journalism, I expect it to provide lessons relevant to digital content services of all kinds.

As stated on the project's about page,
So where is the sustainable path? It seems increasingly likely that readers who value a public service press are going to have to sustain it themselves – by contributing money, sharing knowledge, and spreading the word. A good term for this is membership. But membership won't work if it's just begging for cash. There has to be a social contract between journalists and members. Working out what that contract should say is the core challenge of the Membership Puzzle Project.
In a more recent report, "Members made a moral decision: this is something I should support."

Notice this "social contract between journalists and members." Much of what I see discussed about this social contract involves aspects of the substance and process of collaborative journalism (as outlined in this MPP post) that I am no expert in. But Jay Rosen's NiemanLab article makes it clear that a core aspect of that social contract is the "'pay' model" and whether it works "to maximize trust in a 'readers pay the freight' model." This blog, and my book, are focused on emerging strategies for doing just that.

Trust is not enough -- trust depends on value

Membership projects rightly make much of the importance of trust and transparency as central to the relationship of journalists to readers/members. A recent update by Jay Rosen, on their interviews of De Correspondent members, reports that "Trust through transparency is almost universally seen as a key principle...It shows respect for the reader, and it invites their participation, not just their attention."

That is vital, but trust in the journalistic reporting/creation process is not enough -- trust depends on value. Misaligned value weakens trust. Conversely, trust enables the transparency, responsibility, and fairness needed to agree on value. Seemingly arbitrary pre-set prices detract from perceived value and compromise trust. Even when such prices are voluntary, the process of setting prices and framing the value in the value proposition can add or detract from trust and transparency -- and from revenue.

Other current membership efforts -- in journalism ...and more broadly

The MPP builds on numerous ongoing efforts to develop membership models, both relating to journalism and more broadly. NiemanLab features Shan Wang's reports on a variety of them, including the News Revenue Hub's efforts to help news organizations in such efforts. Even well-established major publications like the Guardian are trying membership models (a voluntary, but pre-set, $84/year). Other similar ideas are being applied to a wide variety of other kinds of content.

Notably, some are supported by widely used platform services, such as those offered by Patreon and IndieGogoBen Thompson's Stratechery adds perspective, and expands on the importance of platforms to simplify and pool the mechanics of the back-end tasks needed. Much of the mechanics of FairPay that I describe here could be similarly offloaded to a platform (and some platform providers have shown interest), but whatever the back-end, the fundamental focus on member value remains core to journalists or other creators.

Valuing the pieces of the puzzle

What should the price of membership be, and how insistent should a publisher be about that? The recent update on member interviews by Jay Rosen notes that while De Correspondent charges €60 for its voluntary membership, many members said they would pay much more, €100 to €150, even though they acknowledged that asking for that much up front might have kept them from signing up. Wiktribune takes a more discretionary approach, allowing members to pay what they want. But in any case, the question is how to entice members to pay their fair share -- and to make them feel good and trusting about it, so they continue to do so.

Some of these efforts recognize the diversity of member needs by providing for multiple tiers of membership (or similar forms of patronship), often with different rewards. That is smart in recognizing that different members seek different value propositions. But it gets very complex, and the problem of individual variation is that managing this diversity (both from member to member and from time to time) gets intractable (and just leaving it to member whim risks erratic results). I addressed some examples of that in a previous post, and an interesting NiemanLab review of public media membership efforts by Melody Kramer shows just how complex this can get, (and how far afield of the core value propositions of a service -- tote bags, T-shirts, and coffee mugs -- it can devolve). Pre-set tiers are just not very workable. We need a more dynamically personalized and continuously adaptable approach.

Operationalizing member feedback -- continuing dialogs about value
Think of the membership puzzle as analogous to a jigsaw puzzle that is different for each member -- and so must be solved anew for each member. A puzzle that does not picture value (as seen by the member in question) is like a jigsaw puzzle turned upside down, so that we cannot see the desired pattern of value we seek to solve for. Not being able to see the picture makes solving the puzzle extremely hard.
Another recent post from Emily Goligoski of the MPP highlights the challenges of understanding these value propositions:
Many membership program details are treated ad hoc and roughly benchmarked to competitors’ offerings (a line of thinking that goes if the other station in town costs X per month for members and if subscribing to Spotify costs Y, then we can charge…). Most media companies don’t carefully plan the details of their social contract, including pricing and participation asks.
And this is not just a static problem. Keep in mind that that the puzzle for a given member this month may be very different from the puzzle for the same member last month. The reporting and features change, and the member's needs, attention, and desires change. To really solve this puzzle, we must evaluate the value proposition more or less continuously. Periodic member surveys (such as those being done as part of the MPP as a project effort) are an excellent start, and are current best practice. But I suggest that is just a start.

This is something that FairPay seeks to make routine, and to operationalize it into an ongoing feedback control process that is integrated with the payment request process and the creation process (in an adaptively lightweight way), in the form of ongoing dialogs about value. This ongoing operational feedback from members integrates not only with financial operations data, but also with the core operational data and analytics about member usage. This combination of data and analytics enables ongoing optimization of what services are offered (journalistic and more broadly), to what members, when.

Solving for Value -- A new social contract based on an invisible handshake

FairPay provides strategies for setting pricing and value propositions that can form the core of a new social contract for journalism. While this new logic can be approached in stages, the full form of it is that the publisher offers this social contract:
  • We seek true partners in sustaining the co-creation of journalism for you and our other readers.
  • We will seek to involve you in what we co-create with and for you, to provide you the services you most value.
  • We will permit you to participate in setting prices that correspond to that value -- considering what you get from us, what you contribute to us, and your ability to pay (and how those factors may change over time) -- in order to support our continuing work.
  • We expect you to be fair about that, at whatever level makes sense for you and is fair to us.
I call this social contract an invisible handshake, because unlike the invisible hand of traditional economics (that allocates scarce resources, in this case, news stories, to match demand at a given time), this social contract is about an agreement to find and maintain an equitable relationship:
  • Digital news stories (and subscriptions to them) cost almost nothing to distribute, so are not scarce and cannot be priced by the invisible hand. 
  • What is scarce is the fair share of a reader's wallet that is needed to continue to co-create more news stories
  • Any social contract that does not address payments is un-moored from the economic reality of sustaining journalism. 
  • Because individual members vary widely (and over time), a social contract that expects all members to pay the same price (and a constant price) is bound to be unfair to either the member or the publisher in most cases.
The challenge to this social contract (the invisible handshake) is that different readers (members/subscribers) perceive very different value propositions, and the fair price of membership will vary from person to person (and from time to time) in ways we currently do not get data on. While much of the information needed to assess actual value (as realized in use) can be inferred passively, key aspects of value perception can only be obtained from the beholder. The fair price depends on the nature of their experience, their willingness to pay, and their ability to pay. A publisher can seek to influence these personal aspects, but the final reckoning is best done:
  1. after each cycle of experience, when value is most fully known, and
  2. with the input of the customer, who has unique knowledge of the value as experienced.
FairPay offers a new strategy for enabling publishers to estimate these fair pricing factors through individual dialogs with members about value -- and for doing so repeatedly over the course of the relationship. An explanation of how this can be done in the context of journalism is in my post, Patron-izing Journalism -- Beyond Paywalls, Meters, and Membership. More on the mechanics of the core process, and how it builds cooperation to converge on fair pricing, is in my post, FairPay Changes the "Game" of Commerce. (These posts present the full form of FairPay that balances the pricing power of members with controls by publishers that seek to ensure minimum fairness to the publisher -- but for membership programs that prefer the greater openness and trust of a purely voluntary pricing regime, there is a simplified variant of FairPay that supports a Voluntary Payment Mode. That variant uses similar strategies for nudging members toward fairness, but without enforcing any minimum fairness level.)

Don't panic!

While FairPay may seem complex, it can readily be simplified and reduced to habit, to the point that it becomes largely automatic except when adjustments are needed, as outlined in Profiting from Habit -- Seamless Monetization. It may also seem that consumers may be inclined to be uncooperative and seek to game the system, but FairPay can be initiated for just those segments who will be most amenable, and even eager to cooperate (which is where membership models work best anyway), and then expanded from there, as outlined in Finding Good and Fair Customers -- Where Are the Sweet Spots?

Proven success with value-based pricing -- and value-based relationships

FairPay draws on the concepts of value-based pricing that have already proven very successful in many B2B businesses. It combines three key aspects that are essential to proper estimation of fair prices for individual readers:
  1. Post-pricing: Delaying final price-setting until after the experience, to enable the price to reflect the actual nature of the experience (what stories are read and engaged with, at what level and intensity, with what results).
  2. Participatory pricing: Involving the reader in assessing the perceived and personal aspects of the value exchange (value perceptions, outcomes, interests, objectives, priorities, tastes, as well as willingness and ability to pay).
  3. Bi-directional value propositions: The flow of value is not uni-directional (value to the reader and cash to the publisher). Often value flows in reverse (as Jeff Jarvis suggested), from the reader to the publisher, in the form of participation in journalistic creation, user-generated content, attention to ads (if any), use of personal data, and the many other forms of reader value contribution that are now increasingly recognized as part of the membership puzzle.
To the extent that a pricing process factors in all these aspects, it enables what I call value differentiation. Related to the traditional economic ideal of price discrimination, value discrimination seeks to find the right value proposition for each customer.
  • Price discrimination theoretically leads to an economically optimal price that maximizes revenue -- but it does that in ways that are are narrowly zero-sum and often secret and manipulative, and not reflective of the broader co-creative interests of both the publisher and the reader (detracting from trust and transparency). 
  • FairPay shows how the broader objective of value discrimination leads toward prices that seek cooperatively to optimize the value exchange in a much larger sense -- enabling us to factor in individual human and social values (to the extent mutually agreeable). This brings into the equation the social value of journalism and the need to sustain it, as well as the broader and more personal values of the reader, and solves it in a win-win, cooperative way that builds trust and transparency. 
The key point to remember is that we are not paying for current stories -- we are paying for a relationship that will continue to bring us stories -- doing investigative journalism, and providing other ongoing services in the future. That is the social contract, and its pricing must reflect that.

FairPay is a flexible architecture that a publisher can apply with any of a wide range of policies. Negotiated levels of fairness can be achieved under policies that give the publisher more or less control, using as strong or light a hand as desired. In any case, the strategy is for the publisher to seek to nudge members toward fair (or even generous) levels of sustaining support.
  • At one extreme member payments can be entirely voluntary (pay what you want -- or, more accurately, pay what you think fair) -- and at the other extreme strict fairness minimums can be enforced (mandated prices). 
  • The right choice will depend on the nature of the service and of its membership (and on the sophistication of the system implementation, which can start simply and be enhanced over time). 
  • For journalism, a balanced soft touch is likely to be best, with significant member discretion, but reasonable levels of individualized nudging for each member to to price fairly (for them)
Climbing the ladder of value

The full FairPay process applies rich dialogs about value -- but we need not apply all of its methods (post-pricing, participatory pricing, and bi-directional pricing) to see improvements in value propositions. All pricing methods can be ranked along a "ladder of value," based on the degree to which they apply these three aspects of value differentiation to find the right value proposition. By working our way up the ladder, we can improve our social contract incrementally. Some thoughts on how conventional pricing strategies can be ranked on this ladder of value are in my post, Finding Value in The Subscription Economy (I plan a more nuanced update that addresses all three aspects).

JaaS -- Journalism as a service, not a product

As is highlighted by membership models, many are coming to realize that journalism is not a product but a service, and that those services are not created by journalists alone (to be thrown over the transom at readers, for a price), but must be co-created with readers (at least in part). This parallels a broader awakening in modern marketing.
  • Many marketers are simply applying better technology to old ways of thinking, to apply old logics more efficiently (such as dynamic pricing, as set unilaterally by sellers). Unfortunately, that is a zero-sum logic that that kills trust.
  • The more seminal trend in modern marketing is a shift to a new logic. Many scholars and forward-thinking businesses have recognized that our traditional Goods-Dominant Logic (in which goods are produced by producers and then sold to consumers) is no longer relevant, and a that a Service-Dominant Logic (in which services are co-created, in a win-win process) is far more relevant and powerful. As noted above, membership models take a perspective that is very aligned with Service-Dominant Logic. I propose that value is central to this (Value-Dominant Logic).
Journalists would do well to understand this new logic of services that are co-created -- to see how broadly it can re-shape their view of their profession -- and lead to sustainable success.

Adding value to The Membership Puzzle Project

I hope the MPP team -- and others dealing with these problems (in journalism, and in other fields) -- will take a good look at these economic, business model issues -- issues of personalized value. I stand ready to assist in that.

FairPay is an open architecture, not a product, and I am working on this as a pro-bono project (in collaboration with eminent marketing scholars who can assist with trials). As noted above, even when the full FairPay strategy is not used, understanding the ladder of value can help chart the path toward solutions that get closer to the efficient value differentiation that is needed to make journalism (and other content creation enterprises) broadly sustainable in this new digital era.

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For a full introduction to FairPay see the Overview and the sidebar on How FairPay Works (just to the right, if reading this at FairPayZone.com). There is also a guide to More Details (including links to a video).

Even better, read my highly praised new book: FairPay: Adaptively Win-Win Customer Relationships.




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Addendum
An extract from my 3/20/17 email to Jay Rosen on the Membership Puzzle Project:

FairPay is fully aligned with, and can extend, the principles that have motivated De Correspondent -- and can point the way for others.
  • It solves the “membership puzzle” with a personalized, adaptive architecture that coexists with set-price models and encourages free viral spreading.
  • It enables memberships to be automatically customized to the interests and values of each member, founded on trust, value, fairness, and ability/willingness to pay.
  • It is driven by ongoing “dialogs about value” with each customer that take De Correspondent’s ideas about dialog to the core of the value exchange.  These include dynamically personalized value propositions (with reverse metering options to factor in the broad range of member contributions to value such as UCG, story leads, feedback, etc., and a rich concept of value that includes broad journalistic values).
  • The dialogs about value directly link members’ financial support to value --  what journalists do, in what domains, and what else is offered -- in a way that drives sustainability of the publication and deepens engagement -- at a fine granularity that optionally can be a factor in individual journalist compensation and their relationships with their “fans.”  It focuses on real value, not T-shirts.
This enables membership fees to be adaptively customized to reflect each member’s situation, as it varies over time:  how much they read, how much they support costly journalism, what they contribute back, and their ability and willingness to pay.  FairPay seeks to approximate optimal price discrimination, so that some members might pay much less that average, while others might pay much more, but with transparent agreement that it is a fair value exchange (and contribution to sustainability) for them.  This can broaden the reach of membership to a wider population of casual readers, and deepen it for “superfans.”

Background on how the FairPay relationship pricing strategy can transform the sustainability of journalism:
FairPay is unique in bringing new operational approaches to content businesses in a way that deeply aligns with emerging principles of marketing strategy, with strong foundations in behavioral economics.  It is a new approach to setting value-based prices for digital content (“experience goods” that are really services, not products).  This brings a deeply “member-first” approach to the operational basis of customer/member relationships. 

Wednesday, July 19, 2017

Subscription Marketing: Anne Janzer Reviews FairPay

Anne Janzer's Subscription Marketing: Strategies for Nurturing Customers in a World of Churn is one of the best and most popular guides on this increasingly vital subject. Now Anne has applied her marketing insights and clear writing style to a review of my book, FairPay: Adaptively Win-Win Customer Relationships.

Anne observes that my work on FairPay (and its broader perspective on pricing and relationship strategies) is very aligned with her ideas on value nurturing as a core strategy for "sustaining the customer relationships that build long-term success" in the Subscription Economy. That alignment gives her a deep appreciation of how FairPay adds a new dimension that managers should be thinking about. 

Her review, "Disrupting Subscription Pricing: FairPay," provides a concise overview of FairPay and its motivation. Here is a sampling of her comments on why FairPay matters:
...it’s a natural fit for the evolving Subscription Economy... 
The model brings the business much closer to its customers... Instead of running “voice of the customer” surveys, you can see how people vote with their actual dollars. 
The pricing model itself is based on both trust and value... 
In many ways, the FairPay pricing model is the perfect complement to the practice of value nurturing outlined in Subscription Marketing. 
She concludes with a nod toward the unconventional nature of FairPay:
As soon as you start picturing this in your head, questions will pop up... But before you start thinking of the objections, ask yourself this: 
How would FairPay change the way you do business? 
How would your business operate today if your revenues were directly tied to the customer’s perception of value? What would you do differently in marketing, product development, or support? How would it change the way you think of customers, and of pricing?
I hope you will read her review, and then take a closer look at how FairPay works and why you should be thinking about its implications -- how you can make value nurturing include value discrimination. Even if you are not yet ready to go far with it, thinking about FairPay will change how you view your business. Details are in my book, and my blog (see the Overview, and More Details).

I also highly recommend that you read Anne's book, which provides a practical understanding of the essentials of subscription businesses -- why value nurturing matters and how to make it central to your business.

Tuesday, May 23, 2017

Partners, not Suckers -- From Price Discrimination to Value Discrimination

"How Online Shopping Makes Suckers of Us All" is a very nice analysis of how "standard prices and simple discounts are giving way to far more exotic strategies, designed to extract every last dollar from the consumer."

This article by Jerry Useem in The Atlantic provides a big-picture view of the growing use of dynamic pricing to seek perfect price discrimination -- how companies "are comparison shopping us."  It highlights the current race to the bottom in e-commerce. It also points to the emergence of more positive approaches like Everlane's efforts at "radical transparency" that seek a more cooperative approach.

A recent WSJ article on algorithmic pricing for gas stations gives related background, but observes how there a glimmer of a win-win aspect to dynamic pricing: "This is not a matter of stealing more money from your customer. It’s about making margin on people who don’t care, and giving away margin to people who do care."

I say we can make business far more win-win (at least for many kinds of services) -- all we need is a shift in perspective.

Value Discrimination

This blog explores how both profit-seeking companies, and value-seeking consumers can benefit from refocusing their efforts (especially for digital products/services):
  • From optimizing for price discrimination in transactions
  • To optimizing for value discrimination in relationships .
There are three reasons:
  1. Price discrimination is largely a zero-sum game at the transaction level, but win-win games become more powerful when commerce shifts to a relationship level. Amazon Prime is a clear example of how building a relationship focus shifts consumers from bargain hunting to value-seeking. Prime members value the convenience and the trust that their value proposition is "good enough" at a transaction level -- even if they do not get an optimal price for each transaction, they optimize value at a relationship level.
  2. Digital products/services are "experience goods" -- their value is hard to know until after they are used. Furthermore, their value is very personal and context-dependent, and thus hard to estimate without feedback from the customer. Transaction pricing remains a conundrum. Relationships build trust and limit risk, and average out the noise of transaction-level pricing.
  3. Digital products/services have essentially no scarcity or marginal cost, so cost-based pricing and demand-based pricing (related to allocation of scarce goods, the invisible hand) no longer apply. The only reason to pay is the desire (or duty) to sustain future supply.
Thus for digital goods there is no cost-basis for pricing -- it is entirely based on value and willingness to pay. But that provides new kinds of learning opportunities (freemium being just a crude first step) to really find out what people value and are willing to pay for, and to find new ways to be fair about what customers should contribute to fund production of the services that they really want.

The bottom line is that for digital products/services, a relationship-focused, cooperative, transparent approach can be far more effective. No one has yet put all the pieces together, but my work on FairPay points the way. It all revolves around a shift in mind-set toward
  • a transparent, cooperative process  
  • value over price 
  • personalized services rather than standard products. 
We see elements of this emerging in a variety of partial steps, such as these:
  • Everlane's limited "Choose What You Pay" variant of pay what you want pricing (PWYW) lets the buyer participate cooperatively in price-setting by choosing any one of three prices. Everlane is "radically transparent" in explaining how much each option sustains the seller's ability to provide service. Here customers know they are paying at least "at cost" for clearance items, and 13% of them willingly pay more than the "at cost" price to help sustain a business they feel offers desired services (even though they are not required to do that). (Details are in the Atlantic, and my prior post).
  • Amazon Prime's focus on relationships rather than one-off transactions (as well as its Subscribe and Save discount offerings). Jeff Bezos may be hard-headed, but he is certainly not short-sighted.
  • "The Subscription Economy" more broadly, with its focus on relationships driven by value-in-use -- the idea that value really derives from the service we get from "goods" as services, not from the goods (products) in themselves. 
  • Membership models (a more value-focused variation on subscriptions), which are being increasingly viewed as the future of journalism -- as I explored a few years ago, and is now the focus of the Membership Puzzle Project.
  • "Value-based pricing," which shifts from cost-based and competition-based pricing rationales to the more win-win idea that price should correspond to the value the customer gets from using the product or service. Another post explains how all pricing can be viewed as being on a "ladder of value." Going up the ladder moves from prices pre-set based on predicted average value to prices set after usage based on value-in-use as measured in terms of performance or outcomes as obtained by individual customers. This is becoming best-practice in many B2B markets, and it applies for B2C, as well.
  • Crowdfunding patronship approaches to funding ongoing creation, such as offered by Patreon and IndieGoGo, in which consumers willingly pay to sustain creators they want to support.
  • Similar PWYW models, especially those that draw on human values for motivation, such as those offered by Humble Bundle and One World Everybody Eats.
Back to the future

The Atlantic article gives a nice perspective on the commercial drive toward price discrimination, and how what we see now is the result of over a century of mass marketing that has driven both sides to a zero-sum transaction mentality.
  • We are so used to this model, with its resulting race to the bottom bargain hunting, that we forget that it is not the natural behavior of human commerce. Humans can play the bargain hunting game, and some even learned to enjoy it, but it is neither natural nor productive. As the Atlantic article observes, people are tired of wasting their time at it, and reach "a shut off point." 
  • Traditionally, commerce was driven by human relationships -- while prices considered costs and competition, they were ultimately based on value (as I explored previously.). 
  • Value based pricing in B2B markets shows how a return to those values can work, but not how to make that simple and scalable enough for mass consumer marketing. 
FairPay shows how our digital environment enables us to return to those values by shifting our ideas about commercial relationships -- from haggling about transaction prices to cooperating to set prices in a relationship, based on "dialogs about value" aimed at gaining a shared understanding of the value of the relationship. That is simpler, less adversarial, and more effective (and that is what works in advanced forms of B2B value-based pricing), and it is not so hard to do with computer support. I call the "social contract" that drives this new kind of cooperative process an "invisible handshake." It shifts commerce from a series of zero-sum single-transaction games to a repeated game of relationship that encourages cooperation. 

FairPay's repeated game revolves around these "dialogs about value" that make this process explicit and transparent. It seeks to approximate a deeper economic idea of perfection, as I describe in a thought experiment that provides an underlying model for thinking about pricing and relationships. 

FairPay creates a mass-customized process for seeking "value discrimination." As those articles explain, marketers and economists traditionally think about "price discrimination" as a way to be efficient in getting the most revenue from each customer. But in recurring relationships, what we really seek is value discrimination -- finding the optimal value proposition for each customer. We seek  to maximize not only Customer Lifetime Value (what the vendor cares about), but also Vendor Lifetime Value (what the customer cares about). 

Value discrimination involves optimizing not only the prices obtained, but also the product/service package value that is offered and delivered at those prices, to that customer. Not only does this make the process more win-win with regard to both price and value, but it provides a direct operational map for guiding the business to provide the greatest possible value to each interested customer. Over the lifetime of the relationship, it is both the right price and the right product/service package that guide the path to maximum profit -- and maximum value to customers and society. When done with transparency and fairness, discrimination can be good!

Climbing this ladder of value and making the behavioral changes that refocus all parties on value will take time -- and can occur over each of multiple dimensions of pricing, packaging, and product design. It can happen very quickly for some customer segments in some markets. It will take longer for some customers (those who thrill at the competitive nature of the zero-sum bargain hunting game and are less appreciative the broader aspects of service value) -- and in businesses that are constrained by scarcity, and/or are unable or unwilling to offer services that differentiate themselves. A full spectrum of approaches will coexist for some time.

But it seems clear that value discrimination is the path for the future. Most of us consumers want to be the ones to decide, in transparency, when we want to be generous -- instead of being manipulated in the dark to be "suckers." Even when the result is beneficial -- "making margin on people who don’t care, and giving away margin to people who do care" -- we consumers want to have transparency and choice. Instead of the invisible hand that pushes us around at a transaction level, we can build win-win relationships on this more transparent and cooperative (not so invisible) handshake.

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For a full introduction to FairPay see the Overview and the sidebar on How FairPay Works (just to the right, if reading this at FairPayZone.com). There is also a guide to More Details (including links to a video).

Even better, read my highly praised new book: FairPay: Adaptively Win-Win Customer Relationships.

Thursday, April 13, 2017

Finding Value in The Subscription Economy

At the heart of the Subscription Economy is the idea that customers are happier subscribing to the outcomes they want, when they want them, rather than purchasing a product with the burden of ownership.
...Nicely put by Zuora, the SaaS platform company that drives many of the largest subscription services. They have popularized the term "subscription economy," and recently created a Subscription Economy Stock Index that highlights the striking growth of such businesses. This is not just a Zuora thing -- as the Oracle infographic to the right indicates.

This fundamental shift toward subscriptions is driven by the nature of our digital environment, and the power of Big Data and the Internet of Things. It is becoming easy to manage ongoing subscription relationships and service delivery -- and to get increasingly rich understandings of actual value received. We are only beginning to recognize how deeply this will transform how we exchange value in commercial relationships.

This post explores the key concepts of value as they apply to subscription relationships -- and as they are are embodied in the pricing of subscriptions. This draws on "value-based pricing" strategies that shift from simple (but less optimal) cost-based or competition-based models. (These are increasingly transforming B2B markets, but have so far seemed less readily applied to B2C markets. FairPay, a new approach to value-based consumer relationships, promises to change that game.) This post shows why shifting toward value-based pricing -- even if only in small, incremental steps -- is vitally important to maximizing the value of subscription relationships -- Customer Lifetime Value (CLV).

[UPDATE 4/20/17:] Think of this is "value discrimination." Marketers and economists think about "price discrimination" as the way to be efficient about getting the most revenue from each customer. But in recurring relationships, what we really want is value discrimination -- finding the optimal value proposition for each customer. Value discrimination involves optimizing not only the price, but the value of the product/service package that is provided for that price.

Value is complex, multidimensional, and highly individualized 

Our digital age has not only driven "relationship marketing" to become deeper and more powerful, but has changed the economic realities of value -- shifting focus from "value in exchange" to "value in use." That is what the opening quote from Zuora referred to, "the idea that customers are happier subscribing to the outcomes they want, when they want them..." We generally do not really want products for their own sake, but as services that produce outcomes. Subscriptions are not a product with a set value in exchange, but a structure for a service relationship that produces a dynamically varying value in use.

Current subscription models drive toward this idea of value-in-use, but do not yet fully embrace it. Our concepts of value and value-in-exchange are still rooted in the old logic of products ("goods"). Value-in-use can not be known until after use. Not only does value vary from subscriber to subscriber and from period to period, but there are many factors involved in estimating value.
  • Is the value tied to the period of access and/or the amount of access (permitted or used)? 
  • Is it per unit of product/service? 
  • Is it how well the service met quality or service-level standards (performance)? 
  • Is it what the experience achieved, what benefits it led to, or how well liked it was (outcomes, whether objectively measured or in customer perception)? 
  • Is it a matter of broader values, like cultural merit or support for social/civic/environmental values (including economic "externalities")? 
  • Is it affordable to me (willingness/ability to pay), and does what I pay sustain creation of more content or services that I desire?
An ideal market system would factor all of these aspects of value into pricing. For example, the value of a content service is not just how many songs or videos or stories I have access to, nor how many I do access, nor whether they arrive without halts or delays, nor whether I play all of an item or hate it and stop, nor whether the service pays its creators and employees, and avoids pollution, nor whether it is priced within my means. Ideally it is a reasonable combination of all of these.

The question is: how well can we do at approaching that, in a way that still creates a good customer experience without undue complexity? In this digital era, we are gaining a wide range of Big Data that bear on understanding value -- data that directly or indirectly provide new insight into:
  • the usage of products and services with detail on what we use, when, and how completely or intensely
  • the performance of what we use and the quality of the experience
  • the objective and subjective results of the experience.
Marketers are already using newly available data to target their offers, and to factor better predictions of value into their pricing. But subscription pricing strategies are just beginning to address the gap between average predictions of value and the widely varying actual experiences of individual consumers. 

Climbing the ladder of value -- profiting from more win-win relationships

Consider the range of approaches to price that we commonly see in practice and how they track to value. Keep in mind the fact that value in use, the outcome of a service, is difficult to predict in advance, and varies from customer to customer and time to time -- and so is best assessed after use, when the outcomes are known. There is also the problem that important subjective value perception data arises from within the head of the consumer -- that aspect of value can be hard for the business to know, even after the fact.

Uncertainty in quantifying value realization forces us to address the related question of who takes on pricing risk? This has important implications. How much use will I get from my subscription? Must I lock in a package rate to get a volume discount, and then have to wonder if I will use enough of the package to get the value expected? What if I use it, but am disappointed?
  • Pre-setting prices puts the pricing risk on the consumer (causing many to refuse to take the risk at all, resulting in lost revenue), and often leads to disappointed customers (which hurts customer retention, thus reducing future revenue).
  • As practitioners of value-based pricing recognize, offloading pricing risk from the customer is a service, and one that can increase sales and loyalty. Think of it as pricing-risk-management as a service.
  • For digital services (which typically have near-zero marginal cost for unlimited replications), businesses have little to lose by taking on pricing risk (as long as they manage that risk effectively).
Both parties suffer when services are priced in a way that a) poorly correlates to the value the customer receives, and b) forces consumers to take on unwanted pricing risk. Specific strategies can be understood in terms of how they combine three aspects of pre- (versus post-) pricing risk:
  1. Pre-set packaging of an assortment or bundle of items or services in a subscription. Do you have run-of-the-house access to a full range of items or services to choose from, as you decide you want them, or must you choose a specific assortment or bundle in advance? This comes up when you subscribe to TV channels in bundles, or to NY Times news plus crosswords, or support a museum or a musician on Patreon, and choose from multiple packages with different perks at different prices. Do you know in advance what combination you will want and how you will value it?
  2. Pre-set usage levels. If you subscribe to a service, does the price depend on how much you use it, building in volume discounts? Other things being equal, a customer who uses many articles, songs, programs, or whatever, per period will presumably get more value than one who uses only a few. Does the price reflect that? Unlimited usage plans do not -- so heavy users get a bargain, and light users subsidize them (and may not find it worthwhile to subscribe at all). Beyond that, usage-related pricing generally tracks better to value when it applies volume discounts, as with mobile data plans, and TV channel bundles. (Such prices can vary a unit at a time, or be fixed within set usage bands.) Volume discounts can factor in both diminishing returns to the customer and economies of scale to the supplier. 
  3. Pre-set price schedules. Even when pricing depends on usage, and offers volume discounts, that usage is most commonly priced using a pre-determined price schedule, which presumes some average quality of outcomes. More advanced value-based pricing approaches can allow the price schedule, itself, to depend on actual outcomes. For example, the price of an article or song or video may depend on the value I actually get (/perceive) from it. One simple example is when a sales commission depends on the price obtained for the sale. Outcomes pricing is generally not done in current consumer subscription plans (but is a feature of the new FairPay strategy).
Whatever the particular form of pre-pricing, the business must try to predict pricing levels (/tiers/packages) that work on average, but will inevitably work poorly for the many consumers who diverge from the average in one way or another. To the extent that such pricing decisions can be deferred, greater price discrimination can be achieved in a fair and transparent way. That leads to better economic efficiency, higher profit, and happier customers.

More detail on "Understanding the rungs on the ladder of value" is provided in the sidebar below, but to cut to the chase...

Maximizing CLV and Value Experience

The established wisdom of subscription economy businesses is that it all about Customer Lifetime Value (CLV). The problem is that this is generally viewed from a one-sided perspective -- value to the vendor. But value to the vendor is maximized when the relationship is win-win. It is a matter of fair balance -- maximizing CLV requires equal attention to how the customer values the relationship: Vendor Lifetime Value (VLV).

  • It is costly to acquire customers, and therefore it costly to lose them and have to replace them -- recurring revenue models work best when the revenue recurs. 
  • Customers are retained when they feel they are getting good value for their money -- for what they really want. That is especially likely when they feel the business is listening to them, understanding what they value, and seeking to deliver that at a fair price. 
  • To the extent that we can migrate toward pricing methods that offer better mappings to value-in-use, customers will be happier and more loyal, and move toward maximum CLV (and VLV).

It is easy to get lost in the mechanics of pricing and subscription models (which are complicated and full of compromise) and lose sight of the underlying goal -- to find a right price, for each customer -- a price that each customer will view as fair compensation for the value they seek. We are so used to the compromises and nasty zero-sum games that are the dark side of the past century of mass marketing, that we often descend into a cycle of exploitation on both sides. Businesses treat the consumer's perception of the total value proposition as something to manipulate and exploit, and, as a result, consumers distrust businesses and try to "hack" them. But as businesses become "customer-first" and oriented to "customer experience" (CX), we see that what really matters is cooperating in a joint, effort to co-create value, to maximize "value experience" (VX).

A few decades is a long time in our personal lifetimes, and that makes it is easy to forget that we are still in the infancy of the digital era, with many deep changes yet to come. But we do see that a few decades into the digital era we are still in a time of continuing disruption and turbulence. As Peter Drucker said, "The greatest danger in times of turbulence is not the turbulence, it is to act with yesterday's logic." Moving toward value-based post-pricing will move us toward tomorrow's logic -- to reduce the cost and risk in how poorly prices track to value. It is that new logic that will fully realize the value in the subscription economy.


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Sidebar:  Understanding the rungs on the ladder of value

A more detailed view of how this plays out in subscription pricing plans is outlined in the following list (drawing on an earlier post). Looking at this progression, ordered roughly in accord with the degree of value-based post-pricing, it becomes apparent that we are only at "the beginning of the beginning" of our evolution toward a commerce for the digital era.
  • Unit sales of items (pre-priced). This is the pre-subscription base case. Examples are song/album, video, e-book, and article ownership downloads (with or without cloud repositories). This is simple and easy, but tracks to value only on average -- and as predicted, not as realized. It is a bargain for heavy users of specific items, but costly or prohibitive (and a management problem) for light use of many items.
  • All You Can Eat (AYCE), unlimited subscriptions (pre-priced). The common model of all the items you want, time-limited to periods of subscription. This too is simple and easy, but has similar kind of unfairness and inefficiency -- still tracking to value only on average (overpricing light users and underpricing heavy users), and considering value only as to the predicted average experience, not the value-as-realized. Many potential subscribers who are unsure of the value or how much they will use (or expect it will not be much) are disinclined to subscribe. Often referred to as paywalls (with all the exclusionary connotations of a "wall,") these also include tiered variants with levels of premium access, including freemium versions that begin with a free tier (but still place a paywall at some pre-set premium level). 
  • Membership models (pre-priced). These are a form of subscription with a more cooperative, participative orientation, such as for publications, artists/creators, or museums -- sometimes using crowdfunding platforms like Patreon or Indiegogo. These may seem more voluntary than hard paywalls, and often include tiers or bundles that include different levels of perks, but still have pre-set prices for given levels of service (see pre-bundling, below, and note that these perks, such as T-shirts and tote-bags, are often gimmicks of questionable value).
  • Partially usage-related subscriptions (pre-priced for the most part). These improve on unlimited models by adding usage-related tiers, such as for varying levels of mobile data service, how many TV channels are viewable in a bundle, or how many DVDs or e-books you can have out at one time. In most cases not only are the price schedules pre-set by the seller, but the customer must pre-select which specific tier or bundle they want. These can track better to value, in terms of usage, but only based on pre-defined units of usage -- without considering the experiential value of that usage.
  • Fully usage-based subscriptions (pre-priced schedule applied to actual, metered usage). Currently, these are most widely accepted in B2B, such as jet engine "power-by-the-hour" and fleet "tires-by-the-mile." These have also been used for B2C, such as the old "per-minute" charges for mobile phone and dial-up Internet services. Consumers often dislike these plans because of the unpredictability of both usage and value, and the relentlessness of the "ticking meter." However, in some B2C uses the tracking of usage units to value can be quite satisfactory. Tire miles and engine hours are manageable and serve as a good estimator of the broader business outcomes.
  • Pre-bundled subscriptions (pre-priced menu). These can be forms of any of the above in which the customer is given a set menu of options (pre-set, tiered packages) to select from at pre-specified prices. The use of tiers and packages with appropriate volume discounts leads to a better fit to value (for the tier or package), but in a very static way -- it forces the customer to select a tier or package before knowing if they really want it and will find value in it, and sets the value based on predicted averages, not actual value in use.
  • Post-bundled subscriptions [new] (post-priced in part based on actual usage -- but still based on pre-set volume discount schedules). This is an enhancement of conventional subscriptions that I have proposed, such as for TV services, that offers discount prices at levels comparable to current TV bundles, but with the composition of the bundle set after the fact, so that customers can watch whatever channels they want, while still benefiting from a bundled-rate discount. This can track significantly better to value as it varies from customer to customer and month to month. It does not directly address outcomes (did you like that program?), but refund options can be provided (for each program view) to add a degree of outcomes tracking (duds are free).
  • Performance/Outcomes-based pricing (post-priced based in part on actual usage, with a price schedule that is based on performance or outcomes). This goes beyond usage alone, to factor in the quality or result of that usage. Performance-based pricing is common in digital advertising (clicks, leads, transactions) and other B2B markets. Outcomes-based pricing takes that farther up the value ladder, and is increasingly applied in healthcare (where the price schedules are typically set in advance, based on prior results in test populations). Of course it would be more desirable to base the schedule (at least in part) on actual individual customer outcomes, where that is feasible (pay if cured). 
  • Soft values as pricing factors (pre-priced or post-priced). This adds consideration of broader values in the overall experience, like cultural merit or support for social/civic/environmental values. Conventionally, this is rarely an explicit factor in pricing, but some aspects are increasingly implicit in prices, in the form of a tacit understanding that consumers are OK with paying a premium for goods and services that support broader human values and/or are produced and delivered in socially responsible ways.
  • FairPay subscriptions (/memberships) (post-priced, with price schedules set after usage). This is the new value-based strategy that shifts to an adaptively cooperative process for "dialogs about value" that get finalized after usage to create the best practical approximation of price to value in use. (FairPay also applies elements of participatory pricing to optimally factor in the customer's perception of value-as-experienced.) FairPay is designed to co-exist, at whatever level desired, with the other methods above, and to be able to subsume them in a flexible architecture for collaborating on value and price (co-pricing). More about FairPay and how it can adaptively seek the best of all of these approaches is addressed elsewhere in this blog. It is not yet clear how widely applicable FairPay will be, but it points to many aspects of deeply value-based strategy that will almost certainly be important in one form or another.
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(Other posts in this blog have explored many aspects of the subscription economy, and how FairPay offers a path to a next generation of more profitable subscription relationships. Recent posts explained how and why the FairPay strategy adapts the "value-based pricing" approach that is increasingly transforming B2B markets, but has so far seemed less readily applicable to B2C markets --and how FairPay's new approach to consumer relationships can change that game.)

For a full introduction to FairPay see the Overview and the sidebar on How FairPay Works (just to the right, if reading this at FairPayZone.com). There is also a guide to More Details (including links to a video).

Even better, read my highly praised new book: FairPay: Adaptively Win-Win Customer Relationships.

Thursday, March 30, 2017

Foreword, by Adrian Payne, to my new book on FairPay

Adrian Payne -- one of the foremost authorities on Relationship Marketing and CRM -- wrote a Foreword to my new book that serves as an excellent overview.

Adrian is author of fourteen books, including the first text to be published on Relationship Marketing (1993), and most recently, Strategic Customer Management: Integrating Relationship Marketing and CRM (2013). He is Professor of Marketing, University of New South Wales Business School, Australia and Visiting Professor, Cranfield School of Management, Cranfield University, UK, and has extensive senior management experience. Adrian has been influential in my work on FairPay, and I thank him for many valuable suggestions during my writing.

The full text of his Forward is online.  Here is the opening paragraph:
Enterprises everywhere are recognizing the need to become more customer-focused, but struggle to determine how to achieve this. This compelling book explains how a new innovative approach to pricing—“FairPay”—can help achieve this goal through a radical shift in considering how to price products and services. Pricing is not an area that executives consider with great excitement, yet the approach outlined by Richard Reisman promises to be transformative both in practice and theory. It is likely to receive great interest from enterprises, especially those offering digital products and services where the marginal cost of producing a further unit is close to zero. (More...)
I hope you will read his Foreword -- and my book -- and join us to change how we do business in the 21st Century.

Other early praise:
"Anyone responsible for monetizing digital content in consumer markets should understand this radically new perspective on pricing and how to maximize customer lifetime value. FairPay provides strategies and operational methods for creating better relationships -- to increase loyalty, market reach, and profits." - Shelly Palmer, Business Advisor, Author, Commentator 
"Reisman unveils a new world of possibilities through an innovative and visionary methodology that introduces a reference platform for digital value exchange. FairPay is very versatile in its applications and compatible across industries. It is a great example of what disruption could look like in a new digital business era." - Lucila Pagnoni, News Corp Australia 
"FairPay boldly explores the future of pricing from a co-creation of value perspective. Highly recommended for digital business entrepreneurs, as well as established firms working on their digital transformation." - Jim Spohrer, IBM and ISSIP.org 
"A groundbreaking and definitive book on pricing strategy for the digital age. This highly innovative and practical work shows how enterprises can develop relationship-based pricing strategies leading to long-term customer relationships, based on principles of equity and fairness for both customer and supplier." - Professor Pennie Frow, University of Sydney Business School
Order the book now from:


Tuesday, March 7, 2017

Value-Based Pricing Is Transforming B2B -- Now for B2C...

"There is broad consensus...that a pricing orientation based on customer value and customer willingness-to-pay is best and can positively influence pricing power and firm performance." -- Journal of Revenue and Pricing Management
FairPay is a new way to do value-based pricing -- in which prices are set based on the actual value realized by each individual consumer -- with a fair share of the value surplus going to the provider.
  • Value-based pricing has proven transformative in B2B contexts. It is becoming accepted as best-practice, where feasible, even though this approach has been largely unknown in consumer markets. 
  • Now FairPay provides a lightweight way to exploit the economics of digital to achieve similarly transformative win-win results, in a way that is suitable for many mass-B2C businesses (especially for digital content/services).
This post provides background on what value-based pricing is, and shows how and why it is increasingly transforming businesses in the B2B space. It explains why it has generally not been relevant for B2C businesses, and how FairPay provides a new variation on this theme that is specifically suited to consumer markets. (Links to authoritative references are provided -- it is strongly recommended that any manager with revenue responsibility understand this increasingly important new perspective on strategy.)

New pricing strategies can drive business design and disrupt markets

Before jumping into the details, let's be clear that these ideas go far beyond the narrow "green-eyeshade" confines of pricing that many managers tune out. Pricing is an often neglected aspect of strategy, given little attention or respect. But pricing can have huge impact on profitability, and value-based pricing has proven that it can transform fundamental business models and organization structures. It can drive design thinking in ways that improve customer relationships, disrupt competition, and reshape markets. As Peter Drucker said, "The greatest danger in times of turbulence is not the turbulence, it is to act with yesterday's logic." In these times of turbulence, pricing is too important to be left to the pricing specialists. 

Value-based pricing -- seeking optimal value exchange

The terms value-based, performance-based, outcomes-based, and success-based are often used for variations on the same basic idea. (I use the term value-based, for breadth and simplicity, since performance, outcomes, and success are aspects of value.) These all differ from more conventional cost-based (cost plus markup) and competition-based (what the market will bear) pricing orientations, which are widely used, but are more simplistic and generally less effective.

My particular emphasis is on post-usage assessments of value, which are central to individualized, in-context experiences of value -- these are most important to quantifying the true value to a given customer (especially for experience goods). The term value-based pricing is also used for less collaborative, pre-usage pricing variants that are based on generic predictions of value. That is a step in the right direction, but generic predictions are just expected averages, and thus a poor approximation of post-usage measurements of value, as actually realized by any given customer.

Value-based pricing seeks to approximate the ideal of perfect price discrimination, which captures maximum revenue from every customer (including many who would otherwise not actually become customers at all). As currently applied, experiential value-based (post-) pricing has generally been impractical in consumer markets, but it has proven very effective and efficient for industrial items or services. For post-pricing based on value, the challenge has been that this requires 1) that the parties can agree on how to measure value as it is experienced in context, and how to share in the value surplus that the product/service creates, and 2) that they able to do the analysis that requires, after the performance and outcomes are known.

While this had limited where value-based pricing has been applicable, it is widely accepted that digital transformation is rapidly expanding that applicability.

The following sections address how FairPay simplifies this process to make a new kind of value-based pricing practical for consumer markets, but first, let's look at the evidence of why this is so important.

Powerful lessons from the B2B world

The current special issue of the Journal of Revenue and Pricing Management is devoted to value based pricing -- its editorial observes (emphasis added):
There is broad consensus among pricing scholars, consultants, and practitioners that a pricing orientation based on customer value and customer willingness-to-pay is best and can positively influence pricing power and firm performance...More stories of successful transformation are being presented at pricing and business conferences. More firms are piloting value-based pricing with specific projects and technology platforms. 
One of the articles in that issue, The conceptualization of pricing schemes: From product-centric to customer-centric value approaches (by Stoppel and Roth), provides a conceptual structure and a survey of practice to show how this can "strengthen the relationship between customer and provider" and provide numerous mutual benefits.

Helpful background on why this is so powerful is contained in Is Performance-Based Pricing the Right Price for You?, a 2002 paper from Harvard Business School Working Knowledge (emphasis added):
Not every industry or company can benefit from performance-based pricing. But where there is a fit, PBP can be a powerful tool that merges the interests of buyers and sellers, says Harvard Business School professor Benson Shapiro.
Because pricing is such a difficult and complex arena, it has confounded sales and marketing executives and scholars for centuries. In no other marketing element is the two-sided conflict and cooperation nature of the buyer-seller relationship made so clear.
Part of the relationship is a zero-sum game between buyer and seller in which one's gain is the other's loss. Pricing is at the center of this part. But, there is a second, win-win part of most buyer-seller relationships, including almost all business-to-business relationships. The win-win part often includes improved products and services that simultaneously provide greater customer value and higher supplier profitability. We constantly strive to move elements of the relationship from the zero-sum conflict side to the win-win cooperation side to achieve business success and relieve personal angst on both sides. We have searched for ways to move pricing into the win-win category. In some situations, performance-based pricing can make pricing a win-win element of the buyer/seller relationship.
That paper goes on to give many examples, noting its popularity in advertising, as well as "industries as diverse as consulting, trucking, and heavy industrial services." It cites three advantages:
  1. "alignment...between the buyer's goals and the seller's goals
  2. "insurance...when the final performance of the service or product is in doubt," creating "a greater sense of 'fairness' for both buyer and seller" 
  3. "the very process...develops 'wide-band width" communication between buyer and seller...a great deal of buyer/seller cooperation and coordination and literally a much broader agreement.
The downsides cited by Shapiro are that it "is complicated...the amount to be paid can not be determined until after delivery, and often even after usage' and that this "moves both the cost and price risk to the seller," (and that "it is not good for sellers who desperately need short-term cash flow"). It is this complexity that has kept such approaches out of B2C markets until now.

But Shapiro also observes that "the vendor then obtains the opportunity to better manage the spreads among value to the customer, price, and cost to its advantage. With risk comes added opportunity. The vendor who uses performance-based pricing must thus be willing to accept greater, two-sided (price and cost) risk for added reward opportunity." These are advantages that I have highlighted as the motivations for FairPay. This idea of opportunity coming out of risk is important, and is addressed further in the last section.

Additional interesting background that reinforces these points is in the chapter "Pay if it Works" in Smart Pricing, by Raju and Zhang of the Wharton School, and a more recent HBR article

This trend relates to the ideas described in my post, Price = Value, based on the growing acceptance that value derives from services, not goods (even if it is a service that is embodied in a good) -- and that companies can profit from that by setting prices based on the value of their services, not just the goods that they are based on. There have been many successes. Perhaps most familiar to people in content businesses are performance-based advertising pricing models, such as the shift from cost-per-impression to cost-per-click to cost-per-lead or cost-per-action. But industrial services provide many illuminating examples. For example, Rolls Royce profited from realizing that it need not sell jet engines as commodities, but could get more share of wallet and make its customers happier by selling "Power by the Hour," where the airlines pay for what they use, and leave it to Rolls Royce to manage high capital investment and critical maintenance efforts. GE and others now do the same. Michelin now sells tires by the mile to fleet owners.* There have been many more successes, including the example of Salesforce, which uses customized value-based pricing for its large accounts (as reported to me by the executive who managed development of that pricing system a decade ago). An important example where outcomes are increasingly viewed as an essential basis for fair and efficient pricing is in healthcare. (The Stoppel and Roth paper cited above provides additional examples.)

The advent of Big Data and the Internet of Things (IoT) is making this more feasible and effective in a much wider variety of businesses, as described in a 2014 HBR article. Value can be measured in any appropriate manner, reflecting usage, performance, outcomes, and other factors. (I addressed the similar potential for big data about content service use in an earlier post, "E-Books Are Reading You" -- How That Enables a New and Far Better Economics.) 

Value to the consumer! -- a win-win game

Now FairPay takes the principles of the value-based pricing and applies them in a lightweight and intuitive form to consumer markets. In doing this, it can flexibly blend desirable features of other pricing models in a new paradigm. It combines aspects of freemium and participatory pricing (along with post-pricing) in a new way -- one that gives buyers and sellers evenly balanced power to set individualized fair prices in "dialogs about value" -- a collaboration over time that can consider all of the relevant dimensions of value and fairness. Its assessments of value may at first be crude, but because of its continuously adaptive learning process they can be good enough, and get better, on average, as the relationship develops over time. (It also gets more seamless and habitual after a short initial learning period.)

Shapiro's paper nicely points out the zero-sum versus win-win game aspects of buyer-seller relationships (as quoted above). FairPay is based on just such a view, working as a repeated game that seeks win-win cooperation over the course of each relationship. The details of that game are described in my post, FairPay Changes the "Game" of Commerce, and how it works in various industries is outlined throughout my blog. A conceptual perspective on why this is important and how the value surplus can be shared fairly is in my post, An Invisible Handshake for The Digital Wealth of Nations.

Drawing on the conceptual model of Stoppel and Roth, pricing schemes have two key components: measurement units (that provide a basis for pricing), and calculation mechanisms (effectively the pricing rates that derive a monetary amount based on the units). These elements can be addressed in systematic ways in the large B2B contexts where value-based pricing has been successful, but are a challenge for B2C markets. The breakthrough of FairPay is to recognize that the individual relationships in B2C markets operate at a more subjective, intuitive, heuristic level, and that we can exploit computer-mediation to design the pricing game to operate at that same level.
  • FairPay is not the same as traditional person-to-person negotiation, but both operate at a similar and appropriately subjective, intuitive, and human level. 
  • The choice of measurement units and pricing mechanisms can be flexible and dynamic, because cooperation is centered on fuzzy aggregate values where these details are merely reference points for justifying an approximate valuation that is intuitively agreeable. 
  • The business can accept some degree of transaction-level valuation errors (given the low marginal costs), as long as the overall trend of the relationship leads to fair and sustainable profit. 
FairPay pricing is emergent out of fuzzily approximate dialogs about value that converge toward reasonable accuracy and fairness. This has strong foundations in behavioral economics, as explained in Making Customers Want to Pay You -- Research on How FairPay Changes the Game and Thinking Fast and Slow about FairPay: A New Psychology for Commerce in a Networked Age

It is this embrace of fuzziness and emergence that enables FairPay to find a solution that transcends rigorous computational models to cut through the dilemma of unlimited all you can eat (AYCE) models versus metered usage-based models, both of which are inefficient and have consumer acceptance issues.* By accepting pricing risk (which is actually very manageable for digital services), FairPay opens vast new opportunities to collaborate, build loyalty, and upsell -- to maximize Customer Lifetime Value (CLV).

The competitive advantage of taking on risk

Expanding on the observations of Shapiro noted above, an article in the current issue of PWC Strategy+Business, The Uncertainty Advantage, notes that "Creative leaders don’t fear risk — they turn it into a money-making strategy."
There is no better source of profit than your ability to first identify the opportunity hidden in disruptive forces and then use it to differentiate your company from its competitors.
Post-pricing based on individual value is such an opportunity. FairPay recognizes that in a digital world, service providers risk little by taking on pricing risk, because their marginal cost of service is near zero. They can provide  a big win for their customers -- by taking on the customer's risk of disappointment, at little risk to themselves -- and thus create a big win for themselves.

FairPay can help us move from thinking narrowly about user experience (UX) and customer experience (CX) based on rigid, imposed pricing models, to the more central and win-win issue of value experience (VX). Notice that UX and CX consider the perspective of the user/consumer, but they do so with the the idea that the UX/CX is to be managed by the vendor (and with the vendor's unilateral price setting power). VX looks at this from the broader perspective that value is something that neither party owns or fully controls, but is something that both co-create and share in cooperatively. With this central focus on value experience, we can then find ways to cooperatively look beyond conventional notions of pricing, to change the nature of our business models, and make them more win-win.

Which is more win-win way to think about pricing? Which gives your customers a truly "customer-first" experience of value? Which will make your business most sustainably profitable? Isn't it time to give it a serious try?

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Some other discussions of value-based pricing on this blog [updated]:
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For a full introduction to FairPay see the Overview and the sidebar on How FairPay Works (just to the right, if reading this at FairPayZone.com). There is also a guide to More Details (including links to a video).

Even better, read my highly praised new book: FairPay: Adaptively Win-Win Customer Relationships.

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*Note important distinctions between models based on actual usage, such as power by the hour and tires by the mile, versus those based on potential usage, such as the all you can eat (AYCE) subscriptions that are becoming dominant is content sales (news, music, TV/video), as described in the Deadweight Loss post. Actual usage is a form of post-pricing, and thus tracks moderately well to realized value, while AYCE access subscriptions are pre-priced, with no correlation to whether usage (and thus value) is high or low. 

At a next level of refinement, actual usage is still not an ideal metric of realized value, especially for experience goods. For jet engines and fleet tires, hours or miles (respectively) will usually correlate well with value, but for news stories or videos, the number of stories or number of programs (or minutes) may not correlate very well with realized value at all. That unforgiving "ticking meter" is why conventional usage-rate-based pricing of content (pay per view and micropayments) has remained unpopular with consumers. The "subscription economy" moves us closer to actual value than an ownership economy does, but the measurement of subscription value is the key challenge in making pricing truly value-based and win-win. That is why FairPay (with its fuzzy, value-based blend of AYCE and usage pricing) can make all the difference.