Wednesday, August 25, 2010

An Open Letter to Radiohead and Seth Godin -- How to Make Much More Money

For those who have not noticed, Radiohead might be releasing another album soon, and Seth Godin is ditching his publisher and going direct. Both are in the vanguard of content disintermediation. This is an open letter to Radiohead and Seth...]

I have a suggestion on how you (and others like you) can make much more money than you realize.

You both obviously know that by ditching the middleman and going straight to your public, you get a much larger piece of what you sell. And you both clearly know how to reach your public without the help of a middleman, and that you and your public are partners in a collaboration.

But what you probably don't know is how a radical new pricing process, a sort of Pay-What-You-Want (PWYW) on steroids, can significantly increase your total revenues -- and profits. Radiohead knows that PWYW can be a very effective way to reach your market, getting far more people to buy, and many of them to pay reasonably well. But both of you know that many pay nothing at all. ...PWYW is is participative, but flawed.

FairPay (Fair PWYW) is a radically new pricing process that builds on the flexibility and participation that PWYW offers to buyers, but motivates them to pay fairly. It works where there is an ongoing relationship of continuing sales, and tracks how fairly buyers pay. If they pay fairly, the seller continues to extend more FairPay offers to them. If they do not pay fairly, they lose the privilege of continuing to buy on a FairPay basis, and must pay a conventional set price for future purchases. Unlike PWYW, FairPay is a two-way dialog that creates consequences for not paying fairly.

Because of this cycle, this FairPay process may not work so well for single sales, like one album or one book, but can be very powerful for an ongoing series of sales. For example:
  • Individual songs from a collection of albums, offered in series, one at a time, or in small bundles...
  • Individual items from a catalog of book chapters, articles, podcasts, or videos...
The process begins with one of a few low-value items, to test how the buyer sets prices. If the prices are reasonable, a few more items are offered. As the buyer builds a reputation for pricing fairly, more FairPay credit is extended (but never so much that there is too much risk that the buyer is done and will pay nothing for a valuable bundle). So perhaps it might better be called Pay-What-You-Think-Fair, because that is the result.

I suggest FairPay can produce far more sales than any set-price offer, and far more revenue and profit than any simple PWYW offer.
  • For Seth, this may be easy to apply now to the extensive library of materials you already offer, and have full rights to control.
  • For Radiohead, this might work when you have at least a second album you have full rights to offer songs from.
This FairPay process can be even more effective if you can aggregate a larger collection of content that will sustain an even richer and more extended relationship with your buyers. This might be done by teaming up with other content creators who appeal to the same buyers, perhaps in a cooperative selling service. With such a deep (and preferably growing) catalog, buyers will have even more incentive to develop and maintain a reputation for paying fairly, and will generate more
cycles for the feedback process to fully develop. The task of developing the FairPay e-commerce platform will be spread across more sellers, and the buyers' FairPay reputations will be shared by all of the sellers.

This could be a back-end service, so that you can keep your direct relationship with buyers, and you can sell to everyone interested in buying at a price they think fair -- and you control the offer decision process, to limit your exposure to the few buyers who pay what you do not think fair.

Much more detail is given elsewhere on this blog, and the FairPay Web site -- the FAQ is particularly recommended.

To Radiohead and Seth, I suggest you think about this. If you want to try it, I would be happy to assist.

To other content creators (including video, games, apps, software, etc.), I suggest the same. Think of this as the next step in C2C (Creator to Consumer) commerce.

To entrepreneurs and developers looking for a killer business opportunity, I suggest this is it. Again, I would be happy to help.

And to Amazon and Apple, of course you could do this too, as described in an earlier post. A FairPay Zone within your store could offer products from creators and/or publishers who agree to offer FairPay pricing, and you could facilitate the offer-pricing-reputation(-offer...) cycle.

Friday, August 13, 2010

Doing Well by Doing Good with FairPay -- Shared Social Responsibility and Pricing

Adding charitable giving to the pricing process can significantly increase total revenue and profit. This was the finding of a paper in the July 16 issue of Science that was reported recently on the Discover magazine blog. The finding was for charity combined with Pay What You Want pricing (PWYW), but the lesson seems equally applicable to charity combined with FairPay. FairPay builds on PWYW by adding feedback on buyer pricing that lets sellers decide whether to make further FairPay offers, as explained in the sidebar to the right.

As reported, PWYW+charity yielded significantly higher total profit than PWYW without charity, and also more than either a simple set-price, or set-price+charity.

Individually, the PWYW buyers paid less than the set-price buyers, but far more of them made a purchase. In this case the product was a photo of the participant taken during an amusement park ride. Purchase rates were very low with standard pricing (at $12.95) and only slightly higher when 50% of that price went to charity.

As summarized in the Discover blog, "...But when customers could pay what they wanted in the knowledge that half of that would go to charity, sales and profits went through the roof. Around 4.5% of the customers asked for a photo (up 9 times from the standard price plan), and on average, each one paid $5.33 for the privilege. Even after taking away the charitable donations, that still left Gneezy with a decent profit."

"This is a substantial result, especially since it came from a real setting. The theme park that Gneezy used stands to make another $600,000 a year in profits if it takes up her sales strategy. And just to be sure, Gneezy confirmed that sales at a nearby souvenir shop didn’t fall on the days when she ran her study. These extra profits weren’t coming at a cost to retailers elsewhere in the park."

These results suggest that combining FairPay with charity could have even better results, possibly even with much lower levels of charity, and thus higher profit. The charity component encourages people to buy and to pay a fair price, and the FairPay feedback process provides even more incentive to pay a fair price. I suggest that FairPay without charity will also prove very effective, and be more widely applicable, but the combination certainly seems worth trying.

Gneezy describes this use of charity as "shared social responsibility," a variation on "corporate social responsibility," which gets to issues of how corporations seek to build a more collaborative relationship with customers. I suggest that the FairPay pricing process is a complementary way to build more collaborative relationships, and to do so more directly and efficiently. Whether the combination is more or less effective than FairPay alone, remains to be seen, and probably depends on the details of the situation.

The charity contribution percentage could be fixed as it was in this experiment, or it might be at a user-specified rate. One real-world example of a PWYW offer with a buyer-specified rate of charity is from Camel Audio (until the end of August 2010). The suggested price is $59 (which seems to be the usual list price), and the suggested charity contribution is 50%. My test indicates this Web offer restricts payments to being between $1 and $100, but that it allows charity rates up to 100%.

The results of the Gneezy paper also show how much of the addressible market can be lost under conventional pricing. Sixteen times more people bought photos when given the ability to pay what they wanted (but they paid poorly), so that is not so attractive. But nine times more people bought with PWYW+charity -- and they paid at a rate that tripled profits!

Trying new pricing models takes time, effort, and some risk, but it would seem that the payoffs might be very large indeed. Businesses struggling with revenue models might be risking much more by not taking the plunge.

Sunday, August 1, 2010

FairPay -- Why Would Anyone Pay If They Don't Have To?

The answer is simple: Buyers who do not pay will not get further offers.

This is the first question many people ask on hearing of FairPay -- given its core of Pay What You Want (PWYW) pricing. It is an important question, and a central feature of FairPay is the FairPay reputation feedback process that addresses that. With FairPay, there are consequences for not paying -- much as there are for getting a poor credit rating.

FairPay will generally be most useful in cases where there is an ongoing relationship between the buyer and one or more sellers. This might be for ongoing purchases of multiple items or services, or for ongoing subscription access, taking the form of a series of limited FairPay offers from the seller in response to a series of FairPay pricing actions by the buyer.

Sellers can be expected to limit the initial FairPay offers that they extend to new customers who lack established FairPay reputations. They might offer only items and quantities that might typically be free (much as with freemium pricing), so that their risk is small. Only after the buyer establishes a history of paying fairly will the seller continue to make FairPay offers for larger quantities or premium items. The benefits to the buyer of not paying will be limited and short-lived. The benefits of paying will continue and grow.

Sellers can be expected to make these consequences clear when they first extend an offer to sell on a FairPay basis. The product/service is not offered as "free," nor as simple PWYW, but as Fair PWYW, or perhaps better put as Pay What You Think Fair -- essentially on trial, on approval, and on evaluation. Sellers would make it clear that zero is "acceptable" (with regard to reputation and future consequences) only when that is arguably fair. Such cases of reasonable fairness in setting a zero price might include cases in which the buyer gives a reason why there is little or no realized value to the buyer (much as is often required for returns), or where only very low quantities are sampled (which might be conventionally understood as a buyer-directed form of free sampling).

This process may be clearest and work best for early uses of FairPay that are complementary to "freemium" offerings -- which combine limited access to free products/services with a "pay wall" that requires set price payments for more usage and/or premium items. As an alternative to the pay wall and its set prices, buyers may be invited to enter a "FairPay Zone" and permitted to stay there as long as they pay fairly, as depicted in this diagram:

See more FAQs, and further information on the FairPay Web site.