Sunday, May 1, 2011

Guiding FairPay Pricing for Control and Predictability

One of the common concerns sellers have about buyer-set FairPay pricing is that they will lose control and predictability in their pricing and revenue.  I suggest this is actually much less of a problem than it might seem, in spite of the buyer freedom to "pay what you think fair."  There are a number of aspects to this issue, but one especially powerful strategy deserves greater attention.

In many situations, one of the best ways to manage FairPay pricing may be to rely heavily on a suggested pricing structure, and to frame the setting of FairPay prices by the buyer in terms of a differential from the suggested price.  Here is an example of how that can work for the seller.  (For a basic introduction to the concepts of FairPay pricing, see the sidebar at right.)

  1. When making the offer, provide the suggested price schedule, so the buyer has a clear idea what you will  be expecting.  The buyer can still be completely free to price as he feels fair, but will know the seller's reference point.   
  2. After usage, provide the buyer with the suggested price based on that schedule. The schedule might be a single price, or might provide whatever level of structure you think the buyer might grasp.  The suggested structure might explicitly take into account such factors as usage/volume levels (counts/times, etc.), categories of product/service used (basic or premium, etc.), buyer demographics (business/consumer/student/retired, etc.), indicators of value obtained, adjustments for any problems, etc.  (This schedule could be customized to the buyer, but showing how it varies can help frame the buyer's understanding.)
  3. Provide a price-setting form that presents the suggested price and its rationale, and asks the user to set a price as the suggested price plus or minus a differential (whether a percentage or a dollar differential).
  4. Include in the form a set of multiple choice (and optional free text) inputs to enable the buyer to explain the reasons why he thinks the differential is fair.  Depending on what is already in the suggested price rationale, these reasons might relate to additional aspects, such as usage/volume, product value perception, buyer circumstances, problems, etc.
  5. Determine a fairness rating for the price (the differential), as explained by the buyer -- unfair, marginally fair, fair, very fair, generous, etc.
  6. Provide feedback from the seller back to the buyer on the seller's view, in terms of this fairness rating. (This can be clear and explicit, but can also be left fuzzy, and just implicit in how the offers are made.) 
This provides a shared frame of reference that can guide the buyer to price more or less closely to the suggested amount, and provides a basis for communication and judgement as to the fairness of any differential.

This structuring works within the broader FairPay pricing feedback process, in which sellers communicate back to buyer regarding fairness, and determine whether to make more and better product/service offers, or to warn and restrict the buyer, or to disqualify them from further FairPay offers.  That broader process provides the primary method of control:  
  • The seller controls an offer management process that stages their offers in an ongoing relationship  (such as a subscription).
  • That staging enables the seller to limit the value at risk (at any given stage) to buyers who have not established a reputation for paying fairly, and to extend that as the relationship warrants.  Offers can be managed to limit the value of the unfair exceptions, and to minimize their number.  
With this combination of offer framing, suggested prices, and feedback-driven incentives to price fairly, sellers should generally obtain FairPay prices that average very near to their suggested prices.

(Of course the idea here is to guide the buyer, but not to be deaf to buyer feedback. FairPay is a dialog about value, and it takes two to have a real dialog.  If there is a pattern of buyers pricing below suggested values in any context, that is an indication that buyers are not satisfied with the value received in that context. Such a situation should be understood as a disagreement as to value that the seller needs to address, whether by changing the perceptions of the value, the realities of the value, or the price suggested in exchange for that value.)

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(Also, as suggested elsewhere, this may work best where a conventional set-price offering remains the default for those who do not price "fairly."  I suggest setting the suggested FairPay prices somewhat below the set non-FairPay prices to give the effect of a relationship discount to those in the FairPay zone, and thus add to their incentive to maintain that FairPay privilege.)

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