Adaptively Seeking Win-Win
Beyond Freemium: How to Really Exploit The New World of Networked Commerce
FairPay was described very briefly in The Harvard Business Review, more fully in this paper to appear in the Journal of Revenue and Pricing Management, and in depth in my highly praised 2016 book.FairPay is a new logic for conducting ongoing business relationships that adaptively seek win-win value propositions in which price = value. It takes the lesson of value-based pricing in relationship marketing contexts that has found great success in B2B markets -- and adapts that to B2C markets by applying a new twist.
It can resolve the revenue crisis for digital content and services (and applies more broadly), and create more customer/vendor lifetime value for all. It works by seeking value-based, customer-first relationships that build on a one to one "invisible handshake." It applies mass customization and learning to re-center commerce on a personalized human exchange of value, a center that was largely lost over the past century.
FairPay promises to transform how we do business in ways few imagine, because we have not fully come to grips with the fact that traditional economics does not work for pricing digital experiences in networked markets:
- Replication is nearly free -- The invisible hand flails without scarcity, and freemium just begins to exploit this -- meanwhile many consumers question why they should pay at all
- Value is experiential, personal, and context-dependent -- Freemium totally misses this
- Relationships are the new marketing -- The Subscription Economy is the way of future, but freemium just scratches the surface
FairPay can be applied not just to digital, but to any service where marginal costs are low, value is experiential, and relationships can be leveraged -- including non-profits.
FairPay literally changes the "game" of commerce -- from a series of independent one-time games of individual transactions that center on price, to a repeated game of relationship that centers on value. This shifts the game from zero-sum toward win-win.
Climbing the Ladder of Value -- to Increase Customer Lifetime Value
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 (for the seller), but the value of the product/service package that is provided for that price (for both parties). That drives toward win-win.
A full FairPay strategy applies three mutually reinforcing strategies in concert, to achieve high levels of value discrimination:
- shifting from a short-term transaction-level focus to an ongoing relationship-level focus that motivates cooperation for mutual benefit over the life of the relationship (the repeated game)
- determining price more individually and flexibly to better reflect the value to the customer based on the actual nature and context of their individual usage (as that becomes known)
- enabling increased participation of the customer in the pricing process to enable value discrimination that is transparent and reflective of the customer's needs and values.
This has the promise to transform many markets, especially digital media. Many have seen potential in participatory pricing, but seller control and predictability has been a big stumbling block. FairPay adds dialog and reputation tracking to make this practical, controllable, and profitable for mainstream business use. It does this by using structured dialogs (choice architectures) plus Internet-enabled reputation tracking, to limit price-setting empowerment to those who price fairly over an ongoing relationship -- and to guide consumers to price fairly. These dialogs generate a whole new level of customer feedback on their experiences -- and their real willingness to pay for them -- as that evolves over the relationship.
FairPay embodies modern concepts of business as the co-creation of value by producers and consumers working cooperatively. It provides a new form of co-pricing. It builds better customer relationships for greater profit from a wider market.
The central process of FairPay is outlined in this sidebar
(see more on how)
Many ask why consumers would pay if they do not have to, but extensive experience with "pay what you want" (PWYW) pricing shows that people actually do pay -- they want to be fair -- and the FairPay process adds strong motivation to pay fairly. FairPay builds on this by aligning values in ongoing cooperative relationships.
Game theory: Even the hard-headed homo economicus, the rational, self-interested utility maximizer of classical economics (not just the homo reciprocans of behavioral economics) will see the compelling logic of FairPay. FairPay is structured as a “repeated game” in which it is worthwhile to pay up, to invest in reputation building, in order to maximize FairPay access to future purchases. It is just a matter of careful and constantly adaptive game design to ensure that the game remains win-win (and that any losses from those who seek to play unfairly and then quit are limited to be acceptably small).
Economics: The most economically efficient prices are not uniform, but are customized for each consumer to the actual value they receive, and their willingness to pay for it. This is true in theory, and has been proven effective in high-end B2B businesses where actual value-in-use can be cooperatively determined and used in "value-based pricing" strategies. Doing that in mass consumer markets had seemed difficult, but FairPay now points the way to do just that, in a consumer-friendly way. (This contrasts to the deadweight loss of seeking to impose "artificial scarcity.") FairPay motivates businesses (and consumers) to move from short-sighted "price discrimination" to more sustainably win-win "value discrimination."
Customer journeys: Modern marketing practice is increasingly focused on fostering customer journeys that develop "loyalty loops" to maximize profitable repeat business. What better way to build strong loyalty loops than to center them on true dialogs about individual value perceptions?
Sustainability and Social Values: Consumers and businesses increasingly see the value in cooperating to "co-create value" in ongoing, sustainable relationships. This is a driver toward The Subscription Economy, as well as movements toward Creating Shared Value, and Social Bottom Lines. FairPay builds cooperative relationships that reflect the broad aspects of value that consumers seek -- and will happily reward.
Where it Works
FairPay promises to be useful for any product/service where low marginal costs apply, so a seller can afford to put a limited amount of product at risk in order to seek to build a profitable relationship with a consumer. This includes most forms of digital content (newspapers, magazines, music, video, e-books, games), software/apps, and services (of any kind) offered to consumers (or low-end B2B offers). It can also apply to perishing items of any kind (much like Priceline and Groupon offers) -- and to more costly items, when used with a minimum price floor that ensures variable costs will be covered.
FairPay can be applied by individual content/service businesses, but gains economies of scale when applied across a platform serving multiple provider/seller businesses. FairPay builds a new kind of database on each consumer’s fairness and willingness to pay for specific value propositions – that can become a very valuable resource for targeting marketing offers. For platform providers, this creates a network effect in which this detailed reputation data can be leveraged across the platform to predict how known customers will respond to new sellers (creating a valuable asset much like a credit rating database).
- Retention win-back programs are a particularly promising place to experiment at low risk -- selectively using FairPay to seek win-win value propositions for customers who reject the standard offer (such as light users for whom standard set prices are just too high).
- Customer acquisition, premium tiers and loyalty programs are also good areas to begin tests -- or other selected product tiers or market segments.
- FairPay is designed to coexist with conventional methods, which can continue to be used while the segments that most readily respond well to FairPay are identified and onboarded.
- FairPay shows why a focus on value matters, and how even small and very conventional steps up the ladder toward a more value-based approach can be beneficial.
The concepts have been developed in depth and published. The key elements of FairPay have been proven in commercial use (including various levels of value-based consumer pricing), but the full FairPay feedback control process has not yet been implemented and tested. FairPay has generated wide interest, and discussions on implementation and trials of the full process are underway.
- Basic forms of value-based pricing have proven highly successful in both B2B and B2C markets. (Even before trying FairPay, forward-looking businesses can begin moving up the "ladder of value" to build stronger and more profitable relationships using more conventional methods.)
- I have had encouraging discussions with a wide range of companies and industry experts, including both vendors (such as NY Times, News Corp, Disney, Spotify, Rhapsody, IBM, Verizon, American Express, and many smaller companies), platform providers (such as Salesforce and Zuora), and market research firms (such as Forrester and MECLABS).
- My collaborators include eminent marketing scholars who can assist in conducting and assessing trials.
- My primary current objective is to develop opportunities to do proof of concept testing and refinement of the strategy, create effective implementations, and foster its wide adoption.
- Please contact me at fairpay [at] teleshuttle [dot] com for information and assistance.
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