Thursday, August 22, 2019

A Platform for Teaching Men to Fish -- Revenue-as-a-Service for Non-Profit Impact

Fund development of a platform that enables non-profits to sustain themselves
Give a man a fish and you feed him for a day;
Teach a man to fish and you feed him for a lifetime.
The same applies one level up:
Fund teachers of fishing and you feed their teaching for some days;
Fund a platform that supports teaching men to fish and you feed all of them for all of their lifetimes.
This could be a very high leverage opportunity! Making a transformative new tool widely available and affordable.

Foundations and others who fund charitable service organizations face a huge problem:
  • Current strategies for funding non-profit services have yet to exploit the power of digital relationships to transform how they work with their customers and donors.
  • Digital technology is already enabling transformative tools, especially for businesses on the leading edge of relationship commerce. Businesses are shifting to recurring revenue models, managing customer journeys and loyalty loops, and the most enlightened are engaging in dialog the brings a mutual focus on co-creation of value. The FairPay framework described in this blog and elsewhere supercharges value-centered relationships, and applies to non-profit organizations  (NPOs) as well as for-profit businesses.
  • But non-profits lack business sophistication and can rarely afford to put resources into developing, testing, and applying similar methods to their relationships. The FairPay framework can transform revenue management at a full range of levels, but much of this potential remains out of reach for many organizations
  • Meanwhile foundations and others are looking for ways to support worthy non-profit organizations, and for ways to make those services more cost-effective in their funding and operations.
(Much the same applies to news organizations that struggle to sustain socially valued journalism (even where there is a for-profit element).

"Revenue as a Service" for Non-Profits -- platforms as a universal leverage point

Viewing this from a systems perspective, this opportunity appears: Fund development of a platform to enable non-profits to sustain themselves by drawing more systematically on support from their community of customers, patrons, and donors. This can provide leverage across a broad swath of service organizations.
  • Non-Profit Organizations (NPOs) -- as well as others, such as news providers -- need a systematic, ongoing way to obtain funding to sustain their operations.
  • That can now be done in very sophisticated ways -- and that sophistication will be constantly increasing -- drawing on advancing technology. 
  • The FairPay framework outlined here suggests a path to transformational improvements in relationship-based revenue models. 
  • Doing that will take skills and resources that may not be economically feasible for small or even mid-sized organizations (even if they would pay back handsomely).
  • That is just the kind of problem that "Software as a Service" was designed to solve: a platform provider (whether for-profit or non-profit) can develop, operate, and continue to enhance a high quality service that non-profit organizations can outsource to. 
  • This can bring economies of scale and network effects to solving the problem of nurturing revenue relationships with large numbers of patrons. (Venture capitalists love platform businesses because of their scalability and high return on investment.)
  • The impact of a non-profit platform could be so transformational that such projects should be very attractive to the charitable foundations that support non-profits and/or journalism. (VCs might be concerned that profit potential of such a platform may be limited by the tight budgets of the NPOs that would use it -- all the more reason for foundations to step in.)
Such a platform would provide "Revenue as a Service." Just what is that outsourced service?:
  • The platform provides the common base of operational software services (based on marketing and behavioral science, technology, and systems analysis), that can facilitate relationship-based revenue management strategy and execution for each of many organizations. Build it once, use it many times. Spread the cost of research, development, and support across many client organizations.
  • Each of those client organizations can retain full control -- setting all the key policies and retaining control of all exception handling. Each decides on all the parameters that define how the system works for them (the platform service may offer suggestions to guide that). Each  gets to have its people handle all human-to-human contact (but can outsource parts of that as well).
There are some existing models for revenue platforms for NPOs. They range from cooperatives like Tessitura, to for-profit services like The News Project, and less structured services for recurring crowdfunding like Patreon. FairPay provides methods for making such services far more powerful, across a far broader range of NPOs. The paths forward are 1) to add advanced FairPay features to existing platforms, or 2) to create new platforms that are clearly focused on FairPay strategies.

"Impact Data as a Service" -- platforms as instrumentation

Funders not only want to get good results, but to get the data to validate whether they are in fact succeeding in that. Common platforms lead to common data and metrics, and common reporting practices.

FairPay drives organizations to increase the quality and frequency of their operational dialog with their community, creating a new level of impact data. Platforms that manage and add new layers of communication with an NPOs's customer/donor community will create new kinds of fine-grained data and metrics -- on just what services are consumed by whom, with what outcomes, how those are valued by those individuals, and how they add value to each community member -- interaction by interaction, over the lifetime of the relationship.
  • That creates a new level of rich data on just what services were consumed and the impact they achieved. 
  • That enables the organization to be more dynamically adaptive and self-tuning, to maximize their co-creation of value with their community. 
  • Funders can use that data to manage their funding and maximize their own impact.
The following sections explain how this is achieved.

The heart of the platform opportunity -- the FairPay framework

FairPay is a radically innovative framework for relationship-centered, “customer-value-first” revenue strategies for the digital era. Its varying forms can be adapted across a wide spectrum of business contexts, both for-profit and non-profit.  (It is an open architecture in the public domain, not a product, and I am working on this as a pro-bono project.)

The original focus of FairPay was on advanced strategies for sustaining for-profit enterprises (especially for digital products and services) -- but the framework spans non-profit services as well, and can be even simpler to apply in non-profit contexts. The core strategies of FairPay have gained recognition in business and scholarly publications. It has strong foundations in behavioral economics, and sheds light on many knotty issues and perverse incentives that are often poorly understood.

What can FairPay do for service organizations? FairPay provides a framework for applying elements that can be mixed and matched to provide a powerful solution to engage customers and donors, and build ongoing relationships with them in a way that motivates them to cooperate in sustaining services that they value. (I use the term "customer" in the broad sense, as including those served as wells as those who donate, regardless of whether they are overlapping or distinct sub-groups. The term "patron," in its broad sense, also conveys that inclusiveness.)
  • Modern behavioral economics has shown that people want to be fair and even generous when asked in the right way to support a service they find valuable. 
  • Game theory teaches that relationships can operate as repeated games, and that well-designed repeated games that are rewarding motivate cooperation to continue the game. (Subscriptions and memberships are forms of repeated games, sometimes well-designed, sometime not so well-designed.)
  • Marketers have learned that they can build profitable recurring revenue businesses based on ongoing relationships (a simple form of repeated game) rather than one-shot transactions, and are beginning to apply the lessons of behavioral economics to enhance that process. They are managing customer journeys and loyalty loops, and engaging in dialog the brings a mutual focus on co-creation of value.
  • FairPay adds more advanced elements to the mix, and combines them to re-align the repeated game to maximize cooperation in creating lifetime value. FairPay builds on transparency and trust to build relationships. It applies empowerment of stakeholders (to show trust), dialog about value given and received (to achieve transparency and motivate willingness to pay to sustain that), and reputation (to sustain trust). 
  • FairPay works best when the business can position itself as a benevolent and fair partner in value co-creation that is worthy of the "price" it needs to sustain the relationship.
  • Non-profit organizations can apply the same methods, and are more naturally seen as benevolent and fair partners in value co-creation.
  • Therefore non-profits have more power to motivate fair contributions from their "customers," and therefore they are able to yield more power to their customers than for-profit businesses are. 
  • That enables them to make contributions voluntary (as is already common practice, but not yet effectively managed with modern relationship-building tools). Such voluntary forms of the more advanced methods of FairPay are relatively easy to apply. 
  • These methods center on regular and ongoing dialogs about value that remind customers of the value co-creation they have benefited from (looking backward to what has been experienced, not just promised for the future), how much they have contributed to sustaining that, and what more can and should be done to add value (in whatever forms are agreed to) in this relationship. That points to what else of value can be done. 
The FairPay framework informs an architecture that can enable NPOs (and journalism organizations) to enhance their revenue-related operations -- to apply the latest business systems, methods, and communications media in a way that optimizes their relationships with their "customers" (again, including donors) to maximize their ongoing sustaining revenue. 
  • This process applies a new kind of leverage -- as a self-adapting engine to create real and valuable impact, measure its perceived value, and adjust the process to do even better.
  • From this perspective, the FairPay framework clarifies how little most businesses and NPOs are currently doing to maximize that, and how much more they could be doing.
More detail on just how this FairPay framework works follows, but first, what does it take to make it happen?    

The platform that supports teaching men to fish

A basic platform for bringing these tools to fund-raising and revenue operations could be built in stages. This is a natural candidate for applying an open source strategy (or a cooperative) to become self-funding beyond a certain initial pump-priming:
  1. Do a basic proof of concept. This could demonstrate the synergy of the combined elements and make the case for further investment. It might take something like 1/2 person-year in total, split between technology and business analysis.
  2. Enhance that to a "minimum viable product" level to be a useful service for a large number of organizations.
  3. Facilitate cooperation of that user community to continue further development, and to attract experts to aid in developing and testing more advanced methods.
  4. Build all of that out into a vibrant, self-sustaining platform ecosystem (much as has been done with other platform or SaaS services like Linux, Mozilla, and Wikipedia).
NPOs (and/or news organizations) could then use this platform to get far more effective and sophisticated in managing their activities as a revenue-generating business, in ways that deepen their social contract with their community.

(As noted above, existing revenue platforms might also be enticed to take the lead in adding FairPay features.)

The FairPay social contract

FairPay works by creating a new social contract for sustaining the creation of desired services.

Consider this change in the game:
  • From today’s conventional repetition game: “Here is our requested price/donation, take it or leave it. We hope you will take the risk — and be satisfied enough to continue this game.”
  • To the FairPay game: “We will grant you the power to pay/donate what you think fair for you after each period of service — we will remind you of the services you got (or funded for others), and will encourage you to pay/donate accordingly.”
This voluntary form of FairPay relies on dialogs about value to frame the value proposition, and to remind patrons of the value they received. It empowers them to determine the "price," engages in transparent dialog about the value that the price should relate to, and tracks reputation to build trust and to know how to nudge fair levels of support.
  • It draws on all available information on when and how services are actually consumed by each patron. Increasing availability of fine-grained usage data will make that increasingly meaningful.
  • It may seed its dialog with individually-calculated suggested prices based on the value and cost of those services. (Even if services may be offered to some at no charge, it may be fair to gently nudge others who have greater means to pay for those services for themselves (and others) as they can afford.) 
  • It regularly solicits payments to sustain ongoing services in an open and transparent way, framing and managing the dialogs about value to remind patrons of the value they (and others) got, and what and when they have paid in the past to sustain that, why they should now pay again, and what new value to expect. 
  • It learns which patrons are fair or even generous in their corresponding payments, so that they can be most effectively nurtured, and resources can be directed to serving those who most appreciate the value offered.  
  • It can suggest additional benefits (perks, tiers of services) based on how fair or generous the customer is
  • In selected uses, it can also withdraw benefits -- for-profit businesses can use that "stick" to enforce fairness, but non-profits might stick to more positive "carrots" (but might still use "sticks" in limited situations).
That is how it drive revenue operations, building on that basic social contract. This is simple in in its core concept, but it is amazing how few organizations engage in real and regular dialogs about value with each customer at this fine-grained level.

  • Engaging an NPO's community on what it offers each of them, what each of them values, and what it needs in the way of support from each of them is the way to build strong sustaining support, enabling it to co-create the maximum value. 
  • Some managers fear getting customers to think about value and price, and some fear that customers will not be willing to engage in such dialog. But behavioral economics shows that customers are far more responsive to productive dialog about value and price than most businesses realize (my latest journal article cites a number of compelling studies, and the most relevant are listed in my Resource Guide). 
  • Managers also tend to forget how much their value propositions vary from one community member to another. (A simple thought experiment can help recenter on the importance of these individual value propositions.) 
  • That, in turn, enables a funder to leverage its impact -- the value it co-creates with its NPO portfolio and each member of their communities.
There is of course much more to how this is done, and it will vary greatly from context to context. Background on these variations is in my previous post, The Elements of Next-Gen Relationships and Pricing -- A Unifying Framework. It provides this summary table of the elements, and then comments on each:

Elements of FairPay
For-Profit
Non-Profit

(Now)
Low Trust
High Trust
(Now)
Low Trust
High Trust
Foundational Elements






Relationship-centered
(repeated game)
?
?
Individual-value-centered
X
?
Post-pricing (“risk-free”)
(after the experience)
X
?
Basic framing and nudging;
transparency and trust
?
?
Amplifying Elements






Participation of customer
in price-setting
X
?
?
?
Individual nudging
based on reputation tracking
X
X
Enforced fairness / revocable privileges ("Gated FairPay")
X
?
?
?
?
Flexible adjustment
for ability to pay
?
?
?
?
?
?

The columns to the right show that while most of these elements are applicable to both for-profit and non-profit organizations, the details will vary, and it will further depend on the level of trust and cooperation in the customer segments to be addressed.

As indicated, most non-profits currently use fewer of these elements than for-profit businesses, but greater use could improve their results (including increasing the satisfaction and generosity of their community). This presents a broad opportunity for a platform to make it easy for non-profits of all sizes to gain leverage.

Again, the clearest difference from how FairPay is used by for-profits is that fairness will often be left as voluntary, to be gently nudged with positive "carrots" rather than enforced with negative "sticks" (such as the revocation of privileges). But motivating fairness should be relatively easy for non-profits, since they can readily point to both the individual value and broader social value of their cause. (And non-profits can generally avoid the most complex element of FairPay, the business logic and policy issues of revocation or other negative incentives.)

The foundational elements are already used to some degree in many contexts, to build on the power of ongoing relationships. Now the amplifying elements can be added in and combined, to bring new synergy to revenue operations.

The general implication of the differences across columns is that the more advanced elements of the FairPay framework are most effective when the parties are perceived as holding up their side of the social contract:
  • for service providers who are perceived as offering real value and warranting trust and commitment from customers/patrons for being fair, transparent and responsive to their value creation needs and desires.
  • for customers who are perceived as fair and honest about communicating their needs and desires, and being fair (even generous) in making contributions to sustain that desired value creation. 
Concrete use-case examples

If this still seems abstract or unclear, please see my other posts with more concrete details of how FairPay applies in specific use-case examples:
Simpler "80/20" solutions with the same platform

Organizations using this proposed Revenue as a Service platform need not use its more advanced features, except as they are ready and wish to. The platform can be configured to deliver just the features each organizations wants. Thus it can provide a service that scales gracefully, from very basic, to very advanced.

One very important simplification of FairPay can serve as a high-leverage 80/20 solution in both voluntary and payment-required contexts. That is the "risk-free" subscription model that relies on post-pricing (after the experience). That can be done without using any of the participative pricing elements of more advanced FairPay solutions (and need not even exploit nudging). That is less of a departure from traditional set-price subscription or membership pricing. But unlike the high hurdle of an all you can eat, fixed price membership paywall, it works as a gentle "pay ramp." (This, too, is explained in my Elements post, and the Whitney and Metropolitan Museum use-case examples listed above.)

Similarly, the platform, itself, can be built in stages, beginning with the more basic elements, then gradually adding the more advanced ones.

Crossing the lines between donors and those served

As explained in my 2016 post on non-profits, FairPay provides new and better way to address the complex issues of pricing and sustainability across the spectrum from donors to those served.  Consider how this works for these two often overlapping constituencies:


·         Recipients -- direct customers/patrons of direct services (the mission). Here, pricing takes on two interrelated dimensions -- what is the fair value of the service, and what is the fair contribution from the recipient (to both the cost of the service to them, and to the added overheads needed to sustain the organization -- and optionally to the cost of service for those who can less afford it).
·         Benefactors -- indirect customers/patrons of indirect services (the altruistic value of supporting services to others, and the value of being a benefactor, including perks and recognition).  Here, the key dimensions are the value of direct services to others enabled by the benefactor’s donations, and the value of the indirect benefits to the benefactor.

The details will vary with the type of customer/patron and the nature of the organization and mission, but the essential task is the same -- to generate sustaining revenue by cooperatively setting prices (for service or donation) that make the value proposition "win-win." (That also includes recognition of non-monetary contributions by those who give in kind.)

The platform as a universal leverage point for achieving impact

The problem that limits the uptake of these methods is the implementation effort, and the need for ongoing testing and refinement (including "devops," the work of enhancing and maintaining the operation). Fund a platform for that, and many more organizations will be able to teach men to fish -- or give them fish -- or whatever other good works they do. The platform is a universal leverage point.

A platform solution across many organizations also has other kinds of economies of scale and network effects, beyond simply outsourcing that service. FairPay dialogs about value generate valuable data about exactly what each customer values at a fine-grained transaction level, as well as reputation data about the fairness of each customer (and how that varies with context). While that data is sensitive, if managed with care it could potentially be used in win-win ways to help guide service providers to engage with those customers who most value their service (for a single service provider, or across all the service providers that use the platform, subject to appropriate privacy controls). That can lead to more effective co-creation of value for everyone.



------------------------
Posts that are specific to non-profits and social welfare:
...and focused on journalism:
------------------------
More about FairPay

A concise introduction is in Techonomy"Information Wants to be Free; Consumers May Want to Pay"

For a full introduction see the Overview and the sidebar "How FairPay Works" (just to the right, if reading this at FairPayZone.com). There is also Selected items (including links to videos and decks). 

(FairPay is an open architecture, in the public domain. My work on FairPay is pro-bono. I offer free consultation to those interested in applying FairPay, and welcome questions.)

Thursday, August 1, 2019

Break Through Your Old Biz-Model Blinders! -- Updated Workshop, NYC 9/26

I am again leading a workshop that will challenge your foundational ideas -- at NYCML19 (the annual summit of NYC Media Lab) on Thursday, 9/26. It was very well-received last year, and now updated:

21st Century Customer Relationships, Value Propositions, and Pricing
A New Economics for Digital Content and Services.

"This workshop is an exploratory “think tank” workshop on future directions in Customer Relationships, Value Propositions, and Pricing. Participants will learn to see through presumptions now obsoleted by the new economics of digital content and services. Participants will be shown a promising architecture for a new logic that includes “risk-free subscriptions” (as a pay-ramp rather than a pay-wall), and that customizes prices based on value. We will explore how to chart a strategic path that rethinks conventional approaches and points to incremental steps toward a deepening transformation. This workshop relates to the “relationship economy” in which recurring revenue, subscription, and membership models are becoming mainstream, all driven by the win-win potential of the “post-scarcity” economics of digital media. It will draw on AI, machine learning, and operationalizing ethics in business models."

This interactive session will be a forum for rethinking how we do business, earn profits, and create value in our new digital world. We will consider a wide range of current and emerging models in terms of a "Ladder of Value" -- including subscriptions (unlimited, and usage-based), paywalls, freemium, membership, crowdfunding, patronship, pay what you want, micropayments, dynamic pricing, blockchain, and paying consumers for their data and attention -- with a perspective that spans commercial services, journalism, the arts, and non-profits.

A preview of this perspective is in my posts, The Relationship Economy -- It's All About Valuing Customer Experience, and The Elements of Next-Gen Relationships and Pricing -- A Unifying Framework. .

NYCML'19 is a snapshot of the best thinking, projects and talent from across the City's industry and university ecosystem. Through thought-provoking discussions, hands-on workshops, and 100 innovative demos, attendees will consider pressing issues related to digital media innovation.

This workshop will be 1-2 pm.  Registration for NYCML19 is required (and includes all workshops). (Sign-up for workshops begins 9/3, but the conference usually sells out, so do register early.)

------------------------
More about FairPay

A brief introduction is in Techonomy"Information Wants to be Free; Consumers May Want to Pay"

(FairPay is an open architecture, in the public domain. My work on FairPay is pro-bono. I offer free consultation to those interested in applying FairPay, and welcome questions.)

Wednesday, July 3, 2019

The Elements of Next-Gen Relationships and Pricing -- A Unifying Framework

FairPay is a new and transformative way to think about how businesses market and price consumer services -- it points to ways to dramatically improve many businesses and satisfy many more customers. It is a framework that combines many important elements, some familiar, some not so familiar.
  • Advanced versions combine all or most of those elements, but useful solutions may apply only some of them. 
  • Many of these elements are already used in conventional pricing, at least to some degree. 
There is a clear opportunity to do much better. The original focus of FairPay was on specific new business model strategies for sustaining for-profit enterprises (especially for digital products and services) -- but the framework spans non-profit services as well, and can extend to subsume conventional strategies as well.. These core strategies of FairPay have gained recognition in business and scholarly publications.
I often struggle to explain what FairPay is -- as it applies at different levels, and in different business contexts. Without a full perspective of all the elements, this can be hard to pin down, and it can shift from one context to another. In a narrow sense, FairPay is a way of applying advanced methods used in combination. But in its broader sense, FairPay is an architectural framework that spans the full range of value-exchange styles and business contexts, and points to ways to move up the rungs of a ladder of value,

I am reminded of the familiar parable of The Blind Men and the Elephant. Even when I seek to explain the whole elephant of FairPay -- which seems to be a new kind of beast -- it can be challenging. But when I try to explain intermediate forms, and how these forms relate to various conventional approaches to business relationships and pricing, that adds to the challenge.

This post is an attempt to list the elements -- the trunk, the ear, the leg, and the side -- and outline how they fit together to take various forms (whether an elephant, anteater, or tapir). First, a discussion of the elements, then brief examples of important combinations that can move us up the ladder of value.

The Elements

This following table summarizes the elements and how they can be mixed and matched to fit a given context. These elements have a synergy, so that more can often be far more powerful that few. However, some may not be applicable in some contexts -- depending on the nature of business, product/service element, and the customer segment. Each of these elements are discussed below.

Check marks indicate elements that are likely to be desirable in most contexts, question marks are more case-dependent. (But just how each of the elements is used is very case dependent.) The "trust" factor is meant to address the varying levels of mutual trust and expectation of fairness in an individual business-customer relationship -- trust-based strategies can work with many consumers, but may not work for others:

Elements of FairPay
For-Profit
Non-Profit

(Now)
Low Trust
High Trust
(Now)
Low Trust
High Trust
Foundational Elements






Relationship-centered
(repeated game)
?
?
Individual-value-centered
X
?
Post-pricing (“risk-free”)
(after the experience)
X
?
Basic framing and nudging;
transparency and trust
?
?
Amplifying Elements






Participation of customer
in price-setting
X
?
?
?
Individual nudging
based on reputation tracking
X
X
Enforced fairness / revocable privileges ("Gated FairPay")
X
?
?
?
?
Flexible adjustment
for ability to pay
?
?
?
?
?
?
(with minor updates, 8/5/19)


A thought experiment about value -- Reisman's Demon

Before digging in to the elements, let's consider our objective. Imagine a supernatural demon that might power a system of commerce.  This demon has a "god's-eye" view, a perfect ability to observe activity and read the minds of buyers and sellers to determine individualized "value-in-use:"

  • The demon knows how each buyer uses the product or service, how much they like it, what value it provides them, and how that relates to their larger objectives and willingness/ability to pay. It understands that the value of a given item or unit of service depends on when and how it is experienced. It is also aware of broader/external value impacts.
  • This demon can determine the economic value surplus of the offering -- how much value it generates beyond the cost to produce and deliver it.
  • The demon can go even farther, to arbitrate how the economic value surplus can be shared fairly between the producer and the customer. How much of the surplus should go to the customer, as a value gain over the price paid, and how much should go the producer, as a profit over the cost of production and delivery, to sustain their ability to continue those activities.
Even if we lack such a demon, we can internalize it as an ideal, and design relationships and pricing methods that seek to approximate what it knows. This demon would apply all of the elements described below.  Advanced forms of FairPay apply all or most of them. Keep this demon, and its sense of value and fairness in mind as you think about which elements you can apply now, and which you might add in over time.

Foundational Elements

These elements are often used (to some degree) in some forms of conventional pricing -- they support finding value and serve as a a foundation for the less conventional elements described in the next section.

Relationship-centered. Modern commerce is increasingly moving to a relationship focus, whether the loyalty loops of repeat purchases, or more explicitly in the form of subscriptions. This shifts the entire focus of business from one-shot games of transactions and short-term profit, to repeated games of lifetime value. Well-structured repeated games build cooperation, trust, and loyalty. They exploit the economy of scale over time -- keeping customers is usually far more profitable than finding new ones. Subscriptions and other conventional models exploit this, and online services facilitate  relationship-building, but other elements of FairPay can change the structure of the game to make it far more cooperative. This is actually a reversion to traditional norms of commerce, the village markets where buyers had ongoing personal relationships with sellers. All of the other elements relate to this core element.

Individual value-centered. Business is of course a matter of value exchange. Value-based pricing is often best practice in B2B businesses, but is harder to do in B2C. It is a basic principle that both sides are best served when prices map to the value actually received. Few question that this is desirable, but if it is done at all in B2C, it is usually just typical value (for some "persona" segment). It is increasingly recognized that individualized value-based pricing is most effective -- and studies of pay what you want (PWYW) pricing support that for consumer markets. FairPay points to ways to do that much more effectively. (When conventional subscriptions are usage-based, such as for cellular data megabytes, that offers a very basic level of value-based pricing.)

The question of how to measure individual value is complex and multidimensional -- much of it is founded on the fundamental value of fairness in our business relationships. There are questions of value to the customer and to the business, and of broader aspects of value, such as externalities, ESG values, and triple or quadruple bottom lines. There are also questions of fairness in dividing the value surplus (among the direct parties, and along the value chain). My demon defines value primarily in terms of the buyer and seller's perceptions, experience, and outcomes, but has awareness of larger aspects of value as well. The FairPay repeated game seeks to do much the same. This largely comes down to fairness -- the idea is that all aspects of value can be internalized by the two parties and used as a basis for pricing whatever aspects of value they agree are fair to consider.

It must be emphasized that it is customer value is paramount here. Of course equity (my demon) requires that both sides share in the value -- but the motivation that drives customers is value to the customer.
  • Businesses increasingly see that Customer Lifetime Value (CLV) is how they make money, but usually fail to realize that they are measuring the value of the customer to the vendor.
  • What really motivates the relationship is Vendor Lifetime Value (VLV), the value of the vendor  to the customer. This clearly deserves much more attention!
And, in delivering value to the customer, smart businesses know that this comes back to the values of human relationships. Even economists recognize that "Not Only What, but Also How Matters." (That can even extend to call centers.) 

Post-pricing / "Risk-free" pricing. We have gotten into the habit of thinking that prices must be set before consumption, but in our digital world, that is often not necessary. There is evidence (from B2B value based pricing, and from PWYW consumer pricing) that setting prices after the consumption can be more effective. Customers no longer face risk of disappointment or uncertainty about what they are paying for, and so are willing to pay more, especially for experience goods which can only be valued after the experience, or in situations where prices can be contingent on performance or outcomes. The "risk-free" subscription model I have proposed is an important example of an advanced form of post-pricing. (Again, when conventional subscriptions are usage-based, that offers a basic level of post-pricing.)

A simple way to get a limited post-pricing effect is by permitting post-adjusted pricing, in which prices are pre-set, but can then be adjusted after the experience to reflect a revised understanding of value. Money-back guarantees are a simple form of this, but because they are all or nothing, they tend to be underused -- disappointment is often just partial, and so a full refund is seen by both sides as unfair. Enabling a post-priced discount (or bonus) at whatever percentage corresponds the the degree of value non-delivery (or of positive surprise) could make this two-stage method work well on both sides. That is a strategy that could easily be introduced in almost any payment context.

Framing and nudging, plus trust and transparency (generic). These are all important tools in relationship building that are often neglected. Behavioral economics has demonstrated the framing effect: how you frame questions and offers has dramatic effect on how people understand and respond to them (see the classic book, Nudge). Smart marketers (and pollsters) have long understood this, but the science is maturing. It is amazing how many businesses (and non-profits) utterly fail to apply this powerful tool. FairPay focuses on how this can be customized to the individual (or just a persona/segment) to boost potential customers' willingness to buy, and to pay (as expanded on below), but the basic principles apply very broadly. When these techniques of behavioral psychology and economics are unilaterally abused to gain zero-sum advantage, that is toxic to the larger goals of the relationship -- but when done openly and transparently, they can build trust and help establish fairness.

That brings us to the basic values of transparency and trust. Transparency is a prerequisite to trust, and trust is prerequisite to a constructive and lasting relationship. Old-fashioned mass-market customer relationships are often shaped by an intentional lack of transparency, leading to mutual distrust. Hardly a way to grow CLV!

Applying the foundational elements. As indicated in the above table, the above four elements of FairPay are broadly desirable and should generally be used wherever practical. Some highly successful B2B pricing models already apply all four. An example of a new pricing model that is suggested by this FairPay framework is the what I have called "risk-free subscriptions." While I would not call that a full form of FairPay, it is a good example of how other important new ideas can be suggested by the FairPay framework. This risk-free model promises to provide many of the benefits of a full FairPay model, in a more simple and conventional way.

Amplifying Elements

These further elements are not widely used in pricing to consumers because the synergies of using them together have not been understood. But as we will see, they can significantly amplify the power of the fundamental elements, especially when used in combination. This new synergy derives from the basic structure of the FairPay repeated game. Consider this change in the game...
  • From today’s conventional repetition game: “Here is our monthly price, take it or leave it. We hope you will take the risk — and be satisfied enough to continue this game.”
  • To the FairPay game: “We will grant you the power to pay what you think fair for you after each month’s use — but we will continue that game (beyond a few trial cycles) only if we agree that you are being reasonably fair.”
Here are the key amplifiers that make that repeated game converge on cooperation -- on value, dialog, trust, and transparency -- to seek to do what the demon would suggest:

Participation. Participation in pricing is the element that underpins FairPay, and is gaining recognition as widely applicable in many models. We are all accustomed to fixed-pricing that is set by the seller -- but that was actually rare before the mid-1800s, when the "price tag" was invented to enable scaling in newly emerging department stores. Joint participatory pricing (bargaining in which both parties negotiate a price) was the norm in traditional village marketplaces, and still used in auctions. PWYW is considered "participatory pricing," but it still involves one-sided participation: price setting is entirely controlled by the buyer instead of the seller. We can view participation as a continuum, from full seller control (set-price) to full buyer control (PWYW), with various forms of joint participation in between.
  • Joint participation enables the complementary value perceptions of both the provider and the customer to be considered, and so provides the most complete understanding of actual value. That brings us closest to the god's-eye view of my value-pricing demon. (Joint participation was the norm in traditional marketplaces, and is still applied in auctions.) 
  • Full forms of FairPay create a new participatory balance of power over time, in which the buyer sets the price after the experience. That is done knowing that the seller may chose to end the repeated game and not make future offers, if the price is judged to be consistently unfair (after some number of cycles of purchases and price settings). That is what I call the invisible handshake -- not agreement on a price, but agreement on how to price.
  • The breadth of the FairPay framework becomes evident when one considers that the extremes of participation are just variations in the policy of how FairPay is applied -- conventional fixed pricing is the case where seller constraints on the buyer are total, and PWYW is the case where buyer control is absolute (FairPay privileges are never revoked.)
  • There is also considerable flexibility in just how pricing participation is shared. For example, a minimum "floor" price can be imposed to require that buyers pay at least that much. Such restrictions might sometimes be desirable when providing services which have high marginal cost (and/or are scarce).
Individualized nudging based on reputation tracking. The heart of the of FairPay game is in how it exploits one-to-one computer-mediated dialog to build a relationship centered on value and trust. It centers on ongoing dialogs about value --  in which information about perceived value, and why a suggested price is or is not fair, is regularly exchanged between the buyer and seller. That enables mutual learning and understanding of value propositions, perceptions, and desires, with opportunities for each party to nudge the other, and to develop a fairness reputation with the other. This builds on the basics of framing and nudging, and can be supercharged by big data and predictive analytics. This reputation tracking and nudging is what makes FairPay powerful as a way for each party to better understand the value exchange and to seek jointly to converge on a common understanding of value over the course of the relationship -- what would the demon have us do?
  • The most basic form is simply to communicate value and nudge customers to appreciate the value provided. When pricing is participative, this enables nudging toward more desirable levels of fairness and generosity, but it can always be beneficial (when done well).
  • The converse basic form is to solicit ongoing feedback from the customer on their perception of value received. Few companies make it easy to provide feedback. (They seem to fear getting customers to think about value...and to have to listen and maybe respond to what they think.) But doing that well yields fine-grained, real-time value data -- and makes the customer feel valued.
  • Advanced forms of FairPay build on this to conduct the full FairPay repeated game -- to give more pricing power to the customer, and to learn exactly what product/service elements each one values, to nudge them to recognize the provider's efforts to deliver that value, to obtain reasons for customer pricing above or below suggested values, to assess the customer's fairness in their pricing, and to track that as a reputation for fairness that warrants trust (or not). [Update: for a detailed use case, see Patron-izing Journalism -- Beyond Paywalls, Meters, and Membership.]
  • Voluntary forms of FairPay can limit nudging to positive incentives, such as premiums and perks to motivate more generous pricing.
  • FairPay can also apply negative incentives, limiting access to premium offers and perks to those who have demonstrated that they price generously enough to warrant such offers.
  • In extreme cases of free riding, the ongoing privilege of future FairPay offers may be limited or revoked. Unfair customers may be relegated to a fixed-price paywall, or even excluded from all service offers. This may or may not be useful depending on context -- and so revocation is discussed as a separate element in the next section.
Enforced Fairness / Revocable FairPay privileges (if unfair) -- Gated FairPay. This just-noted aspect of nudging and reputation tracking deserves special attention. It provides the most powerful tool for enforcing fairness in the FairPay game -- but one that can be counterproductive by reducing trust and cooperation. "You catch more flies with honey than with vinegar." For the most part, the "carrots" of positive incentives will motivate customers far better than the "sticks" of negative incentives.
  • FairPay is an architecture, not a single rigid method -- and there are a variety of decision parameters that determine how strictly or liberally fairness policies are enforced. 
  • At the extremes are the strictness of seller-set fixed pricing that gives the customer no ability to adjust pricing, and the looseness of PWYW in which the seller has no power to limit unfair, free riding customers. 
  • "Gating" of FairPay by selectively limiting who is offered FairPay privileges -- and by revoking future privileges for those who abuse them -- is important for enforcing fairness in for-profit contexts where trust in the customer's fairness has not been established or is questionable. The privilege of a FairPay relationship can only be sustained for those who honor the invisible handshake -- the agreement to be fair about doing what the demon would have them do.
  • Once a good fairness reputation is established, a forgiving policy is likely to be best, keeping the stick of revocation out of sight unless signs of growing unfairness suggest a reminder or probationary warning is required. 
  • Where wide market reach is desired (much as with freemium) similar liberality may be desirable. 
  • And in non-profit contexts, payment may be entirely voluntary, and no revocation or even negative incentives may be appropriate at all. 
Flexible adjustment for Ability to Pay (ATP). This is an opportunity to dramatically improve pricing for both providers and customers that can now be applied far more widely. Student discounts and senior discounts already benefit customers and bring added revenue to businesses. Price discrimination is recognized as bringing economic efficiency, but often in ways that exploit customers. But the above elements of FairPay enable the customer's ability to pay to be factored in to the dialogs about value in ways that are transparent and fair -- what I call value discrimination. The delicate issues here may argue for ATP adjustments in some contexts but not others. Great care must be taken to do this fairly, in responsible and privacy-sensitive ways. But FairPay creates a platform that can get very smart and nuanced about ability to pay.

Using the elements to climb the ladder of value -- a sampling of notable combinations

As we combine more and more of these elements, we generally tend to climb up the ladder of value, toward relationships, value propositions, and prices that center of actual value to the user. This brings us closer to what my value demon would suggest. Organizations that do that well are more likely to thrive, serving more customers, over longer lifetimes, and sharing more value surplus -- thus sustaining revenue and/or profit. The rationale for this is more fully explained in my publications and and blog posts. A wide range of use-case examples are given on this blog (but not always using the  terms used here to identify the relevant elements). Here a few representative examples, along with a table showing which elements are applied in each. (Remember that my value demon would want to apply all of the elements.)

Elements of FairPay
Use in Examples

(Now)
Full
FP
Voluntary FP
Risk-Free
Micro FP
Foundational Elements





Relationship-centered
(repeated game)
?
Part
Individual-value-centered
X
Part
Post-pricing (“risk-free”)
(after the experience)
X
Part
Basic framing and nudging;
transparency and trust
?
?
Amplifying Elements





Participation of customer
in price-setting
X
X
Part
Individual nudging
based on reputation tracking
X
?
?
Enforced fairness / revocable privileges ("Gated FairPay")
X
?
X
?
Flexible adjustment
for ability to pay
?
?
?
?
?
(with minor updates, 8/5/19)

Full, gated FairPay -- the ultimate value-based subscription. Many of my posts, especially the earlier ones, and my journal articles, are focused on full embodiments of FairPay that apply most or all of these elements, including the enforcement of a minimal level of fairness using negative incentives, up to and including revocation of FairPay privileges. I believe that will ultimately be the most effective pricing strategy available for many for-profit contexts. It can be done in basic forms with moderate effort, but will take more effort to build, validate, and refine than the simpler variations that do not use gating to enforce fairness. Even in contexts where this may not apply well, such as for high marginal cost items, it may still be applicable for value-added service components.

Voluntary FairPay -- all "carrot;" no "stick."  This is much simpler to implement and manage than full, gated FairPay -- and can be more appropriate in non-profit settings, and in for-profit settings for products with low marginal cost where wide uptake is desired. Even with full, gated FairPay, the most basic tier of service might allow for voluntary payments with no enforcement of fairness. This works much like freemium, but can generate some revenue from happy customers even for the "free" tier. This form of FairPay is more closely related to PWYW and crowdfunding, but emphasizes regular dialogs about value, including use of framing and "carrots" to nudge for fairness and generosity.

Risk-free subscriptions -- an 80/20 solution that omits participation. This is a very important simplification of FairPay that can serve as an 80/20 solution. It relies primarily on post-pricing -- without using any of the participative elements of more advanced FairPay solutions -- and need not exploit nudging. Thus it is less of a departure from conventional subscription pricing. Unlike the high hurdle of an all you can eat, fixed price paywall, it works as a gentle "pay ramp." Instead of the direct customer participation in pricing for full forms of FairPay, the provider retains full unilateral control of price schedules, but applies a price discount schedule that is value-based -- ramping from zero for no usage in a given period, upward based on value actually received -- with increasing volume discounts, until limited by a price cap to avoid risk of overuse (similar to that for an unlimited plan).

FairMicroPay -- simple, relationship-value-based adjustments to micropayments. With resurgent interest in micropayments, partly fueled by blockchain, simplified forms of FairPay might be applied to make micropayments more flexibly value-based. There are fundamental problems with most forms of micropayments, but relationship-value-based adjustments can be overlaid on micropayment models.  The idea is to add a FairPay layer that identifies the user, and that allows the user to modify a standard base price within limits permitted by a smart contract -- downward as a volume discount, or as a refund/discount for lack of desired value -- or upward as a value-based bonus or sustaining contribution.

Climbing the ladder of value

Once you understand these elements, the framework becomes a tool for climbing the ladder of value toward more value-based pricing models -- toward what my demon would have us do. Wherever you are in current practice, you can begin to better apply these elements to chart a path to improve market reach, share of wallet, loyalty, and customer lifetime value, to better sustain your business.

Not all of these elements are applicable in all contexts -- but with time and maturity in better ways of doing business (and of sustaining non-profit services), more of these elements can be effective in more and more contexts. Keep in mind that these methods are not all or nothing.
  • They can apply to offers for some products/services, but not others. That may depend on the nature of the product/service, including such factors as fixed costs that must be covered, or scarcity that must be rationed, which may cause providers to restrict the pricing power of customers.
  • What we may now think of as a single product/service can often be re-factored to separate high-marginal-cost elements, where pricing must be controlled, from low-marginal-cost elements, where customers can be given more freedom (such as for value-added services and support services).
  • They can be applied to selected customer segments who are expected to be cooperative, fair, and even generous, but not to others who might not buy into the social contract of the invisible handshake.
  • They can be introduced to selected test populations as limited time tests to allow key parameters of the offering to be tested and refined before wider and more permanent use.
Some of these elements will drive a shift in mind-set on both sides -- from zero-sum to win-win games, and toward more cooperative norms of behavior -- and some people and organizations will adapt more quickly than others. But over time, the players will learn how to play this game in a way that becomes attractive for more and more products/services, and for broader and broader segments of customers.

"Revenue as a Service" -- the power of platforms

The more advanced elements of this framework -- and increasingly nuanced variation of each of the elements -- will take effort to implement and operate, including software development and operations. That suggests an opportunity for platforms to provide these services, along with expertise in how to apply them, for the many organizations that might otherwise have difficulty doing that for themselves. That is just the kind of problem that "Software as a Service" was designed to solve. This can bring huge economies of scale and network effects to solving the problem of nurturing revenue relationships. Expanding a suite of services across this entire framework presents a significant opportunity for new or existing platform service providers.

A platform solution across many organizations also has other kinds of economies of scale and network effects, beyond simply outsourcing that service. FairPay dialogs about value generate valuable data about exactly what each customer values at a transaction level, as well as reputation data about the fairness of each customer (and how that varies with context). While that data is sensitive, if managed with care, it could potentially be used in win-win ways to help guide service providers to engage with those customers who most value their services. That can lead to more effective co-creation of value for everyone.

That pool of data holds much of what my demon knows.

-----
[Update 8/5/19]

The above tables and element descriptions have been updated slightly to add clarity and completeness.

The first change is to add transparency and trust as foundational elements (listed in combination with framing and nudging). I was reminded by Steven Forth that, while I had these in mind as part of the relationship-centered element, they were important enough to deserve explicit mention. I combined them with the other important elements that reinforce relationships, framing and nudging, as not dissimilar enough to warrant listing as separate elements.

The second change is just a minor wording change, adding "enforced fairness" as a broader, and perhaps more meaningful, description for selective granting and revocation of FairPay privileges.


------------------------
More about FairPay

A concise introduction is in Techonomy"Information Wants to be Free; Consumers May Want to Pay"

For a full introduction see the Overview and the sidebar "How FairPay Works" (just to the right, if reading this at FairPayZone.com). There is also Selected items (including links to videos and decks). 

The Journal of Revenue and Pricing Management, "A Novel Architecture to Monetize Digital Offerings" provides a scholarly but readable overview. 

Or, read my highly praised book: FairPay: Adaptively Win-Win Customer Relationships.

(FairPay is an open architecture, in the public domain. My work on FairPay is pro-bono. I offer free consultation to those interested in applying FairPay, and welcome questions.)