Friday, August 17, 2018

Challenge your ideas at my 9/21 Workshop at NYCML18: "A New Economics for Digital Services"

Come break through your old biz-model blinders -- I am leading a workshop on re-thinking basic principles at NYCML18 (the annual summit of NYC Media Lab) on Friday, 9/21:

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

This workshop is an exploratory “think tank” discussion 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 -- and make that concrete with the example of one promising architecture for a new logic.  
  • From there we will explore in open discussion how to chart a strategic path that (1) rethinks conventional approaches and (2) points to incremental steps toward a deepening transformation. 
  • This workshop relates to AI/ML and ethics in business models, and the “relationship economy” in which recurring revenue, subscription, and membership models are becoming mainstream, all driven by the “post-scarcity” economics of digital.

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 post, The Relationship Economy -- It's All About Valuing Customer Experiences -- plus the "Ladder of Value" section at the end of Finding Value in The Subscription Economy

NYCML'18 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 10:30am-12pm, at NYU Kimmel Center.  Registration for NYCML18 is required (and includes all workshops).

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More about FairPay

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). 

My article in the Journal of Revenue and Pricing Management, "A Novel Architecture to Monetize Digital Offerings" also provides an overview of FairPay (summarized more briefly in the ESADE Knowledge article "Three building blocks to monetize a digital business," and previously in Harvard Business Review, "When Selling Digital Content, Let the Customer Set the Price.").

Even better, 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.)

Wednesday, August 15, 2018

Deeper Lessons From MoviePass -- From Tickets to Subscriptions to Relationships

Many have commented sagely on the folly of MoviePass, but, at a deeper level, it is something of a caricature of how we are just at the baby-steps stage of The Subscription Economy. It is easy to laugh at what seems to be a Wyle E. Coyote model: "we lose money on each customer, but we will make it up in volume."  Of course it is not quite that simple, the intent being to monetize consumer data to compensate, but still the value proposition seems to defy gravity. There are important lessons here, as recently noted in the Washington Post, Price Intelligently, and Harvard Business Review.

These commentaries point to many dots that we have yet to fully connect into the larger image. There are many excellent insights about what Tien Tzuo of Zuora calls "The Subscription Economy" in his recent book Subscribed, and in these recent articles. The bigger picture I see here is what I call "The Relationship Economy." Subscriptions are an important way to structure profitable customer relationships, but what matters is how a business co-creates value in its relationship with each customer. If you focus on creating and sharing value with each customer, the rest will follow. That is explored in some depth in my recent post, The Relationship Economy -- It's All About Valuing Customer Experiences.

The core lesson of co-creating value is the shift from the Goods-Dominant Logic of tickets, through the more Service-Dominant Logic of subscriptions, to a fuller understanding of that logic in the value of service relationships. As the head of Stanley Tools was reported to say long ago, "our customers don't want drills, they want holes."

Eddie Yoon's article in HBR lists five lessons that serve as nice examples of some of the dots I refer to -- which I would connect into this larger picture of value-centered relationships. My perspective on his five points:
  1. Price elasticity is powerful -- and highly variable -- "playing with it requires great skill and precision." The issues are so dynamic that an adaptive, mass-customized approach to pricing is needed to profitably serve more than narrow niches. We need to go much farther down that road.
  2. "MoviePass serves as a cautionary tale of treating consumers with a transactional mindset" and "seeking to monetize them through advertising." I believe the age of services that are predominantly advertising-supported is giving way to models that are predominantly customer-supported (even if they retain some advertising value exchange in a way that is more customer-value focused, such as with a "reverse meter").
  3. All you can eat models are economically inefficient for both customers and businesses. Highly engaged "superconsumers" should be a prime asset to a business, not a gaping liability. Pricing and value propositions must adapt to different consumer needs.
  4. The movie ticket is only one aspect of the consumer experience. The customer wants holes (a good experience), not drills (tickets). A service relationship, value co-creation perspective points to ways to get more "share of wallet" from each customer.
  5. Yes, "bullying is a bad business plan." Long term success models are win-win, not zero-sum -- for consumers and business partners/suppliers.
Changing an industry like movies with essential entrenched players (theaters and studios) wedded to rigidly antiquated models will be challenging, but even so, the ultimate direction of relationship=value-focus seems clear.

My work on FairPay points to how such a new logic can work, but there may be other paths. The future of The Relationship Economy will be more mass-customized, and more win-win, drawing on deeper customer "dialogs about value." The power of businesses and customers will be more evenly balanced, and cooperation in co-creating value over the ongoing relationship will be the key to success.

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More about FairPay

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). 

My article in the Journal of Revenue and Pricing Management, "A Novel Architecture to Monetize Digital Offerings" also provides an overview of FairPay (summarized more briefly in the ESADE Knowledge article "Three building blocks to monetize a digital business," and previously in Harvard Business Review, "When Selling Digital Content, Let the Customer Set the Price.").

Even better, 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.)

Tuesday, June 26, 2018

An Open Letter to Influencers Concerned About Facebook and Other Platforms

To those concerned about Facebook (and its ilk), here are some potentially powerful new levers you can advocate, based on a more creative approach to business models.
  • Many prominent influencers have expressed concern about how the ad model perverts the incentives of Facebook (and/or Google, Twitter and others) to do serious harm to society, saying that more creativity is needed (see list below*). As Tim Berners-Lee said, "create a new set of incentives and changes...will follow."
  • My proposals go beyond those calls -- I suggest action based on a new class of user-sustained, relationship-value-first, business models that could negate those ills – and make our platforms more broadly humane and sustainable.  
  • This “innovative and visionary” FairPay architecture has been described briefly in Harvard Business Review, and more fully in the Journal of Revenue and Pricing Management, “A novel architecture to monetize digital offerings” (with eminent marketing scholar Marco Bertini as my co-author). 
  • These methods have been discussed with many companies, including 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). 
  • They build on proven business trends and behavioral economics principles, but are not yet well-known. (FairPay is an open architecture in the public domain, not a product -- I am working on this as a pro-bono project.)
Immediate action can be begun:
  • Show that calls for better business models are not just cries in the dark, but can point to specific actionable strategies by the platforms and by others.
  • Provide market-based solutions that can be acted on by individual businesses, with reduced need for regulation or antitrust action.
  • Advocate a targeted, market-based strategy for regulatory or antitrust action that mandates business model incentive-based remedies, thus reducing need for a more intrusive hand.
You can help:
  • Consider why this approach is workable and powerful -- good for businesses, their customers, and society.
  • Spread the word to others who can help bring this to broad awareness.
  • Stimulate experimentation with this and similar strategies, to prove and adjust them (or to find alternatives) based on learning in varied business contexts and consumer market segments.
Learn how:

Understanding the concepts as relevant to Facebook, etc.:
Understanding the core of this new business model strategy in its deeper and broader aspects:

Understanding how to start with low-risk trials and low-hanging fruit:

***Please contact me to explore how you can help -- fairpay [at] teleshuttle [dot] com. 

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More about FairPay

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). 

My article in the Journal of Revenue and Pricing Management, "A Novel Architecture to Monetize Digital Offerings" also provides an overview of FairPay (summarized more briefly in the ESADE Knowledge article "Three building blocks to monetize a digital business," and previously in Harvard Business Review, "When Selling Digital Content, Let the Customer Set the Price.").

Even better, 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.)

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*A few of the notable calls for more creative business models for social media:
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On the deeper issues with our social media
and digital democracy

Friday, June 22, 2018

Upending the TV Pricing Model -- Why Pay For What You Don't Watch???

AT&T reportedly will "upend the established model in which cable and satellite-TV companies pay programmers fees based on how many subscribers have a channel accessible in their bundle, regardless of whether they watch it." AT&T's new "'skinny bundle' of channels" will be free to subscribers on unlimited data plans Drew FitzGerald reports in the WSJ, and "...the free version that comes with unlimited-data plans would only count subscribers that spend significant time using the app, according to a person familiar with its plans."

This seemingly simple change represents an important break from tradition -- a necessary step toward more sensible, value-based pricing models for TV/video. It opens the way for a variety of new consumer-value first pricing models.

I have written about why this is urgently needed and where this should go, in “Post-Bundling – Packaging Better TV/Video Value Propositions with 20-20 Hindsight.”  Updates to that post explain why this is increasingly a life or death issue for pay-TV providers.

("Post-bundling," alone, is a fairly straightforward half-step toward the much more advanced customer-value-first models suggested by my FairPay strategy -- as also noted in that prior post.)

Let's hope this crack in the dam of tradition will lead to an increasing range of better offerings.

Thursday, June 14, 2018

Cool Hand Zuck -- What We Have Here is Failure to Innovate / Looking Toward a Better, Fairer Future

"Senator, we run ads" -- "Facebook's fundamental problem? Mark Zuckerberg can't innovate"

As one who has been a voice in the wilderness -- not only suggesting the need for new business models (as do many*), but actually proposing a new approach described as “an innovative and visionary methodology” that "promises to transform business" -- I have been captivated by the Facebook fiasco, and how much of it centers on the ad model as "the original sin of the web."

Many have pointed to the ad model as Facebook's fatal flaw, and called for more creative business models. This week's Wired UK opinion piece by James Williams provides a particularly concise and current summary of the issue -- and of the stubborn denial of its importance by "the billionaire CEO of a media platform whose design constraints shape the daily thoughts and actions of over two billion people."

Williams pointedly analyzes Zuck's stance in responding to Tim Cook's recent criticism (my emphasis added):
“You know, I find that argument, that if you’re not paying that somehow we can’t care about you, to be extremely glib and not at all aligned with the truth. The reality here is that if you want to build a service that helps connect everyone in the world, then there are a lot of people who can’t afford to pay. And therefore, as with a lot of media, having an advertising-supported model is the only rational model that can support building this service to reach people. [...] If you want to build a service which is not just serving rich people, then you need to have something that people can afford.”
“An advertising-supported model is the only rational model” – is this not a remarkable statement coming from a titan of innovation, especially one in an industry where disruption of the status quo is often viewed as inherently valuable? Imagine if an automobile magnate were to declare, “The internal combustion engine is the only rational means of locomotion”. Or if a scientist were to claim, “A p-value of 0.05 or less is the only rational standard for statistical significance”. Or if the lord of a medieval manor were to state, “Serfdom is the only rational model for enabling the masses to subsist”. It’s remarkable how quickly one can lose one’s imagination when power and money are on the line.
The obvious spin in these arguments can be easily dispensed with. No one is arguing that the advertising business model inhibits employees’ ability to care about users; rather, the argument is that it creates organizational priorities that incentivize downstream designs which run counter to users’ interests — regardless of how much individual employees might care about users. As W. Edwards Deming said, “A bad system will beat a good person every time”.
We can also sidestep several false assumptions that are doing background work here. For one, people already do pay for Facebook: not with their money, of course, but with their time and attention. Second, if Facebook were to charge its users money, Zuckerberg unnecessarily assumes that it would have to charge all its users money, and that this would need to be the only way anyone could pay for Facebook. Similarly, he assumes that whatever amount of money might be charged, only ‘rich’ people would be able to pay it...
How my suggestions for new business models add specificity to this issue in a moment, but Williams lays even deeper groundwork for that:
There may be an important implication lurking in this last point: Zuckerberg seems to be implying that ‘just serving rich people’ would not merely be undesirable in a business sense, but would in some way be unfair. Elsewhere in his interview with Klein, Zuckerberg admits, to his credit, that Facebook now in many ways resembles a government more than a traditional company. Its goal, he says, is to connect everyone in the world. And yet he has resisted the suggestion that this amounts to any sort of monopoly.
However, to the extent that his argument about the inevitability of advertising does rest on an appeal to fairness, would it implicitly grant the notion that users have no meaningful alternatives to Facebook? Fairness is a principle of justice, not typically a consideration among competitors in a market setting. For example, if Coca-Cola were to stop selling its products in low- and middle-income countries, we might say that it had reduced consumer choice—but would we say that it was unfair?
In any event, in the wider injury to both choice and fairness here exists in the fact that users have no meaningful alternative to a type of advertising that is fundamentally extractive of their attentiona type of advertising which, in the era of digital technology, has transformed into something else: a form of intelligent, adversarial persuasion. The ostrich-headed reluctance of Zuckerberg and others to seriously entertain any alternatives to it serves as one more reason why we ought to seek its urgent disruption.
Fairness as "a consideration among competitors in a market setting"

All very well put by Williams, and most notable to me is the very common assumption that "Fairness is...not typically a consideration among competitors in a market setting." That is the central assumption that FairPay challenges.

I have pointed out that fairness was actually typical as a "consideration among competitors in a market setting" until the last century or so. Competition in market settings was traditionally a very personal process, with significant elements of one-to-one negotiation in which fairness was a significant factor.

We are so accustomed to the impersonal but highly scalable alienation of modern mass-market businesses from their customers that we fail to grasp how new digital technology is enabling us to reverse that. Not to restore old fashioned negotiation at a transaction level (in which businesses are likely to retain an asymmetric AI and big data-fueled advantage over individuals) but at a relationship level (in which the game is inherently more equal, if enough customers insist on that, to make that the best path to sustained profit).

That is our deeper failure to innovate. Many business executives have heard about the alternatives I propose, and seen that FairPay's repeated game structure (a direct extension of proven methods) has intuitive appeal, and has support in behavioral economics and in the small successes of baby steps already taken in this direction. But, so far, all who have the resources to test this have fallen back on their assumptions that consumers don't really care about reciprocal fairness, and cannot be motivated to be fair. Like Zuckerberg, they do not even bother to test those assumptions in the face of competing short-term objectives.

But as with Zuckerberg as the most exposed offender, the rumble of the once distant drum of market fairness at a one-to-one level is getting louder for all of us. The time to test our assumptions about how we can use the technology of computer-mediated commercial dialog to find new levels of fairness between businesses and individual customers is upon us. FairPay is one promising architecture for finding the way -- if we find that is not quite the right path, we need to seek and test others.

But now is time to try to find a fairer one-to-one future. Our welfare and our very freedom now clearly depend on that.

How can we do that?

That is addressed in other posts on this blog listed here (and in my book and journal article below):

With respect to Facebook and other ad-based platforms:
More broadly, plus more about just how:

And some suggestions on starting with low-risk trials that can begin with low-hanging fruit:
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More about FairPay

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). 

My article in the Journal of Revenue and Pricing Management, "A Novel Architecture to Monetize Digital Offerings" also provides an overview of FairPay (summarized more briefly in the ESADE Knowledge article "Three building blocks to monetize a digital business," and previously in Harvard Business Review, "When Selling Digital Content, Let the Customer Set the Price.").

Even better, 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.)

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*A few of the notable calls for more creative business models for social media:



Thursday, May 31, 2018

The Relationship Economy -- It's All About Valuing Customer Experiences

Few grasp how fundamentally the dynamic richness of computer-mediated relationships is changing the very nature of business. We see that we are shifting from a world of products sold in one-shot transactions to a world of "Anything as a Service" delivered in recurring revenue relationships. We see that subscription businesses are emerging in all kinds of industries and growing at much faster rates than their more conventional competitors.

It is less apparent is how deeply this changes the nature of businesses relationships, and how all aspects of a company are transformed by the shift from a linear product pipeline to the cycle of a recurring relationship. What we have seen is just the beginning. First a look at how far we have come, then a look toward the next level.

Foundations: "The Subscription Economy"

A thought-provoking view of how deep this change already is, is in the new book, Subscribed: Why the Subscription Model Will Be Your Company's Future and What to Do About It. I read a pre-release copy and see it as a must-read for anyone with responsibility for designing, managing, or even just executing on business models of any kind -- even if you think subscriptions are not relevant to your business.

Author Tien Tzuo (with Gabe Weisert) speaks in terms of "subscriptions," but this book is is very relevant to recurring business relationships more broadly. Relationships are the future of business. Call it a subscription, a membership, or just a loyalty loop in the customer journey. In our connected digital world, relationships will deepen -- or they will die.

Tien applies the experience of his journey from the very early days of Salesforce to founding Zuora and its fast growth to a recent $1.4B IPO -- where he has had a unique view into the guts of thousands of subscription businesses and their growing pains. Zuora has popularized the term "The Subscription Economy" and provided thought leadership in this space, including well-attended conferences and a rich body of Web resources. (I have spoken several times at Zuora events, beginning in 2011.) Zuora also provides rich data on "The Subscription Economy Index," drawn from the anonymized system activity of hundreds of subscription companies around the world (summarized in the book). His book provides a compelling call to arms and compendium of key concepts and best practices.

The next level -- it's all about valuing customer experiences

This book also provides an excellent foundation for looking further ahead, to a next level in recurring business relationships. My work on FairPay suggests that next step is a sharper, deeper, and more cooperative focus on the value of experiences. I see that shift of focus, leading to a deepening of relationships in which customers are more equal partners. Subscriptions are the most explicit form of recurring relationship, but the essence of what we must now seek to master is how to value experiences, in what I would describe as The Relationship Economy (or The Relationship Value Economy).

We all know that the essence of business is value exchange, but how deeply and broadly do we think about value? How often do we ask our customers about value as they see it? 

I build on what Tien covers, adding exploration of the largely neglected layers of value, and how closer attention to value can enhance relationships.

My focus here is primarily, but not entirely, about B2C relationships. Those are generally asymmetrical, with a human on one side, and an organization on the other side. Our current mind-set is that businesses set the rules of the game, and consumers play their role within those rules. But I suggest that is a temporary anomaly that will revert to a more balanced model.

From products to services -- from transactions to relationships -- Service Level Agreements

Tien quotes Forrester as calling this "The Age of the Customer," and explores how this involves a shift from the old linear flow business model of products through channels to customers, to a new cyclical flow business model that puts the customer at the center -- surrounded by a customer journey cycle of interactions (supported by a corresponding cycle of back-end business processes). (Forrester describes this as a transformation that is driven both from top-down and from bottom up -- drawing on a mind-shift, big-data-based business insights, and transformation of the customer experience, all based on digital transformation.)

Tien describes the thought experiments his team did in the early days of Zuora, thinking about what the limits of subscriptions might be -- could you apply it to refrigerators? floors? elevators? roofs? "Here's the secret we used to answer all of them in the affirmative -- tease out the service-level agreement that sits behind the product. It works for everything. So instead of a refrigerator, it's the guarantee of fresh, cold food..."

Recurring relationships as a repeated game

Whether you think of it as a subscription, or a membership, or just a service agreement, the essence is this recurring cycle of interactions -- the result is that the flow of business changes from linear to circular. This has deep implications, both as to operations, and as to the nature of the relationship. Game theory tells us that one-shot games create very different player behaviors from repeated games. All recurring business has elements of a repeated game, but effective game design can make the game more productive, cooperatively win-win, and long-lived. Let's start with the operational aspects, then consider the broader game.

[Zuora]
Tien explains how recurrence changes business operations to center on the customer interaction cycle, as shown in his diagram (here). He explores how this changes all functions, from innovation, marketing, sales, finance, and IT.

For example he explains how a fundamental change in finance is needed, from the backward view of one-shot product sales inherent in Generally Accepted Accounting Principles (GAAP), to a new kind of accounting that is forward looking toward Customer Lifetime Value. A meaningful accounting must recognize that what matters is not the revenue in the last quarter, but the recurring revenue stream for many quarters forward (decreased by churn, and increased by customer acquisition and up-selling/cross-selling). He explains how he convinced his investors that growth expenses are much like capital expenses, in that they pay off not in the next quarter, but over an extended time -- and that Wall Street has been slow to recognize this.  Similarly, he explores how this cyclical pattern affects all other functions, and requires greater cross-functional cooperation to assure a good customer experience at each touch-point.

This deep enterprise strategy focus draws on Tien's role at Zuora, competing with the likes of Oracle and SAP. That focus makes his book a strong complement to the excellent existing books in this space that are more marketing-focused, including Anne Janzer's Subscription Marketing and Robbie Kellman Baxter's The Membership Economy.

Pricing and packaging as "one of the most powerful growth levers"

In his discussion of marketing, Tien highlights the importance of a topic few businesses think very much about:
"Pricing and packaging" is an old-fashioned-sounding term that might remind you of stocking grocery store shelves, but for subscription business it is one of the most powerful growth levers you can have...In fact pricing is the most important of the four P's [Product, Price, Promotion, Place, from Marketing 101]. 
... Subscription pricing is trickier...at the end of the day, you're not pricing an object, you're pricing an outcome...what do you do about the fact that customers may assign different value to the same outcome? This ambiguity is intrinsic to the subscription model, and it can be either empowering or paralyzing.
...But what happens when you get it right? Whoo boy. Well, customer acquisition gets much easier, and churn gets reduced. Better yet, as your relationship with each subscriber deepens, as you become a bigger part of their lives, that value is translated into revenue...creating a virtuous cycle...You can create intuitive customer journeys...with relevant tipping points along the way. And when your pricing model locks into that subscriber journey, this is when (click) your business model locks into subscriber relationships, and a valuable company is born.
That nicely sets the stage for the next level, which we will get to shortly (but first a broader view).

Customer journeys and loyalty loops -- virtuous cycles

The description above shows how pricing and packaging is what powers the customer journey. The essential issue is the recurring business relationship, and this applies more broadly -- whether a "subscription" or not. In fact, even in product businesses that have no explicit recurrence, modern marketing has recognized the critical importance of repeat customers to profitability. This is seen in  how customer journeys form loyalty loops, as Edelman and Singer explained in HBR:
Rather than merely reacting to the journeys that consumers themselves devise, companies are shaping their paths, leading rather than following. Marketers are increasingly managing journeys as they would any product. Journeys are thus becoming central to the customer’s experience of a brand—and as important as the products themselves in providing competitive advantage.
In the classic journey, consumers engage in an extended consideration and evaluation phase before either entering into the loyalty loop or proceeding into a new round of consideration and evaluation that may lead to the subsequent purchase of a different brand.
The new journey compresses the consider step and shortens or entirely eliminates the evaluate step, delivering customers directly into the loyalty loop and locking them within it.
Thus, recurring relationships are based on "locking" customers into this loyalty loop. The question is whether you try to lock them in by using zero-sum manipulative strategies, or by gaining their trust and cooperation with win-win strategies that deliver value to the customer. As Tien points out, early subscription businesses such as book or record of the month clubs "shipped products by default and made customers pay the price...when they fail to cancel in time... Sadly, lots of companies still depend on customer neglect in order to sustain their zombie business models." Manipulation can work in the short-run ("you can fool all of the people some of the time..."), but which path leads to winning in the long term?

Rooting the customer journey in value

Smart marketers increasingly recognize the importance of customer journeys and loyalty loops. Tien and the others teaching us about these subscription and membership models clearly argue for customer experiences that build trust and loyalty. Tien and many others see value-based pricing as a key factor in doing that.

To that end, I suggest we focus on the unseen connecting layer in Tien's diagram. It shows the inner circle of the customer's view (subscribe, renew, ...) and the outer circle of the business operation's view (quote, order, provision, ...). But what connects these layers?
  • Operationally, it is dialog between the customer and the business. This is increasingly a digital connection that can become much more fully bi-directional and nuanced. We are just beginning to tap the power of these connections, using CRM systems (now mostly just for problem handling) and social media (still erratic and largely decoupled from operations), and nascent uses of chatbots (voice and text, powered by AI) that will give this more depth, breadth, and nuance -- and more bi-directionality.
  • But what is the substance of these interactions? Value exchange and value propositions that underlie the interactions. Customer consider, evaluate, buy, enjoy, advocate, and bond because they are seeking value. Everything else is just a a means to that end. There is specific monetary quid pro quo (typically in the form of price per unit of service), but that is judged in terms of a rich world of factors such as usage, outcomes, service, and support -- and fuzzier values such as responsiveness, risk, social values, transparency, and trust.
We need this layer of dialog about value -- in all its relevant aspects -- to build a strong loyalty loop. Much like flows through the semipermeable membrane of a cell, this dialog about value is what connects the customer to the business. If the membrane is smartly permeable in both directions, and well-centered on value, the loyalty loop grows strong, and stays strong -- a symbiosis.

How do businesses deal now with dialogs about value? Doesn't it seem that most business want to talk at the customer about value, but rarely want to hear from the customer about value? Even when there is good dialog about the trappings of value, how often does it get to the core issue? Rich dialog about value is typically limited to occasional offline focus groups that bear little relation to reality, supplemented by haphazard social media interactions.

Aligning price and value

In commercial relationships, we have a broad landscape of value, but it all comes back to the exchange -- what do I get and what do I give. Price is the monetary part of the exchange that balances all the other aspects of value.

But how do we talk about price? Businesses set price unilaterally (especially in B2C). They say what they must about price to get initial sales, then seem to avoid the topic like the plague, bringing it up only when they want to initiate a change. Prices are mostly take it or leave it -- even though subscription businesses concerned about churn sometimes negotiate discounts on an exception basis to retain a customer who seeks to cancel. The squeaky wheel may get a bit of grease, but customizing value propositions is the reluctant exception, not the rule. 

Pricing can be cost-based, competition-based, or value-based. In the B2B world, it is widely recognized that value-based pricing is most effective. The problem is that such pricing can get very complex, considering many dimensions of usage, performance, and outcomes. For large accounts there may be meaningful customer participation in pricing, with ongoing price negotiation and adjustment processes. In the B2C world, value-based solutions are generally sacrificed in the interests of simplicity and scalability.

But, as Tien observes in the passage above, pricing and packaging is too important to just take the easy way out. Now we can conduct dialogs about value that work for consumers, if we get smarter about how to do that. Many say consumers require simplicity, but they also want fairness. Dialogs about value are a traditional behavior, engaged in throughout human history. It is only in the past century and a half that we opted for the scale efficiencies of uniform, pre-set, seller-mandated pricing and sacrificed these customized dialogs about value. Having grown up with this mind-set, we forget that things were ever different.

But now we have the tools to get back to individual dialogs about value, even between a business and a mass of consumers. Computer-mediated dialogs are getting powerful, and AI support will increase that power. As Tien said, 
You can create intuitive customer journeys...with relevant tipping points along the way. And when your pricing model lock into that subscriber journey, this is when (click) your business model locks into subscriber relationships, and a valuable company is born.
How do we get that lock in? A key aspect of pricing is whether it is usage based. Tien's view across both B2B and B2C businesses reveals some key points about the metrics of value. He notes that "at its heart, usage-based billing is a way of quantifying value...how they actually use your service...a 'value metric.' Simply put, a value metric should do three things: align to customer needs, grow with customers, and be predictable (both for customers and the organization)." But his firm's analysis of the subscription businesses they track finds that "only about 27 percent...use some sort of usage-based pricing today." He finds that those who do grow significantly faster. In B2C, unlimited usage plans are generally the norm. But, referring to cable companies, Tien says "smarter usage-based billing...will make their video content services more responsive and valuable."

Conventional wisdom is that consumers don't like usage-based models, but I suggest that is just because we have not yet gotten creative about applying modern technology to let us do usage-based pricing in a smarter way. We need to find pricing strategies that are truly aligned with the value that each customer perceives.

The FairPay architecture for valuing customer experiences


FairPay is an open architecture that seek to align price with value in its broadest sense -- at all relevant stages in the customer journey -- and on an individualized, dynamic, context-specific basis. (See this article in the Journal of Revenue and Pricing Management, or this illustrated summary from ESADE Business School.) FairPay transcends profit and non-profit orientations, and applies controls that can be as tight or loose as desired by each business.  FairPay centers the customer journey on dialogs about value, and drives that by empowering the customer -- while enabling the business to maintain control based on tracking the customer's reputation for fairness. These levers are applied in a cyclic game that encourages cooperation to continue a mutually rewarding relationship. 

Value-based pricing and packaging can now be increasingly dynamic, adaptive, and individualized. FairPay highlights how pricing and packaging that reflects the value of each customer's experience is best done after the experience, when real value is best known. This relates to pricing risk -- does the customer risk not getting their money's worth? The value is also best assessed with user participation, to ensure alignment with diverse customer perceptions. Again, this can be done at varying levels, which shift from the pre-set nature of conventional mass-marketing practices in some or all of the following aspects:
  • Pre-set packaging -- are packages (bundles) locked-in in ahead of time, or as items are desired? Does the customer need to know in advance what content they will want, or how much of it?
  • Pre-set usage levels -- does pricing ignore usage, or relate to pre-set usage tiers, or does it depend on other aspects of value and outcomes? What of customers with widely varying usage levels? Does all-you-can-eat pricing make any sense for the majority of users who are not "average?" If pricing is usage-based, are there reasonable discounts for volume (and perhaps price caps or rollovers to minimize customer risk)?
  • Pre-set price schedules -- does the business have unilateral control of price schedules, or does the customer participate in determining price based on their perceptions of the value experience? How is ability to pay factored in, if at all?
Advanced forms of FairPay address all three of these aspects. Think of this as finding prices and packages that map to value with customized fidelity, considering timing and risk. 

(Even without giving customers any direct power over price schedules, sellers can reduce customer pricing risk, while adding little risk to themselves, especially for digital services. Some simple strategies for that relate to delayed pricing of bundles and usage plans that give customers more "optionality" by not forcing them to commit to specific bundles or usage levels in advance. As noted above, Tien argues for "smarter usage-based billing" for cable TV -- I have proposed just such a smarter, more adaptive, value-based model, which I call "post-bundling.") 

value loop that is cooperative, adaptive, and self-sustaining

FairPay is driven by the cyclic process of recurring business relationships -- it fits with subscription cycles, and customer journey loyalty loops of any kind. The most advanced form of FairPay applies a balanced level of both business and customer control of pricing across multiple customer journey cycles (as depicted here). This applies a "new" balancing method:  the customer is granted full pricing power during each cycle, and the business continues to offer to grant that power going forward if it judges the customer to be reasonably fair about that. This shapes the relationship into a repeated game that motivates fairness on both sides.  (I say "new," because we tend to forget that this is not so unlike the kind of intuitive balance we have applied for millennia in traditional person-to-person commercial relationships.)

The breadth of this architecture is in how control is applied by the business. With the most strict control, we have the conventional, take-it-or-leave-it model of seller-set pricing. With the most loose control, we have voluntary patronship models (like those offered by Patreon, Indiegogo, and Kickstarter), voluntary membership models (like The Guardian), and pay what you want (perhaps most successfully applied by Humble Bundle), where customers have full control of pricing. 

But however strict or loose the control, the focus is on the cyclic nature of the relationship. Too tight, and too many customers are unhappy and leave the relationship. Too loose, and free-riders may make the business unsustainable (ending the cycles). The right balance depends on the nature of the business, the customers, and the service and how its value is perceived. This membrane of value is what brings these factors together, and empowerment, dialog, and reputation are the tools a business can manage to find the right balance -- as that balance changes from customer to customer, and from cycle to cycle. Throughout the customer journey, effective dialogs about value are essential to keeping this pro-actively on track, building cooperation and trust, for a wide range of customers, over time-varying contexts.

From this perspective we also see that Customer Lifetime Value (CLV) is just one of two critical success metrics -- it reflects one side of the total picture. Businesses fail to recognize the equal importance of the complementary metric, Vendor Lifetime Value (VLV) -- the value the business provides to the customer over the lifetime of the relationship. Recurring businesses flourish when the customer looks to the business not for the best bargain right now, but as a reliable and trustworthy source of continuing VLV, The way to sustainable profit is to change the conversation from price to value, and from short-term to long-term.

A next level in customer-experience-centricity

Tien makes a big point of how customer-centricity and customer experience become critical in subscription businesses. FairPay takes this to a new level.

Tien points out how "...IoT [the Internet of Things] allows you to rediscover your customers. It lets you learn what they really want. In fact, I would argue that the only true competitive advantage is your relationship with and knowledge of your customers." I have written about how IoT provides a new kind of data about value (an IoT Cloud of Value), and how FairPay's dialogs on value complement that with direct input from customers (and how that IoT data can help validate what customers say about value).

Much as I have doneTien alludes to traditional modes of commerce: "Once upon a time, we used to know the people we bought from...we used to know the people we sold to, the neighbors in our village. All that knowledge got lost a long time ago...But it's coming back in a big way."

Price is the visible metric of net value, and competitive success is really a matter of value propositions and how a business orchestrates them. Tien speaks of a new "golden age of marketing" and how "the marketing department becomes a giant test laboratory." He speaks of how "subscription businesses need to constantly be optimizing revenue through pricing," and how "price triggers match customer requirements and demonstrate value." FairPay shows how to take that from an occasional thing and operationalize it throughout each cycle of the customer journey.

Part of that can be seen in this more detailed view of the multi-layer, cyclic, repeated game structure of FairPay. It shows how the game serves as an adaptive value-discovery engine, providing an architecture for adaptively structuring products/services into tiers, and segmenting customers based on what they value, their willingness to pay, and their fairness.

By embedding these dialogs about value deeply into the customer journey, businesses can turn their everyday operations at each touchpoint into ongoing and continuous business experiments. This centers on price and value propositions, providing a base on which to become adaptively experimental about not only pricing and packaging, but also about product/service design. With detailed, realtime data about what customers do and do not value (potentially for each unit of product/service), the business becomes an adaptive engine for co-creating value with your customers in ways that can maximize Customer Lifetime Value (and Vendor Lifetime Value) across the fullest accessible market -- and as that market changes.

It is all about maintaining a shared understanding about valuing customer experiences in diverse and dynamic contexts. Doing better at that will bring more success for both business and consumers in this digital age of mass-customization. Our Relationship Economy will increasingly shift from the impersonal invisible hand that rations scarce products, to a more human and personal invisible handshake in which both partners in the relationship cooperate on sustainably creating value.

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More about FairPay

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). 

My article in the Journal of Revenue and Pricing Management, "A Novel Architecture to Monetize Digital Offerings" also provides an overview of FairPay (summarized more briefly in the ESADE Knowledge article "Three building blocks to monetize a digital business," and previously in Harvard Business Review, "When Selling Digital Content, Let the Customer Set the Price.").

Even better, 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.)

Wednesday, April 25, 2018

Privacy AND Innovation ...NOT Oligopoly -- A Market Solution to a Market Problem

The crisis caused by the Internet oligopolies has us careening toward regulation that will likely entrench those oligapolies -- to the detriment of the consumers we seek to protect (and the innovators who might benefit us). One need look no farther than yesterday's front-page stories in both WS Journal and NY Times.

However, many recognize that the real problem with the Facebook-Google duopoly on advertising stems from "the original sin of the Internet," the reliance on the ad model that mis-aligns incentives by making users "the product, not the customer." The problem is that few see how to fix that underlying problem, so very few are even trying!

How can we get services that serve all of of us affordably?  It seems impossible (as Zuckerberg, himself, explains), but this is just a failure of imagination (as called out by such notables as Tim Berners-Lee and Jaron Lanier).  My previous post explains in some detail how Zuckerberg has just thrown up his hands, and how we can all be far more imaginative about that.

But let's consider how our current response is likely to make matters even worse. The problem is that we are moving to regulate the symptom instead of treating the disease. 

Some view this a a simple matter of regulating data privacy and control, but as many now observe, regulating that will concentrate even more power in the oligopolies. Such regulations (going into effect with Europe's General Data Protection Regulations next month, and increasingly likely here) will be cumbersome and costly in a way that will constrain innovation and market forces. They may bring some relief, but at what cost? As Zuckerberg testified: "A lot of times regulation by definition puts in place rules that a company that is larger, that has resources like ours, can easily comply with but that might be more difficult for a smaller startup." And there is high risk that regulation will overshoot.

And on the flip side, many critics of regulation point out that many consumers care little about data privacy and control as long as they get services they want at affordable cost (as advertising enables). That brings us back to the question of business models.  With or without regulation of privacy, will consumers really get services they want, if we stick to the ad model?

Why regulation is a band-aid, not a cure

Maurice Stucke offers this analysis in Harvard Business Review, "Here Are All the Reasons It’s a Bad Idea to Let a Few Tech Companies Monopolize Our Data:"

  • Lower-quality products with less privacy
  • Surveillance and security risks (Government capture, Covert surveillance, Implications of a data policy violation/security breach)
  • Wealth transfer to data-opolies
  • Loss of trust
  • Significant costs on third parties
  • Less innovation in markets dominated by data-opolies
  • Social and moral concerns
  • Political concerns (Bias, Censorship, Manipulation)

Regulating data privacy and control will not eliminate most of these problems -- in fact, it may make many of them worse.

As Tim Wu outlines in the Times, "Don't Fix Facebook. Replace It," what we really have here is failure to align business models. He quotes Walter Lippman on "free" TV (in 1959): it is ultimately "the creature, the servant and indeed the prostitute of merchandising." Things have only gotten worse, -- merchandising has gotten far more sophisticated, and we prostitute more and more of our life to it.

This is not to say that there is no need for regulation of data privacy and control, but that it should be limited to areas that business model solutions can not address well.

Aligning the business models

What we need is to move aggressively to change the business models.

A key part of the issue is to ensure that users are compensated for the value of the data they provide, as outlined in a recent WSJ article by Posner and Weyl, "Want Our Personal Data? Pay for It." That can be done as a credit against user subscription fees (a "reverse meter"), at levels that users accept as fair compensation. That would shift incentives toward satisfying users (effectively making the advertiser their customer, rather than the other way around). Paying for user data is long overdue -- independent data agent "infomediaries" were proposed and richly explored in 1999, in Hagel and Singer's book, Net Worth.

But a the deeper challenge is to address the total value proposition -- to balance the varying value exchanges of users, platforms, advertisers, and other participants in this network market. If platforms pay users for their data, at what level? If users pay platforms for service, at what level? Different users get different levels of value and have different abilities to pay. Serving an added user costs little, but continuing to provide and improve services take investment. That is where we need real creativity in our business models. How do we make the subscription price fair and affordable to provide essentially universal access, and still make the business sustainable? (Consider this thought experiment for directional guidance.)

FairPay points to one possible market-based path to dealing with this high inherent variability in value -- as outlined in "Who Should Pay the Piper for Facebook? (& the rest)" (and in the rest of this blog and in a recent journal article). Companies like Facebook, Google, and Twitter could move in in that direction on their own initiative. But they are so seduced by their tens of billions of dollars in advertising that they see little reason to try. Trying might cost them in the short term, even if it could make them more profitable in the long run.

One way to force the platforms to move toward business models to better serve consumers is with simple regulatory mandates, as outlined in my previous post: "require that X% of revenue must be user-derived by some date -- with X starting small, but then increasing in stages over time. As X increases, incentives for tolerating ad-related abuse would be reduced and offset by pressure to be customer-first. Let [each platform] figure out how best to do that, but give them targets over time, and hold them to it." This kind of light touch works well for vehicle emissions, as a market-based solution -- why not for Internet platforms?

The drunkard's search


Our challenge is much like "the drunkard's search" (as illustrated above). The light of regulation is much brighter than the light of innovative business models. But the cure we seek is down that street.

FairPay offers us a flashlight that points down that street. It is not yet clear how broadly and effectively FairPay can enable this kind of transformation of business models to work. But it illuminates a direction that should take us closer, if not all the way. Maybe others have better ideas, but FairPay is easy to try, and maybe better ideas will become apparent once we start down this road -- even if the flashlight of FairPay does not take us all the way.

But in any case, it is urgent that we start moving in that general direction -- that is where the real cure is.

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More on business models: Who Should Pay the Piper for Facebook? (& the rest)

Broad suggestions on opening up the platform oligopolies are in a post on my other blog:  "Architecting Our Platforms to Better Serve Us -- Augmenting and Modularizing the Algorithm"

Update 5/4/18: Bloomberg reports: Facebook Weighs Ad-Free Subscription Option

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More about FairPay

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). 

My article in the Journal of Revenue and Pricing Management, "A Novel Architecture to Monetize Digital Offerings" provides an overview of FairPay (summarized more briefly in the ESADE Knowledge article "Three building blocks to monetize a digital business," and previously in Harvard Business Review, "When Selling Digital Content, Let the Customer Set the Price.").

Even better, 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.)