Thursday, May 21, 2020

Covid-19 and the Future of the Passion Economy

[Originally published in Inc., 4/29/20]                

The “Passion Economy”—the emerging sector of individuals using technology to make a living by direct support from the people they serve—is an emerging force. According to one study, 17 million Americans earned nearly $7 billion in this way in 2017. Who participates in this? Many are creators frustrated with modern modes of livelihood who seek a return to the traditional values of work.  They want to “follow their passion” in their economic life in ways that embrace their individuality -- to restore the self-actualizing joy of creation, and of earning sustenance and support from direct human bonds with those they serve.  They typically do this as an artisan or service-provider in a small business, doing what they love with a customer focus (but even some larger businesses now seek to enable a similar passion).  And now, the Covid-19 pandemic has given this new urgency, highlighting how these strong, direct relationships enable resilience though unstable times. 

This passion economy, described in a recent article and a book, is a way for “passion entrepreneurs” to escape from the rat race of conventional companies – and of the newer Gig Economy that has turned out to be little better.

But many passion entrepreneurs face a revenue dilemma.  Their creations are typically “experience goods” (at least in large part, and often intangible digital ones).  Those are hard to put a value on, and sold via relationships that are remote and digitally mediated.  Customers who know and love their offerings become “superfans” who happily pay a premium price, but how do you get there?  Unlike artisanship in the village marketplace, producers and consumers find it hard to know and trust one another, and struggle to design effective pricing strategies.  Some even turn (with sometimes surprising success) to seemingly impractical donation models like Patreon and “pay what you want” (PWYW).

A growing number of Passion Economy entrepreneurs have reached out to me about this problem. I have outlined a framework of strategies, called FairPay, that structure a new economics for digital creation.  (These are described in my blog and book, and in works co-authored with prominent marketing scholars.)  This builds on why donations and PWYW work surprisingly well: people will pay, even when they don’t have to – if they can pay what they feel is fair.

The insight of FairPay is that our new economics begs for a new social contract.  In our digital world, we pay not because current products are scarce, but because we want to sustain the creation of future products that we expect to value.  We pay because we want to fairly compensate and sustain those who create that value for us -- and for others.  That is how humans are wired.  (That motivation applies to real goods, as well.)

Achieving that requires rich and honest dialog about value propositions.  Providers must empower their customers to try what is offered, ensure both parties have a common understanding of the value realized, and build trust in each other’s reputation to work out and maintain a truly fair relationship.  Relationships are “repeated games” over a series of transactions.  When the game is played well, it is win-win and builds cooperation to continue it.  Both sides see that they are co-creating value as a surplus over and above the cost, and they agree to share fairly in that surplus.  Conventional, set-price commerce tends to devolve into a zero-sum game in which each side seeks to extract the entire surplus.  That is inherently alienating.  Pre-set prices are simple, but cannot adjust for the unpredictable value of experience goods.

To see how FairPay’s simple twist changes the game, consider a subscription:
·         The conventional repeated game is a one-sided game of customer loyalty: “Here is our monthly price, take it or leave it.  We hope you will take the risk -- and be satisfied enough that you will continue this game.”
·         The FairPay repeated game is a cooperative game of joint fairness:  “We will remove your pricing risk by letting you pay what you think fair for you after each month’s use -- but we will continue this game (beyond a few trial cycles) only if we agree that you are being reasonably fair.”

Think of this new social contract as an invisible handshake -- an agreement to cooperate to seek a fair level of financial support to sustain future creation of desired services. That is based on rich, ongoing conversations about value. What value do I want from you? What value can you offer to me? What does it cost to produce? What outcomes can I achieve with it? How do we share fairly in the surplus? Instead of the old invisible hand that works across a market at a point in time, it is an agreement that works over the course of our relationship.

Modern behavioral economics sheds light on how this strategy leverages human nature.  People are not homo economicus, purely rational profit maximizers who will never pay any more than they have to.  Thousands of PWYW success stories and dozens of journal papers prove that people are homo reciprocans, driven to reciprocate fairness with fairness (and even altruism). 
·         Behavioral economics also shows that people are not purely rational about risk. Set-price offers put consumers at risk.  Will I enjoy the product?  Will I use enough of my subscription services to be worth the cost? 
·         At the other extreme, purely voluntary donation or PWYW offers put providers at risk.  How many customers will underpay because they don’t perceive the value, or just don’t care?
  
The FairPay game balances both risks.  Providers can report what each customer consumed, what it cost, and why it is valuable.  Each customer can adjust the suggested price and explain why that seems fair to them (with multiple choice options).  Suppliers can evaluate that with simple software to track each customer’s fairness reputation and nudge them to be more fair.  The customer never fears paying for no value.  The provider risks some of their product (much as with free trial offer), but within a few cycles of the game they can determine who does not play fairly, nudge them, warn them, and cut them off, if necessary.

Providers can put a toe in these waters before jumping into this new logic for commerce.  Basic elements include being relationship- and value-centered, making prices risk-free by finalizing them after the experience, and enhancing dialog to frame value perceptions and nudge toward fairness, transparency and trust.  Advanced elements include customer participation in price-setting, individualized nudging and reputation tracking.  Providers can enforce minimum fairness levels by revoking unfair consumers’ power to participate in pricing.  Both parties can consider flexible adjustments for ability to pay.

Providers who are hesitant to empower their customers to help set prices can control both sides of the FairPay game:  Set individualized prices after use, based on their own hindsight judgment on how each customer consumed services, so the price is always reasonably fair and the game is still nearly risk-free to the consumer.

This new game will take learning -- but is more natural than it may first seem.  It is highly adaptable, to enlarge the passion entrepreneur’s market with a wide range of value propositions.  It enables them to learn just what their market values, how to deliver it, and how to be sustained for that.  Anyone can try their offerings without risk.  It is resilient when things change.  Each party can nudge the other to create more of the kinds of value that are desired, and to share fairly in the surplus.  That is what humans were bred to do.

This may seem peculiar at first, but it is a return to of traditional human values.  We forget that the price tag was invented less than 200 years ago.  For millennia, prices were set by individual negotiation.  But department stores needed a simpler system in order to scale.  That take-it-or-leave-it value proposition led to today’s alienation, distrust, and bargain hunting.  Now we can do better.  In our digital world of abundance, it is hard to negotiate prices before the experience as we once did.  But with a social contract for sustaining future services, we can apply this new invisible handshake.  That is what some Passion Economy entrepreneurs are increasingly seeking to do.  And now the stress of the coronavirus pandemic has made it even more clear that we can -- and must -- return true human cooperation to be the driving force of our economy. 

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Update notes [4/29/20] 

In addition to the links about the Passion Economy included in my Inc article (above), this very recent posting from a European VC adds insights:  A primer on the Passion Economy.

Also, the term Passion Economy has been in use for a while. It dates back at least to this 1/13/16 article by another VC that also provides good background: The Passion Economy: How to Actually Do What You Love

(While the focus of the Passion Economy -- and this article -- centers on profiting from the kind of customer-centered co-creation of value that drives passion entrepreneurs in small businesses, the same principles can transform large businesses as well, as explained in my other writings on this blog -- see the tabs at the top.)


Wednesday, April 29, 2020

Inc Magazine: Covid-19 and the Future of the Passion Economy

Inc Magazine has just published my article, Covid-19 and the Future of the Passion Economy -- with this teaser:  An emerging new infrastructure allows people to make a living doing things they love. The big question: How to properly value what you do.

From the opening...
The “Passion Economy”--the emerging sector of individuals using technology to make a living by direct support from the people they serve--is an emerging force. According to one study, 17 million Americans earned nearly $7 billion in this way in 2017. Who participates in this? Many are creators frustrated with modern modes of livelihood who seek a return to the traditional values of work.  They want to “follow their passion” in their economic life in ways that embrace their individuality -- to restore the self-actualizing joy of creation, and of earning sustenance and support from direct human bonds with those they serve.  They typically do this as an artisan or service-provider in a small business, doing what they love with a customer focus (but even some larger businesses now seek to enable a similar passion).  And now, the Covid-19 pandemic has given this new urgency, highlighting how these strong, direct relationships enable resilience though unstable times.  
This passion economy, described in a recent article and a book, is a way for “passion entrepreneurs” to escape from the rat race of conventional companies – and of the newer Gig Economy that has turned out to be little better. 
But many passion entrepreneurs face a revenue dilemma...[read more...]
(While the focus of the Passion Economy -- and this article -- centers on profiting from the kind of customer-centered co-creation of value that drives passion entrepreneurs in small businesses, the same principles can transform large businesses as well, as explained in my other writings -- see below.)

-------
Update notes [4/29/20] 

In addition to the links about the Passion Economy included in my Inc article, this very recent posting from a European VC adds insights:  A primer on the Passion Economy.

Also, the term Passion Economy has been in use for a while. It dates back at least to this 1/13/16 article by another VC that also provides good background: The Passion Economy: How to Actually Do What You Love

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If you got here from Inc Magazine... 

Learn more here about FairPay and how it empowers the Relationship Economy and the Passion Economy.  See the tabs at the top, especially the Overview and Selected Items. Some especially relevant items:
Important scholarly coverage of FairPay is in the Journal of Revenue and Pricing Management, A novel architecture to monetize digital offerings, and in the Australasian Marketing JournalPricing in Consumer Digital Markets: A Dynamic Framework, as well as an earlier introduction in Harvard Business Review.

LinkedIn Group for FairPay and related innovations
Please join the LinkedIn Group, FairPay: Adaptively Win-Win Customer Relationships, to connect with others who share interest in applying FairPay and related strategies.
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Tuesday, April 7, 2020

The Forever Promise - The Key to Lifetime Value...and Profit

How to Build a Subscription Model So Compelling, Your Customers Will Never Want to Leave 
That is the accurate subtitle to The Forever Transaction, the new book by Robbie Kellman Baxter, consultant and author of The Membership Economy.

Baxter refers to "a forever transaction, as an outgrowth of a forever promise of value." That forever promise "is focused on a long-term customer need or desire." She draws on subscription models like Netflix to say:
I want to show you how to create your own forever transaction. It’s about orchestrating the moment when customers remove their “consumer hats” and don “member hats,” commit to your organization for the long term, and stop considering alternatives. For many companies this is the holy grail: loyal recurring customers, often paying automatically, indefinitely. 
To earn a “forever transaction” you must offer a “forever promise” in return. You commit to deliver a result, solve a pain point, or achieve an outcome for your members forever, in exchange for their loyalty.
Baxter's first book, The Membership Economy, was an introduction to subscription models and why they are increasingly important -- this book is intended to dig deeper into how to do them well. As such the new book provides excellent advice, and expands the list of essential reading on exploiting recurring revenue business models (along with important books by Anne Janzer and Tien Tzuo that I have commented on in this blog and listed in my Resource Guide.)

I reviewed a pre-press version of this new book, and had some dialog with Baxter on how my work on FairPay builds on and extends her ideas in new directions that can potentially transform B2C relationships. (My thanks to Baxter for including a reference to my own book, FairPay, on page 122.)

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TL;DR: The forever promise is the future of business, as Baxter ably explains. We are just beginning the journey. The promise will be stronger and more durable when it becomes more balanced and mutual.
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The why and how of a forever promise

To encapsulate The Forever Transaction, I cannot put it better than Charlene Li's blurb: "Recurring revenue is the holy grail, and Robbie Baxter is giving us the map to find it. Building on 15 years of experience in Silicon Valley and beyond, Baxter provides fresh case studies and practical tools to disruption-proof your organization."

Businesses of all kinds have realized that digital business enables continuing deep relationships with customers, and that it is far more profitable to retain customers than to acquire them, lose them, and acquire others. They study "customer journeys" and build "loyalty loops."

Baxter emphasizes the forever promise as the critical bond that builds loyalty to retain customers. She explains how you can plan what promise you can offer, to what customers, and the importance of ongoing experimentation to test, learn, and adjust. Then, with many examples from her consulting with varied companies, she gets into the details of scaling, including technology, pricing, and metrics, and building for continuing leadership and evolution in whatever promise you are offering.

I find it hard to recommend a single one of these books to the exclusion of the others. I recommend studying all of them -- each offers a wealth of ideas in very useful form, based on varied experience in this space, and each provides unique insights.

Building the best possible forever relationship with each customer

The forever promise is the future of business. We are just beginning the journey. The promise will be stronger and more durable when it becomes more balanced and mutual. The idea of the forever promise is very resonant with my work. My perspective builds on the foundation of this book (as well as the other books mentioned). What FairPay adds is to suggest a focus on mass-customizing forever relationships by designing individualized value propositions to suit the values and behaviors of each customer -- in ways that adapt dynamically, as the relationship unfolds. (Right now, FairPay is especially relevant to digital content and services, and to other low-marginal-cost offerings, but over time it can apply far more broadly.)

The big-picture of this perspective is outlined in my post, The Relationship Economy -- It's All About Valuing Customer Experiences. Modern business is returning to a focus on long-term relationship-building, as opposed to the transaction-focused mass-marketing mind-set of the past century or so. But most business-people have yet to see how we can return to a forever promise with each customer that mass-customizes value propositions just as humans once did in village markets. It is true that we cannot scale traditional transaction-level haggling, but few realize that we can structure a new form of forever promise with customer participation. That can be done with what I call an invisible handshake in which both provider and consumer promise to cooperate in seeking a a value proposition, and a price, that is fair for each customer, and for the business.

Baxter's chapter on pricing is an excellent summary of best-practices in subscription/membership pricing, as generally understood. FairPay points to ways to go beyond currently understood best-practice, and to give the consumer more say in what pricing model works for them -- and to change that whenever changes in desires, needs, and usage warrant. We can create forever transactions that apply modern e-commerce technology to return to the more flexible trust and fairness-based forever relationships of the village bazaar -- but in a new way that works at Internet scale.

Perhaps the simplest statement of how the full form of FairPay changes the forever transaction/relationship game is this:
  • 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.”
That changes everything -- from a one-sided game of loyalty to a more win-win game of fairness and trust – on top of which a whole range of features can be layered, at many levels. It creates a new kind of haggling: not over price at the time of a given transaction, but over the criteria for what is considered fair value exchange over the relationship. It give the customer some new power to to shape the forever promise, but lets the business frame the terms, and retain control over whether the relationship remains beneficial enough to continue to offer that promise to that customer.

Baxter's pricing chapter raises the valid concern that “the more complex the pricing, the less customers trust it” (paraphrasing Einstein: “Keep your pricing as simple as possible, but no simpler”). FairPay may at first seem complex, but I submit that it offers a deeper simplicity. It seems complex because it is a change in perspective, but it is simple at heart: “our forever promise to each other is that we both agree to continually seek a price and a value proposition that is fair for both of us” – what could elicit more trust (if it is done transparently, in good faith)?  Instead of zero-sum games in which both sides view the other as being inherently unfair (back to Einstein, who was the master of rethinking perspectives), I suggest that most pricing is actually simpler than is possible to avoid unfairness.  The result is resentment, alienation, and a ongoing zero-sum battles over who extracts value from who.

Instead, FairPay seeks to motivate customers to cooperate with the vendor, to motivate the vendor to create more value to be shared fairly.  The customer will (as Baxter recommends) “know how the pricing works and why they paid what they did.”  Pricing in the village bazaar was intuitive, in a way that had nuance across a full range of value metrics. Baxter explains that the idea (again) is to establish a forever promise so trustworthy that "people say things like 'I don’t even care exactly what I’m paying because this organization solves my problems and helps me achieve my goals. It’s like they know exactly what I need. I trust them.'” Conversely, the business takes it in stride if an customer known to usually be fair might seem to be a bit out of line once in a while.

Baxter also has a helpful chapter on metrics. Those metrics combine with pricing to get to the broader issues. FairPay shifts our perspective on the entire value exchange, and how balanced and fair it is. Recurring revenue business understand that what matters is not the short-term value of transactions, but Customer Lifetime Value (CLV) -- perhaps the most important metric in current best practice. Baxter concludes the book with a very important Venn diagram: "Operate at the intersection of 'what’s in it for the customer,' 'what’s in it for us,' and 'what’s in it for everyone else.'"

That intersection is where FairPay brings a new focus. This was addressed in a chapter in my book, and in a post that discuss value from the vendor to the consumer, and the risk of not getting the value expected:
…Subscription providers seem to ignore this. They focus on customer acquisition and customer retention (and its converse, churn), but how many of them consider the dynamic value propositions of value/risk to each individual consumer? They optimize for CLV, the Customer Lifetime Value to them, but not for VLV, their Vendor Lifetime Value to the customer. How many businesses really think about how they justify their share of the consumer's wallet?
While VLV may be hard to quantify, it is important to seek to view the lifetime value proposition through the customer’s eyes, not just the vendor’s. Baxter observes: "Because you’ve made a forever promise, you need to ensure that products and pricing continue to support the value you’re creating for the people you serve."

Of course giving customers the amount of pricing power that FairPay suggests is daunting to many, even though FairPay provides mechanisms to enforce fairness (downgrading or declining to make further offers to those who free-ride). But there are many component elements to FairPay, and many ways to apply some of those elements while retaining full price control. That is addressed in two of my posts:
  • The Elements of Next-Gen Relationships and Pricing -- A Unifying Framework – an overview of the individual elements that can be mixed and matched, and applied in stages, to be as conventional or radical as desired.
  • "Risk-Free" Subscriptions to The Celestial Jukebox?  -- highlighting one of those simpler elements. That is a simple change to a more adaptive customer-value-based pricing model that maintains full pricing control for the business, but finds a new way to blend the best of all-you-can-eat and of usage-based models.  This seeks to largely eliminate consumer pricing risk, and thus avoid subscription fatigue.
But businesses are missing an opportunity when they fear giving customers more say about pricing and value propositions. More businesses have been beginning to realize that -- and COVID-19 has triggered new openness to dropping paywalls and gaining goodwill by trusting customers. Voluntary membership payments have proven successful in important use cases, perhaps most notably The Guardian (which recently turned a profit with voluntary memberships at user-selected prices).  Patreon and similar services have had notable traction in some markets. Some small consulting services (including a law firm and another and a CPA firm) have found success with simplified forms of the same kind of user participation in pricing with intuitive forms of enforced fairness much like what FairPay proposes to be automated.  Studies have shown that even simple forms of PWYW (pay what you want) can outperform conventional pricing in some contexts.

As companies grow more customer-value centered, and gain a better understanding of digital products/services (and other low marginal cost services), the line between voluntary and enforced payments will blur, and will depend on the specific value proposition at issue. The invisible handshake is especially relevant to digital because there is no scarcity of distribution once a content or service is created. The invisible hand of traditional economics does not work because of digital abundance ("information wants to be free") -- so we need a new social contract to sustain creation of future content and services. This will increasingly be seen as best practice for low-marginal cost services (or low-marginal cost components of costly services) -- and will become more familiar and widely applicable as automation and robotics enable low-cost replication of more and more services.

So, as I said at the start -- the forever promise is the future of business. We are just beginning the journey. The promise will be stronger and more durable when it becomes more balanced and mutual.

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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.)



Thursday, January 30, 2020

Value Nurturing -- A New Edition of Anne Janzer's "Subscription Marketing"

Anne Janzer is continuing to nurture the value offered in her classic book, Subscription Marketing -- a Third Edition was just released (with a special offer of the Kindle edition for just 99 cents through February 7).

Her subtitle is "Strategies for Nurturing Customers in a World of Churn" -- that to me is the heart of subscription businesses -- and of my related work on FairPay.

As she puts it:
Subscription Marketing is two-way communication between your company and customers in a subscription relationship, with the purpose of sustaining the value of that relationship for both parties.
While this book focuses on marketing after the sale (which I call value nurturing), those activities are part of a broader shift in the marketing discipline. Subscription marketing is marketing with a long-term perspective. It’s changing your mindset to focus on the relationship rather than revenue alone. It’s looking beyond lead generation to cultivating both trust and value, before and after the point of conversion.
Anne's new edition focuses more deeply on how that mindset is critical to success. Additions include:

  • "a new chapter on trust and value -- the true marketing imperatives of the Subscription Economy"
  • updated and expanded examples of value nurturing
  • new chapters on startups, small businesses, and large, established businesses.

Anne and I are in full agreement on the vital importance of value nurturing. Several years ago she wrote a very nice review of my own book on FairPay, where she observed:
In many ways, the FairPay pricing model is the perfect complement to the practice of value nurturing outlined in Subscription Marketing. Organizations that adopt a FairPay pricing must work hard to nurture the customer’s perception of value, both within the solution and beyond.
Her book has been the perfect complement to mine -- with far more detail on the basics of that mindset, and the practice of value nurturing. Drawing on her background as a professional business writing consultant, Anne's new edition expands very nicely on that.

If you want to succeed in a subscription business, you should read Anne's book carefully. If you want to do more than succeed, read her book and mine.

Thursday, December 26, 2019

2020 Vision -- The Restoration of the Customer

The Age of the Customer: You Ain't Seen Nothin' Yet

Nearly a decade has passed since Forrester said we were entering The Age of the Customer. That is apparent and has obvious implications. But as the decade of the 2020's dawns, I call out a deeper vision -- The Restoration of the Customer -- that could bring far more fundamental changes in the coming decade.

There are two surprising turns that may be taken in this decade to restore power to customers -- one that can fundamentally change how we conduct business, and one that can fundamentally change how we collaborate.

Those turns might just begin to undo many of the ills of the industrial revolution and of the computer revolution.  Both turns center on a return to enlightened human values:
  • The customer is not just a persona with a bundle of attributes that a business can learn how to manipulate, but a unique human being that has been bred since pre-history to thrive on a cooperative effort to create value and share it.
  • The user is not just a a source of attention that can be engaged to be sold to advertisers, but a customer to be served what they value -- again, a cooperative effort to create value and share it.
What those paying attention see

Forrester put the basic drivers nicely (emphasis added):
In this era, digitally-savvy customers would change the rules of business, creating extraordinary opportunity for companies that could adapt, and creating existential threat to those that could not. ...It requires leaders to think and act differently – in ways that feel foreign, unfamiliar, and counter-intuitive. And honestly, it is simply hard to do. ...These dynamics will endure as new technologies like artificial intelligence and robotics emerge to challenge core notions of what it means to be a company, what it means to build human capital, and what it means to compete and win.
...And, a deeper vision

Here I point to some little recognized ideas on how re-centering on value can change not only the dynamic of commerce, but also a parallel dynamic of customer value that is equally important.
  • First, the commercial dynamic that Forrester describes is just the foundation for reversing how the "progress" of technology cost us the human dimension in commerce -- a dimension that we had when commerce was just the way villagers did business with one another -- with human beings on both sides of an ongoing relationship. 
  • Second, we humans, as "customers" of Web services, have lost control of our experience of the world.  Our central experience of human interaction has been hijacked by platforms who "engage" us in order to profit from bombarding us with advertising and paid propaganda.
First: Back to the future of commerce

Consumers are increasingly alienated from the companies they do business with. Instead of neighbors or shopkeepers, we deal with soulless institutions that we distrust and feel abused by. That has been, increasingly, the price of productivity and material riches. But now technology has advanced far enough to restore the dimension of human values -- if we applied to do so. That does not require that we abandon the miracle of capitalism, but only that we bring it back to the marketplace of human value. Technology now makes it possible for even large faceless institutions to build human interfaces that behave with human values. That will drive institutions to interact with human in ways that are more truly human.

FairPay is a framework for centering on why and how to do that. The key is to recenter on relationships and the creation and sharing of value in ways that are tailored to each individual. Specifics on how to do that are in my FairPayZone blog, some articles written with prominent marketing scholars, and my 2016 book. Some of the best places to begin to understand this are:
Second: Who does it serve? - a course correction in how we experience the world

Social media and other online content services have changed how we experience the world, including how we interact with other people. Computer-mediation began with great hopes, but now it seems we have built a Frankenstein's monster.  As growing calls for change are beginning to focus on new levels of regulation, it is not enough to regulate against specific harms. Instead we must refocus on what we want to regulate for -- who these "services" serve, and what we want these platforms to facilitate. They were supposed to make us happy and smart -- instead they are making us angry and stupid. But technology can reverse that, if we incentivize that.

We can design new architectures for our interactive media that create value for us.  The key is to recognize that each of us is an individual, and we should be able to individualize our services, mixing and matching offerings to make just the service we want for what we are doing now. The most urgent part of that is to shape our media services to give each of us what we value. The Web stated out seeking to do that, and we can return to that vision. It won't be free, but it can be affordable. And we have seen that "free" is not really affordable (because it is not really free). If we do not change direction, our democracies and our civilization will collapse. Some starting points for seeing how:

(Cross-posted with my other blog, Smartly Intertwingled.)

Monday, November 25, 2019

Tim Berners-Lee's "Contract for the Web" Forgets One Thing!

Tim Berners-Lee's "Contract for the Web" (today in his NY Times op-ed) is a worthy effort -- but it seems to ignore the key contract element that he called on us to fight for a year and a half ago.

The new Contract lists Principle 4, "Make the internet affordable and accessible to everyone" -- but the sub-points for that principle gloss over the fundamental problem he raised in his message on the 29th birthday of the Web (3/12/18, emphasis added):
Today’s powerful digital economy calls for strong standards that balance the interests of both companies and online citizens. This means thinking about how we align the incentives of the tech sector with those of users and society at large
Two myths currently limit our collective imagination: the myth that advertising is the only possible business model for online companies, and the myth that it’s too late to change the way platforms operate. On both points, we need to be a little more creative.
Create a new set of incentives and changes in the code will follow. We can design a web that creates a constructive and supportive environment."
The Contract for the Web should include a new Financial Contract to align incentives to benefit not only Web platforms, but their users.
  • The contract should require that user pay at a level that corresponds to the value they get with consideration to their ability to pay. 
  • It should shift from the zero-sum game of "artificial scarcity" to a win-win game of fairly sharing our digital abundance to benefit both service providers and each consumer. 
  • It should also shift from the opaque extraction of attention and data in exchange for supposedly "free" services, to transparently negotiating with each consumer how (and at what price) advertising and commerce should serve all three parties involved:  the service provider, the advertiser, and that consumer. 
I have written on this blog and elsewhere about why that is essential, and how it can be done. Two of the simplest statements of those proposals were published in Techonomy:
Details of how that can be accomplished using the FairPay framework have been published in Harvard Business Review, and in journals on pricing and on marketing. Specific comments on Berners-Lee's 2018 message are in these several blog posts.

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[Update 12/13:]  It has been pointed out to me that the Contract does address the topic of business models (with regard to privacy and data rights) in Principle 5, Clause 3(b): "Promoting innovative business models that strengthen data rights, respect privacy, and minimize data collection practices." I am pleased to note that, and look forward to seeing progress. At the same time, this underlines an important point that may not have been clear in my original post.

This question of business models -- while very important to privacy and data rights -- is of even greater importance and urgency with regard to deeper issues of how the Web benefits or harms society.
  • As we see in the growing concerns about past and upcoming elections, the harm is not just to personal privacy and data, but to how the advertising-based business models of dominant Web services are inflaming polarization and radicalization of users (with clear effects on politics, elections, and society), rather than enlightening us.
  • The reason is that inflaming users increases their engagement and thus the number of ad impressions to be sold, while enlightening users does not advance that business incentive. 
  • Social media and search engines could be world-changing forces to not only "bring the world closer together" but to augment human intellect and enlightenment -- instead they are driving us apart and making us stupid.
  • That threatens not only our privacy and data, but the foundation of our democracy and freedom.
The articles and blog posts I have linked to above address privacy and data rights as just one aspect of this broader theme. Two additional post that dig deeper into these broad issues are:

Saturday, November 9, 2019

The Streaming War to End All-You-Can-Eat Streaming Wars

(Image: Wall Street Journal)
Do you hear the giant sucking sound of tens of billions of dollars of content production cost and corporate debt going down the drain? ...of tens of millions of consumers missing out on content they want to watch?

Much like World War I, great powers are massing armies and entrenching content libraries for a Great War that may have no real winners. And once again those great powers (and other contenders) are relying on inflexible strategies that will drain resources, and get mired in a long and costly war of attrition. This time the inflexible trenches that will suck up armies of content dollars are not in the ground, but in the deadweight loss of all-you-can-eat (AYCE) subscription models.

News of this streaming war is everywhere. The Wall Street Journal provided a good summary of the order of battle, and of the collateral damage that consumers will face. Axios notes the huge debt being incurred to create these arsenals of content.

The nimbleness of the German Blitzkrieg ("lightning warfare") demonstrated how WWI strategies of trench warfare could be overcome quickly, and with far less carnage. The players in this streaming war should be looking for a similar Blitzkrieg business model. But I predict it will be the smaller players, less able to throw money at this, who will be driven to experiment with less familiar, but more agile, strategies.

We wanted a "Celestial Jukebox" -- instead we got "subscription hell" and "subscription fatigue." This is the era of "peak content," but only a fraction of it is within any one person's reach -- its costs and its price are unsustainable. Can't we find an ecosystem business model that can sustain a celestial jukebox for the video industry?

Earlier this year I suggested how more agile strategies might operate, in "Risk-Free" Subscriptions to The Celestial Jukebox. The essence of the risk-free subscription is to be flexible, in order to be value-based -- cheap or free at low or zero usage, and rising at a reasonable rate as usage and other aspects of value received increase in that month, up to a set monthly cap. Think of it as a pay-ramp instead of a pay-wall. This kind of flexibly affordable model that is based on the value that each individual viewer actually receives (and that ramps up less prohibitively than pay-per-view) will get more viewers to buy more subscriptions. That will generate more profit from more viewers for every provider who has content that viewers want.

Such a pricing model also offers sensible economics across a mix of providers and aggregators. Disney could leave most of its content on Netflix for those who are only occasional viewers, while attracting its more regular fans to direct relationships on Disney+ with added features (such as its newest and hottest shows, and extra perks).

Instead of the all-or-nothing battle for AYCE subscriptions, providers can build relationships with all or most of their potential viewers. Think of this as agile pricing for a good customer value experience (CVX) -- and for a fair revenue share to platforms, content providers, and creators.

Disney is apparently ignoring such options, presumably thinking its Magic Kingdom will enthrall enough users to take the risk that they will not view (and enjoy) $7 worth every month. All of the great powers may similarly be too entrenched in their thinking to want to experiment.

But less dominant providers -- and entrepreneurial upstart aggregators of many providers -- may come to embrace agility and Blitzkrieg asymmetry, seeing that the biggest risk for them is not to take the risk that a risk-free model will empower them to fight a win-win battle -- one based on desirability of their content, not just overwhelming scale.

More on this theme:
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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.)

Friday, September 27, 2019

NYCML19 Workshop Deck - "21st Century Customer Relationships, Value Propositions, and Pricing - A New Economics for Digital Services" (A FairPay Perspective)

My deck is now available on SlideShare – it contains many thought-provoking links...

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

I had the pleasure of presenting a wide-ranging workshop -- designed to break through old biz-model blinders -- to a very engaged audience at NYCML19 (the annual summit of NYC Media Lab) on Thursday, 9/26/19.

We are now at a critical juncture in business, marketing, and broader aspects of market capitalism. If we do not rethink some dangerous unspoken presumptions, we will fail to reap the true promise of this emerging digital era.

The workshop was 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.

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. 

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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.)

Monday, August 26, 2019

Open Letter to Business Roundtable and Council of Institutional Investors on "Social Responsibility"

You both represent critical interests in the current crisis over Corporate Social Responsibility, and you both issued dueling statements last week that seem to do little more than continue a debate that is generating more heat than light.

That was catalyst for my new post, "The Reformation of Market Capitalism in The Age of the Customer -- Profiting From 'Social Responsibility as a Service' [Working Draft]", which suggests a new, win-win way forward.

Both of your interest groups should consider working to achieve that new reality. The thesis is that it is customers, not shareholders who ultimately bear the costs of Corporate Social Responsibility, and it is customers, not your members, that should vote with their wallets on how that is addressed -- but that businesses must facilitate that, as agents of their customers. Your members have the power to make that happen, and will profit from doing that. I hope you will consider making this sorely overdue Reformation of Market Capitalism a reality. A capsule on why:
  • Concern -- and confusion -- about whether and how market capitalism can have social responsibility is reaching a crisis point.
  • An exhorted responsibility of shareholders to be beneficent to other stakeholders (customers, employees, suppliers, community,...) can have only limited and uncertain effectiveness -- even if CEOs truly wish to be more beneficent. 
  • Customers have the prime authority, since the funding comes from the customers. Social responsibility is ultimately a "tax" on the customer. To be "represented," each customer should be able to vote with their wallet on how much tax they pay, for what.
  • Businesses now have new powers to involve each customer in mass-customizing the service value propositions that they pay for -- including payments for Social Responsibility as a Service (SRaaS)
  • That will apply the genius of the market -- enabling businesses to profit from being socially responsible as each customer supports. Think of it as a social responsibility tax that each customer agrees to pay -- at an individualized level that both parties agree is fair for that customer.
(I have been developing the ideas that underlie this, as published in two journal articles co-authored with prominent scholars. This is a pro-bono project and I would be pleased to assist in exploring this new way forward.) [If reading this on my FairPayZone.com blog, the full post is just prior.]

The Reformation of Market Capitalism in The Age of the Customer -- Profiting From "Social Responsibility as a Service" [Working Draft]

[Updated 9/3/19, see update notes at end 
--the 9/3 update on corporate-customer matching funds is especially notable]

We are at a crisis in our view of the role of business in society, as highlighted in front page stories last week. But I suggest both sides of this long-running debate misread the underlying issues. My work points to a new perspective, one that suggests a "reformation" of market capitalism. This is based on a new co-primacy of customer power that will make most reasonable people on both sides happy...
And here we are. Americans mistrust companies to such an extent that the very idea of capitalism is now being debated on the political stage.
So Andrew Ross Sorkin observed in the NY Times, applauding the Business Roundtable's 8/19 "Statement on the Purpose of a Corporation," calling it "a significant shift, and a welcome one." Many others applauded -- but as Sorkin and others noted, there is still good reason to be skeptical of any real change.

On the surface, the Rountable statement may seem pretty mild: "We share a fundamental commitment to all of our stakeholders." But things are hardly that simple. The Council of Institutional Investors (CII) came out expressing strong concerns:
It is government, not companies, that should shoulder the responsibility of defining and addressing societal objectives with limited or no connection to long-term shareholder value.
While it is important for boards and management to have and articulate long-term vision, ...a fundamental strength of the U.S. economy has been and continues to be efficient allocation of equity capital. If “stakeholder governance” and “sustainability” become hiding places for poor management, or for stalling needed change, the economy more generally will lose out.
Since the CII represents "primarily pension funds, state and local entities charged with investing public assets and endowments and foundations," one would expect them to have relatively enlightened view of the shareholder interest.

The WSJ editorial board was so apoplectic they did lead editorials two days in a row, the second quoting the 1970 article “The Social Responsibility of Business is to Increase its Profits” by Milton Friedman of the "Chicago School" of economics (in The NY Times!) that many blame for the current malaise.

(It also seems that the current legal framework for corporate governance and fiduciary duty to shareholders limits the discretion of corporations to fund social responsibility: "a decision by a board that is not grounded in the best interests of the corporation and its stockholders likely would not be protected by the business judgment rule under the current state of the law.")

The dilemma here can be resolved by recognizing that it is not shareholders alone, but customers who share primacy. Customers are the stakeholders who actually fund the costs of social responsibility, and they have the market power to influence the allocation of those costs (or take their business elsewhere).

==================================================================
The Ideas in Brief
  • Concern -- and confusion -- about whether and how market capitalism can have social responsibility is reaching a crisis point.
  • An exhorted responsibility of shareholders to be beneficent to other stakeholders (customers, employees, suppliers, community,...) can have only limited and uncertain effectiveness -- even if CEOs truly wish to be more beneficent. 
  • Customers have the prime authority, since the funding comes from the customers. Social responsibility is ultimately a "tax" on the customer. To be "represented," each customer should be able to vote with their wallet on how much tax they pay, for what.
  • Businesses now have new powers to involve each customer in mass-customizing the service value propositions that they pay for -- including payments for Social Responsibility as a Service (SRaaS)
  • That will apply the genius of the market -- enabling businesses to profit from being socially responsible as each customer supports. Think of it as a social responsibility tax that each customer agrees to pay -- at an individualized level that both parties agree is fair for that customer.
Very basic examples of SRaaS offers: [Added 8/28]
  • Would you be willing to pay an extra $4 for environmentally-friendly, biodegradable packaging and no-fossil-fuel shipping?
  • Matching grant: Would you be willing to pay an extra $1, $5, or $20 (select amount) to fund on-the-job training for ex-coal miners who seek to upgrade their skills to work in our factory in Appalachia, if we match your grant dollar for dollar? [revised 9/3]
  • Do you want to rank your product search results 1) by price alone, 2) by price weighted by ESG score, or 3) by ESG score alone?
  • Do you want to filter your product search to require an ESG score of greater than 1, 2. or 3 stars?
==================================================================

Oversimplifying the problem

There has been a long history of contention (and confusion), and I suggest the issue is not so much a matter of what capitalism is inherently, but of simplistic thinking about how it works. As Sorkin recounts,
For nearly 50 years — following the publication of a seminal academic treatise in 1932 ... — corporations, for the most part, were run for all stakeholders. It was a time defined by organized labor, corporate pension programs, gold-watch retirements and charitable gifts from companies that invested heavily in their communities and the kind of research that promised future growth.
That came to be seen as muddle-headed and inefficient, and Friedman forcefully argued that a business's only duty was to serve its stockholders. Now that view is in growing disrepute -- but the truth is not so black and white.

The Business Roundtable had said in 1997 (as recounted in Quartz) that “The paramount duty of management and of boards of directors is to the corporation’s stockholders.” Now their new statement changes this, to affirm "a fundamental commitment to all of our stakeholders," listing them in this order: customers, employees, suppliers, communities, and shareholders. Some are pleased to see shareholders listed last, some incensed. But others point out that it is not clear 1) whether this has any real operational meaning, and 2) what might actually change, or how.

Making sense of the stakeholders and how they are served

My work on how the digital world changes business relationships provides a new perspective that cuts through much of this confusion with a powerful new simplicity (see my book and/or this post).

It all comes down to the operational roles of the different stakeholders. We have customers, employees, suppliers, communities, and shareholders. We also have managers, who may be the shareholders, but often are the representatives* of the shareholders. Clearly, the shareholders own the business, and the managers are hired to be the shareholders' representatives*. The owners have power because our whole system of private property-based capitalism gives owners special rights. [*See 8/27/19 update below on the agency theory of corporate ownership.]

There have always been critiques of this system, including communism, socialism, cooperativism, and many other variations on shifting ownership/control of the means of production to other stakeholders. But before we throw the baby of market-based capitalism out with the bathwater of its abuses, let's look deeper.

The question is how shareholder's rights interplay with the rights of the other stakeholders, and that is where it gets interesting.

Those who favor market capitalism argue that its genius is that the market creates value with the economic efficiency and emergent wisdom of Adam Smith's invisible-hand of the crowd -- something that other systems are unable to match. Whether you approve of Friedman or not, it is worth reading his 1970 article to understand the mechanism he describes.

I think Friedman oversimplifies how the stakeholder interests interplay, but much of his core argument about how profit-driven market mechanism work is valid, and many critics fail to understand how hard it is to make sound economic decisions without profits as an incentivizing and score-keeping mechanism. Friedman and the CII are right that the Business Roundtable statement offers no meaningful operational guidance to the hard questions of how competing interests are effectively and fairly served.

The co-primacy of the customer

Without customers there is no business. The central role of business is to create value by selling services to customers. Doing that effectively produces revenues, and hopefully some profit, both of which enable the business to continue to create value by selling services to customers. Other stakeholders may be more or less important (sometimes very important), depending on context, but none have as fundamental a role in making a business work.

Businesses can do well by doing good. To the extent a business successfully creates value and obtains revenue from customers, it can share that value (in the form of revenue) with the other stakeholders. Properly managed, it can pay employees and suppliers, and support its community. Good management recognizes that creating and sharing that value enables the creation of more value.

But the only money that comes in is from customers. No value can long be created or shared, except as funded by customers, who pay for the what they value.

You forget one thing, Milton!

Milton Friedman was right, up to a point:
What does it mean to say that the corporate executive has a "social responsibility" in his capacity as businessman? ...the corporate executive would be spending someone else's money for a general social interest. Insofar as his actions in accord with his "social responsibility" reduce returns to stockholders, he is spending their money. Insofar as his actions raise the price to customers, he is spending the customers' money. Insofar as his actions lower the wages of some employees, he is spending their money. ...if he does this, he is in effect imposing taxes, on the one hand, and deciding how the tax proceeds shall be spent, on the other.
But what Friedman seems to forget is that the customer has a say in how much they pay, and will take their business elsewhere if the price does not map to the value they perceive that they get.
  • If the customer will not pay a "tax" to support whatever level of "social responsibility" to other stakeholders they see as desirable and fair, no tax is received. 
  • If the customer willingly allocates part of the price they pay to such a tax, shareholders will be fine with that. 
  • If the customers refuse to allocate any payment for social responsibility, shareholders will not be able to sustain paying to share that value with other stakeholders.
No amount of exhortations to "social responsibility" can change that fundamental reality. Friedman knows that shareholders control the business, and that they do not want to pay an unnecessary tax, but he forgets that the customer may be more than willing to do so, and may go elsewhere if stymied in doing so. It is ultimately the customer, not the shareholder who pays the tax.

Why should we expect the shareholders to spend money on social responsibility unless the customer is willing pay for it? The question is what level of tax will each customer pay, to be spent on what kinds of "social responsibility?" 

This is what the FairPay framework is focused on, as outlined in my blog, and in two journal papers co-authored with eminent marketing scholars (one suggesting where digital business is going, and one digging deeper into its human roots).

A new precision in individual consumer power

This is something entirely new -- a new precision in consumer power, to be applied at the individual level for individual ends. We already see growing consumer power in boycotts and social media, but those are very blunt instruments, with little more wisdom than a mob (and generally reactive, not proactive).

When computer-mediated dialogs and AI work with each customer to decide specifically what to offer to them and what price to accept from them, this can become an effective commercial layer of digital democracy about precisely what social responsibilities the business fulfills -- working as a representative* of each customer and their individual values. That is the theme of this post.

Back to the future of human commerce

First, some perspective -- look back at the history of how humans behave as commercial creatures. We naturally think about the norms of commerce as we experience them, but we are locked in the anomalous mindset of recent decades.

Traditionally commerce was dominated by local economies of individuals and small groups who had long-term relationships with those they traded with. It was natural to view value broadly, to consider the human dimension of the value of goods and services, and their impact on the local stakeholders. Traders who failed to consider their stakeholders did not thrive.

Behavioral economics has rediscovered in the past few decades that people are social creatures. They have an inbred desire to cooperate, to value fairness, transparency, reciprocity, and even altruism, and they are swayed by emotion and self-image. They refer to this as homo reciprocans (reciprocating man). That is in contrast to the older narrow conception of classical economics, of homo economicus (economic man), who acts purely in his rational self-interest. Commerce was very communal, and people evolved over many millennia to develop and thrive on the traits for cooperation and trust that supported that.

That direct connection was lost as business scaled to mass production in factories, and mass-marketing in department stores.  Instead of individually negotiated prices, prices were pre-set, take it or leave it. Customers became just numbers, not people. Businesses became alienated from their customers and both lost sight of this dynamic of win-win co-creation.  Short-term profit became decoupled from long-term sustainability, managers optimized what was easy to measure, and stockholders became fixated on this simple zero-sum game of quarterly profits. There have been ups and downs, but the overall trend has been a devolution of the human center of commerce.

But over the past decade or so, modern marketing has realized that there is a longer game of customer journeys, loyalty loops, and recurring revenue (especially subscriptions and memberships) that it is measured by customer lifetime value (CLV), not current-period profit. That longer game enables a business to grow sustainably and become even larger and more profitable.  Digital customer relationships and digital services are enabling and fueling a re-awakening of more traditional business norms, but we have not really understood where it will lead.

The Age of the Customer

Forrester has called this The Age of the Customer (emphasis added):
In this era, digitally-savvy customers would change the rules of business, creating extraordinary opportunity for companies that could adapt, and creating existential threat to those that could not. ...In this new world, companies have struggled to make hard choices and act. It requires leaders to think and act differently – in ways that feel foreign, unfamiliar, and counter-intuitive. And honestly, it is simply hard to do. ...These dynamics will endure as new technologies like artificial intelligence and robotics emerge to challenge core notions of what it means to be a company, what it means to build human capital, and what it means to compete and win.
Businesses like Amazon and Apple and startups like Warby Parker already profit by delighting the customer, and by listening to what the customer values. FairPay shows how this can go much farther, so that businesses can shift their offers to mass-customize them to what each customer values and is willing to pay for.

That shift can undo the negative, zero-sum turn of the last century, and show companies how to profit from more win-win relationships with their customers.  That is where the new leverage is.
  • If customers will pay for it, it can generate profit. 
  • If customers value it, they will pay for it.  
  • If customers value win-win behavior that benefits not only themselves, but their broader desire to be good citizens, they pay for it, it generates profit, and so businesses profit from that.  
That hits the real bottom line, making their stockholders happy.
  • To the extent that happens, there is less need for exhortations to consider secondary bottom lines and ESG (environmental, social, governance) criteria that are hard to manage without direct market incentives.  
  • The genius of the invisible hand will, itself, drive managers to maximize profit by being socially responsible.
FairPay hearkens back to something reminiscent of old-style negotiation, except instead of negotiating a price for a transaction, we negotiate a logic for how generously to price over a series of transactions, and what forms and levels of value the price should cover.  It is a relationship-based social contract.  Much as the invisible hand sets prices to allocate scarcity of supply across a market, FairPay has the effect of an invisible handshake that sets prices to allocate share of wallet along a relationship.

Each consumer votes with their wallet.  As Milton Friedman said, the manager’s responsibility “will be to make as much money as possible while conforming to their basic rules of the society, both those embodied in law and those embodied in ethical custom.” To do that, the manager will seek to demonstrate whatever level of social responsibility the customers are willing to pay for.  The customers will decide how much they are willing to be “taxed,” and what the manager should spend those “taxes” on.  [This can get very specific, at an individual level, as explained in the 8/28/19 update below.] The shareholders will want that, and external political mechanisms will be less needed because market mechanisms will do the job.

Social Responsibility as a Service (SRaaS)

Consider how this constitutes a more or less explicit category of service -- social responsibility service, analogous to customer service.
  • In the case of customer service, business used to sell naked products, at the buyer's risk. Gradually they added guarantees and support call-centers and white glove service -- all for a fee (more or less explicit) and often with a choice of options as to service levels.
  • Social responsibility service (to other stakeholders) can be similarly customized and funded at different levels by customers, in tiers and sectors. Then it becomes just another service the business can offer to customers who will pay for it. Plenty of behavioral economics assures that customers can be enticed to voluntarily pay for services they value.
Thus every business can offer Social Responsibility as a Service, as a companion service to whatever other services they offer. That can make their customers happier and more loyal -- and they can earn a fair profit for doing it. Smart businesses realize that listening to customers is in their own profit-maximizing interest.  We need only exhort both businesses and consumers to focus on more directly effective dialogs about value of all kinds.

FairPay does this by more explicitly structuring each customer's ongoing journeys as a repeated game that builds cooperation on adaptively customizing value propositions that provide that customer the  value they desire at a price both parties agree is fair. It draws on a synergistic combination of elements, each proven individually. It also points to simpler combinations of just some of those elements that can be good enough in many use cases.

>>>>>>For more specifics on just how FairPay does this, see the 
>>>>>>"Sidebar: Pricing, FairPay and Allocation by the Customer" (below).

Reforming capitalism from inside

What we need to do, is not to try to heal capitalism from outside (which no one has a good solution to), but to encourage managers to reform it from inside (thus exploiting the genius of market economics). I refer to this as a reformation because the Protestant Reformation was driven by the realization that what mattered was the relationship between each man and God, with the priesthood as facilitator, not as intermediary. The Capitalist Reformation will be driven by the realization that what matters is the relationship between each customer and each business, with government as facilitator and guardrail, not as intermediary.

So before we throw out the baby of market incentives with the bathwater of perverse incentives, we should see if the baby of reformed capitalism in the 21st Century can learn to walk with social responsibility. I think we will be very happily surprised.

The challenge is that we are still stuck in our old logic.  In an economy dominated by scarcity and uniformity, being responsive to the customer is hard, and done only at the margins.  But as the digital economy gains from automation, abundance, and personalized relationships, being responsive and customizing value propositions gets easier and more essential. Businesses are just beginning to understand the new logic of how to leverage that.

As businesses learn to elicit what each customer values at a fine-grained level, and to seek to deliver it, they will learn to actually profit from social responsibility.  As they do that, we will all benefit from the fairness, altruism, and reciprocity of homo reciprocans, We will awaken their willingness to support Corporate Social Responsibility (CSR) with their own wallets, and to fairly reward the businesses that cooperate with them in that, working as their representatives.*  Friedman’s title will become correct, but just not quite as he understood it: “The Social Responsibility of Business is to Increase its Profits.” The customers will see to directing that properly, using their power of the purse.

Perhaps we should be calling it “Corporate/Customer Social Responsibility.” (CCSR? C2SR?)

==================================================================

SIDEBAR
Pricing, FairPay and Allocation by the Customer

To clarify my points, we need to go back to basics -- pricing. Pricing may seem boring, but it is at the heart of how we allocate resources among stakeholder "actors." The power of pricing calculations to ensure desirable allocations is at the heart of debates over capitalism and socialism. It is also at the heart of FairPay and my points about customer power. FairPay suggests a broad reformation of how businesses relate to their customers, and how we consider all aspects of value, not just social responsibility.

Pricing is where digital changes everything, and that is what FairPay seeks to reform. We are seeing it first for digital services like news and other content. But over time, increasing automation will shift the economics of scarcity for almost everything. Scarcity of materials and labor, and other marginal or variable costs needed to replicate goods and services, was the core of classical economics, but is now becoming a non-issue. The scarcity that remains is increasingly in the human effort to create new services (and new factories and robots and AI) that then run and replicate services with little added cost. Adam Smith's invisible hand works by using price to allocate scarce supply against demand -- but it cannot allocate abundance. That is why we have confusion over what the price of digital information should be, and why we need a new logic for pricing. This new logic is primarily applicable to ongoing relationships, but more and more of commerce is moving from isolated transactions to recurring relationships.

One early and very telling example is the business of news. Most publishers are still stuck in the old logic – to counter the death of scarcity they seek profit by imposing artificial scarcity, locking their news behind a one-size-fits-few paywall that only their most avid readers can afford.  More enlightened publishers (like The Guardian) have learned that readers will voluntarily pay for news (for themselves, as well as for those who do not or cannot not pay) -- just because they value having the quality news available to all. Similarly, creators of all kinds have learned to use crowdfunding services -- and that the seemingly crazy logic of pay-what-you-want can actually be sustaining. These may seem very narrow markets, but most markets have a blend of elements that are costly and not shareable, and elements that are abundant and shareable.

The repeated game of fairness

The new fairness game that we have outlined shows how this new logic may be applied with increased power and controllability, in a way that works for both the business and the customer. Consider how we can change the game for a subscription, from:
Here is our monthly price, take it or leave it.  We hope you will take the risk -- and be satisfied enough that you will continue this game.
to:
We will reduce the risk and let you help decide the fair price after each month’s use -- but we will continue this game (beyond a few trial cycles) only if we agree that you are being reasonably fair.
The logic of the FairPay game is that each customer pays for what that customer values, within limits of fairness that the business can accept. Thus each customer decides what social responsibilities they are willing to pay for. They vote with their wallet, and the business collects those votes as dollars going into their bottom line.

So, with a new logic like this, how can we hack Milton Friedman's concerns about social responsibility?  Consider these examples that address the growing trend toward digital and experience goods that cannot be effectively valued until after they are purchased and used:
  • A digital newspaper lets readers subscribe and decide what to pay after each month of use. It reminds them what they read, what writing those stories cost per reader, and what share of its revenue goes to the reporters and investigative expenses.  It reminds them of how its recent reporting benefited the community and the prizes earned. It lets readers pay bonuses specifically to reporters they wish to support.  (A non-profit Guardian might accept any level of fairness, but a for-profit New York Times might warn a reader who it thinks is being repeatedly unfair that it will shunt them back to a conventional set-price subscription unless they meet higher standards of fairness.)
  • An online retailer of furniture lets established customers pay for items in two stages, first, at-sale, to cover the marginal costs of the items (and perhaps a small profit margin), then, after it has been experienced for a month, with an added bonus that reflects the customer’s perceived value of the purchase, plus the perceived value of the business’s employment, sourcing/curation, and sustainability practices.  (Again, customers it deems to be repeatedly unfair might be shunted back to standard set prices.)
In each of these cases the business has a dialog with customer in which price relates to value received. The customer has co-equal power to define what aspects of value matter.
  • For the newspaper, value is not just how many weeks the subscription was accessible, or how many stories were read, but whether those stories had real value, what costly investigative journalism or analysis was done, how much was paid to valued reporters, what community values were supported, what waste was prevented, and the like. Some of these "social" values might be segregated to be paid for with explicit "bonus" payments to these other stakeholder categories. To the extent customers value those elements by paying for them, that is no longer "taxation without representation" as Friedman claimed. (See operational details for this example.)
  • For the retailer, value is not just the raw utility of an item, but the quality and style of design, the conditions for employees and at supplier factories, support of local and source communities, environmental practices, and the like. Again, these could be identified as "bonus" payments and again, "taxation" voluntarily paid. (See operational details for this example.)
[Update 8/28/19>] Examples of discrete social responsibility offers to customers

This can get richly nuanced, but to clarify how these SRaaS offerings can be made discrete and easy for individual customers to opt in (or not), at whatever level they choose, consider these simple forms of SRaaS offers:
  • Would you be willing to pay an extra $4 for environmentally-friendly, biodegradable packaging and no-fossil-fuel shipping?
  • Matching grant: Would you be willing to pay an extra $1, $5, or $20 (select amount) to fund on-the-job training for ex-coal miners who seek to upgrade their skills to work in our factory in Appalachia, if we match your grant dollar for dollar? [revised 9/3] 
  • Do you want to rank your product search results 1) by price alone, 2) by price weighted by ESG score, or 3) by ESG score alone?
  • Do you want to filter your product search to require an ESG score of greater than 1, 2. or 3 stars?
Just like any other product pricing, packaging and bundling decision, such offers can be put to the customers as a menu of options. A business can start with a few narrow trials with selected segments of customers with a propensity to support social responsibility -- to begin this new kind of cooperation, and then grow from there. (The specifics of such offers and the corresponding usage of funds can be validated to customers with independent impact certifications and metrics, very much as is now being demanded by impact investors.)  [See further update 9/3 on matching funds, below.] 

The invisible handshake -- one-to-one markets for social responsibility

Increasingly, businesses will earn premium profits by catering to customers' desires to support social responsibility. Customers who cannot afford to pay such premiums could be supported by more affluent customers who see that as their duty to support, not only for themselves but for those less fortunate. (Those who could pay but refuse to might be shunted to set-price models -- FairPay can be offered as a revocable privilege.) Some businesses will cater to the segment of recalcitrant customers who refuse to allocate any of their wallet to that kind of social responsibility, but the profit margins for doing so will be smaller.

(Further detail on FairPay is here, including a variety of use cases, and discussion of how and where to start, and how to grow from there.)

Instead of exhorting managers and shareholders to pay out of the customers' wallets for competing social benefits that that the managers have no clear basis to decide among (and perhaps in conflict with their legal fiduciary duty), we should be exhorting customers to pay from their own wallets for the social benefits they want to support.

If we do that, we may solve 80% of the problem, and do it with high market efficiency, leaving just the remaining 20% to be addressed by regulatory protections.

The greatest danger in times of turbulence is not the turbulence, it is to act with yesterday's logic.

 -- Peter Drucker 


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[*UPDATE 8/27/19:] Terminology: agency vs representation

My original use of the term "agent," now replaced by "representative," may have been too strong and loaded with issues, for reasons outlined in the 2017 HBR article, The Error at the Heart of Corporate Leadership. I now use "representative," to make it clear that it is the possibly contingent role as a representative of an interest, whether as agent, fiduciary, or otherwise, often in balance with other interests, that I refer. 

The relevant thrust of my argument is that managers are naturally driven by financial incentives to themselves and to the shareholders they serve (in whatever legal capacity) in the calculus of their decision-making and allocation of resources. The surplus of the revenue they take in, net of costs and reinvestment, goes to the shareholders. The revenue comes from the customers. One can shift from agency theory to entity theory and broader views of roles and constituencies to be served, but the question remains -- what objective function are boards and managers to maximize in each resource allocation decision? I suggest that rather than an undifferentiated mix of interests to be balanced in vaguely defined ways, the best claim to a vote generally goes to the customer (especially when the customers are a broad base of consumers). That argument may be situation dependent, and market forces may to some extent enable the votes of other stakeholder constituencies to be quantified into bottom line terms. But it is usually customers who have by far the clearest bottom line market power with respect to each business -- it is customers that businesses must increasingly listen to. 


Thus it seems both desirable and practical that primacy of the customer in driving a market calculus for resource allocation will be the best way to manage allocations of resources to all forms of social responsibility. My argument is that we need to get far more systematic and granular in getting the customers to vote with their wallets on all of those allocation decisions. That is not at odds with efforts to quantify effects on other stakeholders -- it is supportive of them, in that a customer-driven social value calculus is the most practical driver for the balancing of other social value quantification efforts. We are already moving to customer-driven enterprise -- this just applies that driving force to social responsibility.


This HBR article notes that the key weakness to company/entity-centered governance is "complex relationships and responsibilities; success is difficult to assess." What I suggest here is a new and sensible way to balance those responsibilities and to assess success at the bottom line.


[UPDATE 8/28/19:] Social responsibility down the value chain - B2B2C

While this was written with primary focus on B2C companies, it should be understood that it applies equally to B2B2C. 

B2B business is primarily driven by homo economicus, but the ultimate customer of B2B businesses is usually a customer in a B2C relationship. Consumers want social responsibility down their supply chain, so that implies a corresponding social responsibility chain. B2C businesses will want to be able to demonstrate that social responsibility to their customers, and so their B2B suppliers will need to demonstrate that social responsibility along each step in their chain so they can pass it up the chain to their consumers. Sounds complicated, but not really very different from any supply chain value issue.

[UPDATE 9/3/19:] Matching funds, for new leverage in CSR

An important variation on the above suggestions for customer-funded CSR is to add a "matching funds" feature. To offers to facilitate CSR efforts like this one suggested above...
  • Matching grant: Would you be willing to pay an extra $1, $5, or $20 (select amount) to fund on-the-job training for ex-coal miners who seek to upgrade their skills to work in our factory in Appalachia, if we match your grant dollar for dollar? [as revised 9/3]
...the business could make a matching funds offer: "We will put in $1 for every $1 you put in."

This has two significant benefits:
  1. It explicitly shares in the cost. Instead of putting all of the burden on the customer to fund such efforts (and even possibly taking a profit margin out of that, as suggested above), the business may invest some of its own funds. That would be a "tax" on the shareholders  only to the extent that it is not recouped in higher profit margins, and only for efforts that the customers signal with their wallets that they really care about. (That results in high likelihood that the investment will lead to higher profits as well as greater social welfare, so it is less likely to really be a "tax.")
  2. It motivates the customer to contribute. Matching funds are accepted as effective practice in charitable and political fundraising, and have also been proven to motivate pay what you want business payments (see the Gneezy paper in my Resource Guide). This brings clear business-customer cooperation to directing and funding CSR efforts.
Matching gift programs are widespread for business-employee cooperation, but I am not aware of similar efforts to enable business-customer cooperation in directing and funding CSR. Why not adapt that already proven model to this most important stakeholder?


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More about FairPay

A concise introduction is in Techonomy"Information Wants to be Free; Consumers May Want to Pay" and the broader perspective in The Relationship Economy -- It's All About Valuing Customer Experiences.

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.)