Wednesday, March 30, 2011

FairPay Process Dynamics -- a Big Picture Diagram

[Further Diagrams and Process Explanation are in a previous post.]

In the continuing quest to explain the radical ideas of the FairPay pricing process, here is a simpler and higher level view, one that gets to the heart of the process dialectic:
  • FP offers are gated by the seller, and restricted in value and duration, to limit seller risk
  • The buyer accepts an offer, buys, and uses a product/service
  • The buyer is then entirely free to set a "fair" price ("Fair Pay What You Want")
  • The seller tracks the price set by the buyer
  • The seller decides if the price is acceptably "fair"
  • -- If so, the seller makes further FP offers
  • -- If not, the FP process ends, and the buyer is only offered conventional fixed-price sales.
Unlike the asymmetric buyer-side power of conventional Pay What You Want offers, and the unfairness that generally results, the seller has a complementary power to balance that.  The buyer knows up-front that FairPay offers are a privilege, and if he does not set the price reasonably, that privilege will end.

The core balance of forces is seen in the dialectic of the two arrows:
  • Price it Backward reflects the buyer's power and privilege of setting the price after he knows what the product was actually worth to him (unlike the conventional case where he risks buyer's remorse)
  • Extend it Forward reflects the seller's power to gate the FP offers, and to limit them as a privilege granted only to those who set prices fairly.

This process is participative in that the buyer has real say in the pricing, but the seller still gets to limit his risk.  This participative process ensures that both parties continue only if they agree that the prices are fair.  The longer this continues, the closer the prices get to an ideal win-win value exchange.

Thus FairPay realizes the economic ideal of individually differentiated prices that correspond to the utility and price sensitivity of each buyer in a way that avoids the feeling of unfair "discrimination." Price discrimination is a problem of roles and perception -- there is nothing inherently wrong about price discrimination (it is beneficial to the general welfare) -- if the buyer sets the price, the "discrimination" is inherently acceptable.

This participative nature is what gives FairPay real power to enable a company to build a deep relationship with its customers, to achieve high loyalty and sustainable competitive advantage.

With this basic perspective, please see more details of how the process works, and how it integrates with conventional pricing, in my recent blog post with additional diagrams, such as this one:


  More Diagrams and Process Explanation...

Wednesday, March 16, 2011

Reinventing Subscription Platforms With FairPay -- for Apple, Google, and others...

In the emerging battle of subscription platforms between the Apple iTunes App Store, Google One Pass, and others, the radically new FairPay pricing process offers a better way to play the game, one that benefits the platform provider, the seller, and the buyer in new ways.

As widely reported, Apple has the dominant position, and is using that power to pressure sellers, and claims to be making things good for buyers.  Google is seeking to be more seller-friendly, and to allow more freedom, which might ultimately be better for buyers as well. The larger issues relating to this battle promise to help shape how digital content is sold, and how a major portion of our economy evolves.
  • Subscriptions are a critical battleground for competing platforms and business models, one that could set the ground-rules for monetizing digital content and services at the broadest level.  
  • Subscriptions get at the heart of ongoing customer relationships, and provide an aggregation structure that works for a broad swath of content and services.
  • Subscriptions relate closely to the major pricing alternatives of free and freemium.
FairPay is particularly relevant to subscription businesses, especially those based on cross-vendor subscription platforms (such as those offered by Apple and Google and others).

FairPay is based on some very simple principles, with the idea that what is needed in a revenue model, is not to choose the right price, but to create an adaptive pricing process.
  1. Let the buyer set any price he considers fair after the sale (Pay What You Think Fair, post-sale).
  2. Let the seller (or a collective of sellers) track that price and use that information to determine whether to make further offers to that buyer in the future.
Instead of a fixed price, this process generates a cooperative and adaptive series of pricing actions, each based on feedback on how fairly the buyer sets his prices. Using this buyer reputation enables sellers to go beyond freemium to offer adaptive hybrids of free and paid service.  FairPay can be used as a complement and enhancement to conventional fixed-price subscription pay walls: Those who pay fairly, rise above the pay wall -- those who do not, must face it. (A diagram of core steps in this process is in a previous post.)

In the context of a subscription, this process unfolds on a (more or less) month-to-month basis:
  • As an alternative to the fixed pay wall, a new user can be offered a trial month of unlimited use of a basic class of service, on the basis that at the end of the month they will set a price for what they used, on a Pay What You Think Fair basis.
  • The buyer will be told up-front that renewals for additional months will depend on whether the price they set is deemed fair by the seller.
  • As the process continues after initial use, buyers will be asked to set their price, and could be given usage reports to remind them of what they used, and how that compares in quantity and value to typical subscribers. 
  • The seller can frame the offers and the pricing requests with background on standard set prices, suggested prices, and typical FairPay prices actually set by other buyers, all with respect to the types and volumes of usage by the consumer (such as basic and premium tiers).
  • Buyers can be encouraged to give reasons  for why the chose to price as they did, including low or high usage, low or high quality, low or high value realized, economic circumstances (student, unemployed, retired, business use), etc. (all or mostly multiple choice, for automated scoring).
  • As long as the buyer sets prices that seem reasonable considering all these factors, the seller offers FairPay renewals, and the buyer enjoys the freedom of the FairPay Zone.  
  • For those that fail to pay acceptably, it is back to the pay wall (at least for a time, possibly to be given another chance in the future).
  • As this continues, each buyer establishes a FairPay Reputation that characterizes how well and fairly they pay, and whether they do so consistently or erratically.
  • Based on this FairPay Reputation, the seller can upgrade or downgrade their subscription offers to include more or less premium tiers of content or service, and added perks.
  • At the same time the buyer learns both the value of the service, and the expectations for fair pricing.
  • As buyers establish good FairPay Reputations, the seller can extend more FairPay "credit" to include longer periods between pricing, and more value that can be enjoyed before it must be priced.
FairPay takes conventional approaches to subscription pricing and stands them on their head.
  • The buyer, not the seller, sets prices (for himself, as a market segment of one). 
  • The seller gates the offers to specific buyers, and thus manages the value at risk, at any given time, to each buyer.
  • Pay What You Think Fair largely eliminates risks of buyer remorse.
  • Price it Backward (after usage) further reduces risks of buyer remorse.
  • Buyer price-setting accommodates a wide range of price sensitivities to ensure that anyone who gets reasonable value from a product/service can afford to buy it.
  • Sellers need not cut off potential buyers (who may not appreciate the potential value), only buyers who have proven to not value the product (as realized) at an acceptable level. 
  • The impossible task of setting a price that is "right" for all is replaced by the manageable task of understanding specific buyers and their sensitivities through a structured dialog.
Given its roots in Pay What You Want, it may take some thinking to appreciate how FairPay can not only result in acceptable prices, but actual profit maximization, and do this with needed simplicity.  Some deeper insight into this is provided in my previous post, Cutting the Gordian Knot of Price Setting: FairPay, Pay Walls, Hurdles, and Simplicity.

FairPay has even more power in the context of a cross-vendor subscription platform:
  • FairPay Reputations for individual buyers can be tracked and applied across sellers.
  • Sellers can maintain control of offer terms and gating, but manage this better based on a shared FairPay Reputation database.
  • Sellers encountering a new buyer (to them) can see if the buyer has already developed a good or bad FairPay Reputation in relationships with other sellers, and frame their offers accordingly.
  • Buyers know that their FairPay Reputation is a valuable asset, that enables them to get more and better offers, and that compromising that Reputation can have real consequences, by limiting future offers from other sellers
  • The FairPay Reputation database becomes a valuable asset to the platform provider, attracting sellers, and creating a significant barrier to competitors. This can work much like a credit rating database.
  • Consumer privacy can be protected by opt-in provisions, and by limiting what data individual sellers can see from other sellers (including the option of none at all other than a simple rating or go/no-go indicator).  
Of course, FairPay can be implemented by a single seller, for use just with their own subscriptions (as long as the platform does not prohibit that, as Apple seems to, but Google does not).  But the power of a common platform and a shared FairPay Reputation database greatly expand on that.

At both the marketplace platform and seller levels, FairPay creates a whole new way to achieve and manage a nearly optimal exchange of value.  FairPay thrives on:
  • Ongoing buyer-seller relationships, as opposed to isolated one-purchase stands.
  • Aggregation of items in subscription or other bulk purchase contexts.
  • Rich dialog on product/service value (as it is realized by the buyer, and with respect to the costs incurred by the seller).
  • Building a knowledge base on buyer FairPay Reputations (with full consideration to buyer needs, values, and circumstances).
FairPay processes and platform services can begin with relatively simple structures and criteria, to accommodate initial usage.  As platforms, sellers, and buyers gain experience and familiarity with how the process works, they can evolve toward increasing layers of nuance and sophistication in:
  • How offers are managed and framed to users. 
  • How prices are set, explained, and tracked.
  • How FairPay Reputations are determined.
  • Doing all of this with full consideration of all relevant factors and circumstances.
Additional background on the general concepts of FairPay, its grounding in behavioral economics, and its application in various business contexts is provided at the FairPay Web site, and in the many other postings on this blog.

FairPay Pricing -- Some Process Diagrams

[See a simpler, big picture view in more recent 11/15/16 diagram post]

Here are some diagrams (work in progress) that seek to clarify how the FairPay Pricing process works. This first chart shows the core process:

  • Beginning at the lower left, a potential buyer is first presented with a FairPay Offer from a potential seller, subject to basic qualification criteria.  The initial offer is for basic services, as the buyer and seller get to know one another.
  • The buyer can accept the FairPay offer, with the understanding that it is on the basis of Pay What You Think Fair (= Fair Pay What You Want), with the price to be determined after initial use.  (The seller might provide suggested or reference prices, but those serve only as non-binding guidance.)
  • The buyer tries the product/service, and learns its actual value to him at that time.
  • The buyer is then reminded to set his FairPay price for that transaction -- to "Price it Backward" -- and invited to give any explanation that might be relevant (preferably in multiple choice form). The seller might include a report on usage and suggest an individualized value-based price, to help frame an anchor price.
  • The seller tracks that price and any explanation, and relates it to any prior history for that buyer to determine a FairPay Reputation for the seller.
  • Based on that price and the FairPay Reputation, the seller decides whether to make further offers (now or in the future).  This can be done at various levels of granularity -- for example, in a simple two product tier case:
    • If the price is considered Low-Fair, basic offers are continued. 
    • If the price is considered High-Fair, offers are continued, and even better premium offers might be extended (including higher value products/services, more time to try before pricing, etc.).  Use of a premium tier gives added incentive for the buyer to pay the maximum he thinks fair.
    • If the price is considered Un-Fair, the FairPay privileges are revoked, and the buyer goes back to the conventional pay wall (at least for a time).  That gives the buyer an incentive to be at least minimally fair. (Note that such downgrades can be handled gently, such as with a probationary period in which the customer is warned that more favorable pricing is needed to maintain the FairPay privilege.)
This process is generally best applied in combination with conventional fixed pricing (as with a pay wall).  That gives a clear alternative, and clear consequences for not paying at a level the seller can consider to be fair.  It establishes a clear reference price to use as a starting point for FairPay pricing considerations (it need not be taken as a minimum, since there may often be good reasons to pay less).  The conventional pricing remains a real alternative for any buyers for whom the FairPay process is ill-suited or unappealing.  Such a combined process is shown below.

As described elsewhere, this simple approach can take on many forms, and provide great amounts of flexibility and adaptability. (And of course good marketing communications skills should be applied to framing the operation of this choice architecture in the most customer-friendly light.)

The diagrams below seek to look at the bigger picture.  First we start with a simple conventional "soft" pay wall, with limited free product, and a fixed pay wall for usage beyond that (such as for a newpaper subscription).  As shown, there might be multiple tiers of services, with a higher fixed price for the higher tier:

Then we add a FairPay Zone above that:

Here we hide the details of the FairPay processes, and simply show it as a fuzzy FairPay Zone, with prices running along a spectrum.  The idea is that there is no longer a fixed pay wall with fixed prices, but a flexible spectrum of prices vs. products/services, that adapts to whatever the buyer thinks to be long as the seller accepts that as fair.

Presumably, once a buyer is invited into the FairPay Zone, he will want to retain the privileges that go with that, and will seek to keep the seller satisfied, so that privilege is not revoked.  (And when this is not the case, the extent of abuse can be limited.)  This balance of forces increasingly converges over time to enable the seller to obtain the maximum price that each participating buyer thinks fair, and thus to maximize revenue over the entire addressable market.

Tuesday, March 15, 2011

Cutting the Gordian Knot of Price Setting: FairPay, Pay Walls, Hurdles, and Simplicity

Pricing is the central conundrum of the digital media business. Consumers hate to pay, or even think about paying, so content providers need to make it simple -- but simple does not work well. This post explains how the new FairPay process solves the problem. (Let's consider a content subscription Web site such as a newspaper or magazine, or a music or video service, but this applies broadly.)

The Dilemma

Conventional pay walls face the dilemma that they put a hurdle in front of sales. Price too high and many potential buyers will simply turn away; price too low, and much potential revenue is left on the table. This is illustrated in The Long Tail of Price Sensitivity (see earlier post), using the figure shown here.

Ranking buyers in order of price sensitivity, some would be willing to pay more than the set price, and many would only pay less. The green box represents the realized revenue. All who buy pay the fixed price, leaving the red excess on the table, and those who turn away would be willing to contribute the amber revenue. Pick your poison -- you either price too low or too high for many buyers. There is no win-win, only bad or worse.

Keep it simple, and you are left with that dilemma. Add refinements such as tiers of premium content or tiers by usage volume or other segmentation by market, and you add complication, and still have a step function that runs well below the sensitivity curve.

Real simplicity?

FairPay may seem more complicated, but I suggest that complication can be largely hidden from the customer. Yes, customers are forced to think about pricing more than once, but is that such a problem? Don't you think about pricing every time you eat in a restaurant and leave a tip?

With a simple pay wall, customers must think about prices when they first hit the pay wall. The hope is they will pass through it, go onto an auto-renew subscription, and never think about it again (while the money just rolls in). That will be the case for some, but others will balk. Either way, the Procrustean pay wall will cut off a huge portion of the potential revenue (whether the red head or the amber foot). One size just does not fit all. This simplicity is very costly to the seller -- and a turn-off to many buyers.

As for those who do forget about their subscription price, and just renew forever, is that really such a windfall? Those who do not think about their continuing payments are those who are not very price sensitive to begin with -- and so they are just the ones who might be persuaded to pay more than the fixed rate under Fairpay.  Maybe they are the heavy users, who know they are getting more than fair value.  So maybe a fixed-rate pay wall is their windfall, not yours...

Is FairPay really more complicated or more of a hurdle? FairPay is "Fair Pay What You Want", and at heart, pay what you want is almost as buyer friendly as free. FairPay costs only what the buyer thinks fair -- what is so complex about that? It is not rocket science, but gut intuition, guided by some conventions. The threshold for seller acceptance can be soft enough to remove all but a minimum of anxiety (as with tipping) -- and once buyers establish a reputation, price setting actions can be infrequent and easy, and left on autopilot except as change is warranted.  (Sure free is even more buyer friendly, but we are all adults here.)

Simple, fair ...and profitable

As to the apparent simplicity of auto-renewing subscriptions, FairPay can hide a huge amount of complexity, because it is buyer-driven and intuitive. The buyer can set a price that naturally reflects his needs, his usage, his valuation of the product and of the relationship, and his ability to pay -- all with unlimited nuance and adaptation to current circumstance, and with hardly a thought. Fully evaluating all that richness on the seller side (as to fairness) will take sophisticated decision rules, but the seller can begin with a simple, forgiving, fairness model to get close to true sensitivity, and later refine it to get even closer. This is just another aspect of customer relationship management, one that gets to the heart of the value exchange.  Isn't it just this kind of customer relationship management that modern businesses should be seeking to cultivate?

The buyer finds a new kind of freedom, almost as much as free or pay what you want. He no longer needs to wonder how much he will use and how much he will value it. That can be determined later, after he knows exactly what he got. If he under-prices, the seller may be forgiving up to a point, and the worst that happens is he is back at the pay wall. There is no fear of buyer remorse to stop him from using a product he thinks he might value.  ...And the buyer and seller learn how to work together to find the maximum desirable and fair value exchange.

Monday, March 14, 2011

How Do You Explain Something That's Never Existed Before?

This is one of my favorite images, and largely speaks for itself.  So you can stop here (all else is commentary).

Some general commentary on where this came from and the challenges it alludes to are on my other blog.

More specific to FairPay, I came back to this image while struggling to explain the FairPay pricing process and why it matters.

Do you start with the problem of pricing for digital media?  ... with the problems of free and freemium pricing models?  ...with Pay What You Want?  ...with the problems of pricing before you know what you bought and the benefits of "Price it Backward?"  ...with the idea that pricing should be a process of dialog, not a single number?  ...with the idea of tracking prices through Internet feedback?  ...with The Long Tail of Price Sensitivity?

All of these are important (and many have been subject of posts on this blog), but none of them seems to get the whole idea across.

Of course cave men never had to make an elevator pitch (or did they?).

This is from the October 1981 announcement of the Xerox Star workstation, the productized version of the Alto, the very first computer with a WIMP (Window, Icon, Menu, Pointing device) Graphical User Interface.  (To anyone who has the full advertisement this was clipped from, I would love to have a better, more complete copy.)
[Image to text:]
"How do you explain something that's never existed before? ... He had a similar problem"
(Caveman to cavemen explaining the wheel.)