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.

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