Wednesday, July 3, 2019

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

[Updated 9/2/19, see notes at end]

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

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

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

The Elements

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

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

(with minor updates, 10/27/19)

A thought experiment about value -- Reisman's Demon

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

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

Foundational Elements

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

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

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

The question of how to measure individual value is complex and multidimensional -- much of it is founded on the fundamental value of fairness in our business relationships. There are questions of value to the customer and to the business, and of broader aspects of value, such as externalities, ESG values, and triple or quadruple bottom lines. There are also questions of fairness in dividing the value surplus (among the direct parties, and along the value chain). [Related to this is "reverse metering" -- considering that value can also flow from the customer to the business, and providing credits accordingly, such as credits for ad attention and data (see 9/2 update comments below).] My demon defines value primarily in terms of the buyer and seller's perceptions, experience, and outcomes, but has awareness of larger aspects of value as well. The FairPay repeated game seeks to do much the same. This largely comes down to fairness -- the idea is that all aspects of value can be internalized by the two parties and used as a basis for pricing whatever aspects of value they agree are fair to consider.

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

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

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

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

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

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

Amplifying Elements

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

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

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

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

(with minor updates, 10/27/19)

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

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

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

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

Climbing the ladder of value

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

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

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

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

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

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

[Update: See much more on platforms in A Platform for Teaching Men to Fish -- "Revenue-as-a-Service" for Non-Profit Impact -- which applies to for profit use as well.]


[Update 8/5/19] Table revisions

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

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

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

[Update 9/2/19] An added element? -- Broad value factors, with "reverse metering." 

I am considering making this a separate element in my table, but unsure to what extent it fits as part of the "Individual value-centered" element, as noted above, and whether to categorize this largely ignored aspect of value as foundational or amplifying. 

FairPay seeks to focus both the business and the customer on all aspects of value that they agree are relevant. This deserves emphasis, and an important aspect of that is that value goes not just from the business to the customer, but often in significant ways from the customer to the business. This can be called "reverse metering" (much the way that electricity generated by a customer is metered to determine credits from the electric utility). Drawing on an older post about journalism as an example, consider how broad value really is, and how far this goes beyond what we think of as the "product:"

From the provider to the consumer, FairPay focuses on the total value of all kinds, as actually delivered to each particular consumer -- the value-in-use for exactly what is consumed and how (what items, how many, how intensely), not only content, membership perks, etc. -- the value of that experience and potentially even the outcomes that result (enjoyment, appreciation, and the results enabled -- did our advice improve your health or your stock market returns?). This can also include "soft" values, such as:
  • service and support
  • participation, listening, and responsiveness (comments, access to the journalists) 
  • events and merchandise
  • the social value of investigative journalism, community services, and good corporate citizenship.
From the consumer to the provider, FairPay considers not just monetary payments (subscription or membership fees, or pay-per-use), but other currencies. Thus it factors in credits (the "reverse meter") for:
  • attention to advertising (including the possibility of customized levels of ad loads) and 
  • personal data that can be used or sold (again with possible customization)
  • the value of user-generated content
  • the value of viral promotion and leads
  • up-sell/cross-sell revenue potential
  • volunteer-provided services to the provider 

More about FairPay

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

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

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

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

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