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.)

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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.