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.)