FairPay: "Better Strategies for Monetizing Digital Offerings" MIT Enterprise Forum 12/1/11

It was very gratifying to present FairPay to an audience of about 100 at last night's MIT Enterprise Forum of NYC panel session on "Better Strategies for Monetizing Digital Offerings: Thinking Out of the Box while Looking across Industry Silos."  (more commentary below...)

Video and slides of FairPay presentation:

 

(If any problem viewing the slides, click the "slideshare" button above)(Links to full session below)

After a nice overview by our moderator Dr. Howard Morgan (Co-Founder and Partner, First Round Capital) we got into the perspectives of a diverse array of panelists.  

• Paul Smurl (Vice President, NYTimes.com) shared insights into the closely watched Digital Subscription paywall strategy at the Times, which has gone even better than they expected to meet the challenge of generating reader revenue without loss of ad traffic--and given a boost to print as well.  
• Betsy Morgan (President, TheBlaze.com, formerly of HuffPost and CBS Digital) noted how they were  monetizing Glen Beck's TV offerings with direct OTT (Over The Top) subscription services, that are already generating $10 per month from 230,000 subscribers.  That may seem small compared to the Fox audience, but when you consider the share to Beck, that gets very interesting.
• Shawn Price (President, Zuora.com) provided insights on what Zuora calls "The Subscription Economy," based on work with over 500 companies.  He noted the power of a flexible platform like Zuora's to adapt in real time with some 100 different control parameters, and how it makes it manageable for content and service providers to apply very advanced and nimble e-commerce strategies.
• I provided a more radical perspective on how we might rethink the whole structure of how we monetize digital offerings, including basic issues of transaction and pricing architecture, to create a new kind of deep real-time dialog with customers about value.  Key themes were
  --the need to take a holistic view of relationships, not just transactions,
  --the power of a simple shift to "Pay as You Exit," an opportunity that has generally been ignored, and
  --the opportunity to apply a new level of detailed market research that is fully integrated with every transaction.

All of the speakers noted how important it was was know your customers and track them in real time, and how some aggregators/distributors (notably Apple) impede that critical task in a way that can ultimately be very limiting to sellers of digital offerings.

I was very pleased with the response to my presentation of FairPay, and to my latest attempts to make it easier to understand.  The challenge is that while FairPay is quite simple in its basic concept, it changes many of our core assumptions about doing business at many levels, and has very deep ramifications in ways that take some thought to fully understand and appreciate.  The discussions and questions on how and where FairPay works indicated that many people found food for thought.

The posted slides may show some of this, and I expect the video should be available soon (to be linked below).  I also plan to adapt this presentation to add better explanations to the Web site and this blog.

My thanks to the other speakers, and to the audience for a very stimulating session.

...And for anyone who wants a really detailed preview of what I suggest are groundbreaking ideas on where the future of digital media business will go (or just needs help getting to sleep), the USPTO published my FairPay patent application yesterday.

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Video (full event, by speaker)
MITEF-NYC event page, with video and slides
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FairPay Presentation

Indie Games Generate $ Millions with Pay What You Want

For those that think there is no real money in Pay What You Want (PWYW) pricing, the growing success of the Humble Indie Bundle suggests otherwise. Their first four promotions have raised over $6.1MM,** with the last one just ending at $2.2MM [now much more**].  It has been reported that the venture behind these offers has raised $4.7MM in VC funding [now more**]. Their model includes payments to the game developers, the distributor, and charities including EFF.*

EFF has posted a nice summary, observing that "While the record labels, movie studios, and video game producers have not figured out a way to compete with free, others have...as the Humble Bundle has shown us, it is possible, with creators and distributors finding new and exciting ways to compete with free. ... when done right – developers, content providers, and even those who provide the business model can successfully compete with free." Additional details are in a Wikipedia entry.

All of this adds to my suggestion that FairPay (which augments PWYW with feedback processes that incentivise buyers to be fair to sellers, as described on the sidebar) can take this from a promotional tool to a mainstream business model for ongoing use.  Indie games and music are a great place to start, since that Long Tail content is where basic PWYW selling is already gaining traction.***

My previous post, How Indies Can Disrupt the Disruptor - A Disruptive Revenue Model for Music and Games, addresses this in more detail -- suggesting how indie distributors can take on iTunes to change the game, starting with the Long Tail, and moving toward the mainstream.

(*The charitable element is also a notable factor in the Humble Indie Bundle, at two levels. One is true charity, in the form of EFF and others. The other is a charity-like feature, in that the structure of the Humble Bundle revenue is for lightweight (and buyer controllable) contributions to the distributor, such that the significant share to the game creator ("developer"), analogous to the artist, musician, etc., provides a social-benefit motivation to pay -- rewarding the creator, and enabling further creation.  See other charity-related posts.)

Updates:-------------

**[9/21/14:  Wikipedia on Humble Indie Bundle reports this as a total of $30MM, in addition to $20 million to charity, as of 8/23/13.  CrunchBase reports funding of $9.2 million. Check there for further updates.] 

***[1/17/12:  For general insight into real uses and experiments see "Pay What You Want -- Still Crazy After All These Years?," and Wikipedia on PWYW.]

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.

The FairPaynomics of Abundance -- an iPad Travel Guides Example

Travel guides on smartphones and tablets (like iPad) present an nice example of some of the richly flexible kinds of pricing behaviors that become feasible with FairPay, the radically adaptive pricing process. I call this FairPaynomics because of the interesting business and behavioral economics issues it creates. One aspect of FairPaynomics is how FairPay can enable nearly unlimited access to content from varied sources, while giving the providers of that content reasonable compensation for the value they provide. The following example suggests the sophistication that advanced uses of FairPay can provide.

A recent article on travel guides for iPads triggered some thoughts on how app stores and e-book vendors could provide new services for buyers, and expand revenues for guide publishers. It points out how guide pricing is a challenge, and how the market is changing from print to mobile. It also noted some limited moves toward slicing and dicing guide content with PDF chapters.

FairPay puts much of the pricing process in the hands of users, and develops a FairPay reputation to select for those who generally pay at fair levels and can be trusted to use discretion in setting prices based on the value received--after trying the product. (A brief explanation is on the sidebar to the right, and fuller explanations are on the FairPay site.)

The challenge in pricing travel guides is that different readers get very different levels of value, so set prices may be too high for some potential users and too low for others. What if I could have access to many guides, and pay based on the use I made of them? It is impractical for sellers to set prices on such a flexible basis, but relatively easy for me to do so (on an intuitive basis, aided with reference to detailed usage data).

Consider the range of situations for using a guide. On some trips I might spend a week or two in one large city, acting as my own guide, and want to make extensive use of one, two, or more guide books to plan excursions, consult while sightseeing, select hotels and restaurants, etc. On a return trip to the same city some years later, I might not need nearly as much help. On a far-away small-ship cruise, I might stay a few days in two terminus cities, plus have day stops in half a dozen small towns in as many as five or six countries along the way (some with guided tours, some on my own). On that cruise trip I might want limited use of one or two guides for each of the countries visited, even though some small ports might have little or no coverage.

Paying a set price for each guide as usually packaged creates significant dis-economies. For my multi-country cruise, buying even a single set of guides to all cities/countries visited is a poor value proposition (well over $100), so I might not buy any. For the single-city first visit, paying maybe $10-40 for one or two guides is reasonable, even a bargain. I probably end up paying less than I would be willing to pay in both extremes. I might be willing to pay more than the set price of the guides for intensive use, and I would pay something more than zero for light use of many guides. Under conventional pricing, I suffer and the publisher(s) suffer.

So how is FaiPay better? Obviously it would be difficult for a publisher or even a full-service bookseller like Amazon or B&N to set multi-factor prices that worked for such extremes of usage. The beauty of FairPay is that they don't have to -- I would set the price. Knowing the list price of guidebooks, I might feel that I am willing to spend $20-40 per week, if I am using my guide(s) heavily, and less if not. I might go higher if covering a lot of cities, and lower if just in one place, and higher if the places are covered in depth, less for small towns with little or no coverage. If I used multiple guides, I would want to divide my payment based on which I used most and which were most valuable (such as tipping me off to good "finds").

How can this work? I would not mind if the sellers had meters that recorded my usage, but I would be put off by knowing that there are set charges per page or minute of viewing, with a meter going ka-ching. I would be OK with such metrics of usage as suggestive of what I should pay, but not as a ticking meter of set charges. With FairPay, I could have it my way.

Amazon or B&N (or Apple or Sony, or whoever) could administer the store, collect the metered usage data, and let me pay as I see fit. As long as I paid at reasonable levels (considering my usage), they would continue to let me get more guides (for my next trips) on a FairPay basis. If I did not pay well, they would cut me off and it would be back to the old way. For my return trip to the big city, they might offer use of an updated guide, and expect only modest payment, resulting in another win for both me and the sellers.

Good for me, some work for Amazon or whoever, but do-able -- but is it good for the publishers? Overall, they might do much better. I would have only bought one or two guides conventionally, for $10-40, so under my FairPay allocation, I might pay $20-40 to those one or two publishers, and so the second might have a sale he would not have gotten. But I would have used other guides in those places as well, and paid something to those publishers, as well. I also would have used guides at various cities on the cruise trip, and paid for the moderate level of usage that was foregone because I did not want to buy guides I would use only lightly (maybe paying $20-30 for those as well). Also, I would feel much better about being able to use and pay for guides accessed my way, not the way the publisher pre-packages them into "titles"that don't fit me, and so would be willing to pay at higher levels. The publisher and the store would get more from me, and I would be much happier about the fairness of the value exchange.

Such FairPay offers might be structured as packages for specific trips, with pricing set by the user soon after the trip. Frequent travelers would place high value on the flexibility this offers, and be careful to pay at good rates to retain the privilege of doing the same for future trips. Occasional travelers, and those on tight budgets might pay at lower rates, but without Fairpay, they might otherwise not buy guides at all. (To prevent low-paying buyers from hopping from seller to seller, the sellers might share their reputation data, just as they do with their credit rating data.)

The bottom line nearly ideal Internet economics. I get access to all the guides I feel I have use for (exploiting their near-zero marginal cost), and pay based on how I use them (based mostly on my intuitive allocation of value, grounded in the reality of usage data). The publisher can sell to anyone who has use for the product, and get revenue commensurate with that use. Doing that with conventional pricing models would be impractical, and the ka-ching of a ticking usage meter would put a damper on the kind of casual use that, with FairPay, might result in added revenue (after the fact, when the value was known). This may sound utopian, but the Internet enables many utopian capabilities. Think about it. It can work.

FairPay for the App Store -- A Radical Pricing Process for Higher Revenue

FairPay, a radically new spin on Pay What You Want pricing (PWYW), could transform pricing for apps. It offers a way to let developers break through the "penny gap" to get a fair price, while giving buyers a high degree of freedom to set their own price.

Apps are becoming a huge business, but the vast majority of them are free. (A recent analysis suggests 81% of iPhone app downloads by volume are free, even though other reports indicate that only about 28% are free by title. This effect has been described as the "penny-gap" -- products go like hotcakes when the price is zero, but demand drops hugely when the price increases to just 1 cent. This makes price setting a major dilemma for app developers. (One attempt to solve this software pricing dilemma was "shareware," in which buyers could Pay-If-You-Want, at a suggested price, but that has proven only marginally successful.)

FairPay can provide a way to bridge this penny gap, using a radically new variation on Pay What You Want, one that still limits buyer risk, but strongly encourages fair prices to sellers. As described elsewhere on this blog, and on the Web, this new variation, FairPay (short for Fair Pay What You Want), uses Internet feedback on what buyers pay, in order to develop a reputation for fairness. The seller (or multiple sellers) then use this FairPay reputation feedback to decide whether to extend further offers to a user based on how fairly he pays. Thus FairPay does not just rely on innate buyer fairness, but looks over their shoulder to help give that sense of fairness real teeth.

(This process also applies to other digital content, as explained elsewhere. The case of e-Books is especially similar to this example of apps. That should be fairly apparent, but I expect to do a blog post more specific to e-books in the near future.)

This process works best with an ongoing buyer-seller relationship, so in the context of an app store, FairPay would be best implemented by the store operator (Apple or Google, or whoever). That way the FairPay reputation feedback is collected across all purchases by that buyer. This enables a dynamically adaptive cycle of offers, prices, feedback, and further offers that rewards those who pay fairly, and cuts off those who do not. I suggest that app store operators should try this (and I would be happy to assist in such an effort).

Such a FairPay pricing process for an app store can be quite simple.

• The store offers to let buyers try a small number of FairPay-eligible apps on a FairPay basis, with the understanding that the buyer can try the apps for a time, see if they like them, and then set whatever price they consider fair (post-sale PWYW).
• The full FairPay process would be explained in detail up front, so buyers understand that future offers will depend on what reputation they develop for paying fairly. Their alternative will be to pay pre-set prices for future app purchases. A suggested price for each app might be provided for guidance.
• The buyer tries the apps, then sets prices, and can indicate why they paid what they did. For example a buyer might explain that they were disappointed in a product, if that is why they decided to pay little or nothing for it. (Of course they can also say the love it, and elect to pay especially well.)
• The store then assesses the prices paid, and the reasons, and decides whether to offer that buyer more items on the same FairPay basis. Criteria might include consideration of app-specific suggested prices set by the developer, and the prices set by other FairPay buyers.
• Obviously those who pay well will get a continuing stream of further FairPay offers (as long as they continue to pay reasonably well). Those who pay well for some, and explain why not for others, might also get a few further offers (effectively on a probationary basis), until it is determined by the store that they either do or do not pay fairly in general.
• Those judged by the store to generally not pay at an acceptable level can be cut off from further FairPay offers, and restricted to conventional, set-price prepaid sales (at least for some time, possibly extending a second chance to try FairPay sometime in the future).
• The cycle continues, based on these evolving FairPay reputations. The longer this process runs, the more meaningful the FairPay fairness reputations of the buyers, and the better able the store and developers are to manage revenue and risk, by controlling what offers are made to which buyers.

Presumably the store would implement and manage this process as a platform service, enabling developers to opt in to offer their apps on FairPay terms, typically in combination with the alternative of conventional pre-set prices. Developers might set suggested target prices and other evaluation parameters, and could change those parameters or opt-out, depending on results.

The result is that FairPay can be a win-win solution for both the developers/stores and for the consumers:

• Buyers will feel more respected and empowered by the added trust and flexibility.
• Some will pay less than the standard going rate, but some will pay more.
• Many who might not make a conventional paid purchase (because of the penny gap) might be willing to pay something reasonable for a FairPay purchase, once they can see that they have gotten a useful app -- the penny gap is smoothed over, and the developer and store get more revenue.
• Developers need not feel they must make their apps free in order to attract buyers (since FairPay gives a try-before-you-set-the-price option).
• The store can (with inputs from the developers) individually and dynamically tune the details of the offers and the process to encourage good payment levels, and to send free-riders back into the hard "pay wall" of the conventional pre-set price.