Pay What You Want -- Still Crazy After All These Years?

Pay What You Want (PWYW) pricing has gotten some attention in the past few years, but most people still view it as naively idealistic, only suited to very special situations. However, a growing body of research and actual usage is suggesting that it has much more potential value than most businesses realize, in a wide range of situations very different from that of Radiohead or a museum.

The Freakonomics Blog has paid some attention to this, and the greatest publicity for PWYW since Radiohead has come from the special PWYW preview offer for the Freakonomics movie.

PWYW is of particular interest to me because the FairPay pricing process described on this blog is a radical enhancement of PWYW that adds tracking and consequences to encourage buyers to pay fairly over an extended series of transactions. This encourages what might more accurately be called Pay What You Think Fair, to produce much better revenue and profitability. As described elsewhere on this blog and the companion Web site, this model offers many of the advantages of Freemium models, but in a more powerful, individualized, and dynamically adaptable form.
...But the point of this post is that plain vanilla PWYW, alone, is highly underrated.

To help make that point, and to encourage research into PWYW, FairPay, and other innovative pricing models, I have posted a Resource Guide to Pricing - Annotated links and references as a survey of this emerging body of exciting research.

I suggest that a whole new era in pricing models is just beginning, spurred by the capabilities of the Internet. A nice summary of some of these directions is in the book "Smart Pricing" by Raju and Zhang of the Wharton School, which has illuminating chapters on PWYW and many other innovative models. Two other notable books on pricing are also listed.

More specific to PWYW are some eight research papers published in the last two years, all of which find it to be quite effective in a range of situations, explaining a number of reasons why people actually chose to pay, and to pay reasonably well, even when they do not have to. One (the Gneezy paper) also looks at PWYW combined with a share of proceeds to charity, which was found to be particularly effective (and subject of an article on the Discover Magazine blog). Another (the Regner paper) focuses on a very interesting online indie music distributor with a PWYW model (combining a try-before-you-buy feature and a high revenue share with artists, both seen as enhancing payment levels).

While many of these papers are theoretical and written for academics, I suggest that business people would do well to give them a look (skipping over the heavy parts, and with just reasonable caution that many of these models and experiments are simplified).

I welcome feedback on this resource guide, and suggestions for additions -- it is a work in progress.

Also sought are researchers interested in doing studies of Fairpay.

Note to searchers: PWYW is also known as Pay As You Want (PAYW), Pay What You Wish, Pay What You Like (PWYL), Pay As You Wish, Pay As You Like (PAYL).

(Revised 10/6/10)
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[8/29/11 update:  The Wikipedia article on PWYW also has useful information, including links to articles on some notable real uses of PWYW.]

Business Model Generation with a new spin: FairPay Revenue Models

The radically new FairPay pricing process is particularly relevant to the continuing dialog suggested by "Business Model Generation," the recent book by Osterwalder and Pigneur. The book is aptly self-described as "a handbook for visionaries, game changers, and challengers striving to defy outmoded business models and design tomorrow’s enterprises." That is also the focus of the book's companion Web hub for ongoing discussion and development.

Very much in that spirit, FairPay is a radically new kind of pricing process that combines the flexibility and participation offered to buyers by "Pay What You Want" (PWYW), but with the hook of consequences that make it fair to sellers. It works where there is a subscription or other ongoing relationship of continuing sales, by tracking how fairly each individual buyer pays over a series of transactons. FairPay is particularly well suited to the Internet and digital media, for which "outmoded business models" are loudly crashing and burning, and for which it is all too clear that new designs are urgently needed. Fairpay is described at the FairPay Web site and on this blog. This post seeks to frame the FairPay concept in the context of The Business Model Canvas that underpins that book.

In fact, the adaptive and dynamic nature of FairPay is itself a process for generating the details of business models (because it can take on the characteristics of many different models), and thus can help bake this idea of business model generation into core business processes. Given this deep and broad impact, I suggest that FairPay offers a new business model "Pattern."

In terms of the Canvas and its Building Blocks, FairPay is clearly most central to the Revenue Streams block. Key features of FairPay are:

• FairPay lets you (the buyer) Pay What You Think Fair, and do so after trying the item -- and is thus very fair and appealing to buyers.
• Sellers track feedback on each buyer’s pricing to establish a FairPay pricing reputation for that buyer, and use that reputation to decide whether to make further offers, and thus manage their risk of being treated unfairly.
• This dynamic makes FairPay fair to sellers because it lets them manage their risk of unfair prices -- and the cycle of offer=>price=>feedback=>offer creates consequences for buyers that motivates them to pay fairly.

FairPay solves the conundrum of pricing, by treating pricing as a process, not an endpoint. The overall result is more sales, at more fair prices, yielding much happier buyers and sellers, and a more effective economy at large.

Thus, in regard to the Revenue Streams block, FairPay is an entirely new kind of Dynamic Pricing model with a uniquely adaptive cycle of buyer and seller controls (the buyer sets the price; the seller makes or withholds the offers). This gives it the flexibility to selectively take on attributes similar to all of the kinds of fixed pricing models listed (list price, feature dependent, customer segment dependent, volume dependent, and many others), and for most or all of the revenue types listed (asset sale, usage fee, subscription fee, licensing, and many others). These variations are emergent from the dialog of

• how the seller frames the offer--and the criteria by which he will judge price fairness, and
• how the buyer sets the price--and explains his rationale for why he considers that to be fair.

Thus FairPay offers an open-ended framework that can be adapted to almost any kind of pricing metrics and behavior desired.

This then carries through to other Building Blocks of the Business Model Canvas, with some highlights as follows:

• Customer Segments: The dynamically adaptive nature of FairPay enables pricing to be individually tuned to "customer segments of one" in advanced uses, or in simpler versions that are framed to mass markets, niche markets, arbitrarily segmented or diversified markets, and to adapt to multi-sided platforms (such as individually varying mixes of paid vs. ad-supported).
• Customer Relationships: This dynamic segmentation is intimately tied to well-managed, ongoing relationships driven by this cycle of offers, offer framing, pricing, and price-related feedback. FairPay encourages and builds on the movement toward "relationship marketing" and the Cluetrain principles of "markets as conversations."
• Channels: The emphasis on pricing processes as relationships feeds back into nearly all aspects of channels, with strong impact on a the touch points of awareness, evaluation, purchase, delivery, and after-sales.
• Value Propositions: The central issue of fairness links directly to the value proposition. The heart of a well-executed FairPay pricing process is the ability of the seller to highlight the important aspects of the value proposition being offered, and of the buyer to price in accord with how the buyer perceives that value proposition, in terms of any and all dimensions of value (the "aggregation, or bundle, of benefits") that either party considers relevant.
• Cost Structure: The FairPay revenue streams naturally link to the cost structure, and do so in a way that is more dynamic and adaptively-driven than conventional revenue processes. Buyer fairness would be defined by both value and cost considerations, and the dialog cycles can be framed to ensure that costs are fairly reflected in considering value promised and delivered. FairPay can be expected to be particularly well suited to Value Driven businesses, and those where Variable Costs are low (and those with Economies of Scale and Scope).
• Key Activities, Key Resources, and Key Partners: The FairPay processes feed back to signal what products should be produced and offered, in what form. This is much the case with any pricing process (as how economics matches supply with demand), but the uniquely dynamic and adaptive nature of FairPay processes can enable new levels of adaptation back into the production side. In extreme cases of mass-customization, FairPay feedback can be applied directly, to dynamically shape just what product and/or service is offered to individual buyers, and to the aggregate of buyers and potential buyers.

So, as suggested, FairPay processes offer not only a new and better way to do pricing in many contexts, but one that inherently links to all other business processes in a way that makes doing business a far more flexible and generative process.

The way to generate a business model in the Internet age is for the business to be one that dynamically and adaptively generates its own right model, a model that optimizes value creation for both seller and buyer, for each relationship as it evolves.