Podcast: FairPay as a New Logic for a More Human Economics - a Wide-Ranging Conversation

A podcast of a very wide-ranging interview of me by Jeff Saperstein is now online. Jeff nicely steered our conversation to briefly highlight not only the basic ideas of FairPay and how it can change business-to-consumer relationships, but also how this bears on many broad issues of current concern about how market capitalism works for people -- as customers, workers, and citizens.

(Jeff is co-author of Interconnected Individuals and a companion Web site that hosts a series of podcasts. He is a career coach with a background in communications and marketing and a focus on values. Our discussion was on 4/22/19, and we covered a lot in 38 minutes!)

Here is a sampling of what we covered ...from the basics:

There is growing unease with how market capitalism is failing society and workers.  FairPay begins with a focus on unrecognized issues in how conventional economics no longer works for digital content and services. That leads to new perspectives on business more generally.

The invisible hand flails: "information wants to be free," but it also "wants to be expensive." Current pricing models for content -- all you can eat subscriptions -- increasingly fail to serve all but the most voracious consumers. Digital services companies fail to see that "artificial scarcity" is a short-sighted response, in direct conflict with the overarching shift of commerce from isolated transactions to recurring revenue relationships based on value and loyalty.

FairPay and related value-based solutions offer a practical new logic for creating and sharing value.  The full, customized, participative FairPay solution leads to consideration of true value in its fullest aspects, combining the complementary perceptions of both the provider and the customer over the course of a developing, evolving relationship -- but still fitting within the familiar context of individual business to customer relationships.

"Risk-free" subscription models build on the same value-centered principles, but are even simpler to understand and apply. While not as fully risk-free to the customer, they leave the provider in full control of pricing -- so may be more readily adopted by businesses, while still providing significant benefits on both sides.

This perspective also casts light on the good and the bad of "dynamic" pricing -- as currently done secretly by providers in ways that customers view as manipulative, compared to more cooperative and transparent new forms.

...to the broader implications and potentials:

The FairPay perspective also sheds new light on how our platforms and social media have lost their way, with perverse incentives to serve advertisers to the detriment of their users. It points to how better business models can refocus them to serve what their users value. One part of that is giving users credit for their attention and data, making ads more win-win for consumers, advertisers, and publishers/platforms.

We explore how shifting to value and fairness-based pricing can harmonize fair exchange down the value chain -- to more fairly compensate the people who work to create the value we consume.

We also talk about how this can work across the value chain -- to let provider-direct and aggregated offerings coexist harmoniously to serve varying needs without perverse economic conflicts.

On the broad logic of capitalism, we speak about how the logic of FairPay can better align shareholder profit with customer and community value -- to incentivize businesses to create value in the broadest senses. Businesses will find reason to focus on lifetime value to the customer  (not just the long-term but self-serving metric of "customer lifetime value" to the business).

We speak of empathy for customers as an intrinsic element of this broad logic of value, and how capitalism can refocus entrepreneurs and investors on creating wealth for all of us. Behavioral economics and related research shows that people are wired to cooperate in creating value. Market economics can be the most effective way to do that once we re-learn how to build on that at scale -- "to re-mold it nearer to the heart's desire."

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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 FairPayZone.com). 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.)

WTF?: A New, Better, Warm-Blooded Capitalism -- Linking Profit to Human Values

Excellent review of my book; summarizes the argument beautifully and extends it to specific business practices https://t.co/I1FBdZua2Z

— Tim O'Reilly (@timoreilly) October 9, 2017

We can start now, one company at a time. What company will take that step? -- to shift from the cold-blooded zero-sum logic of dinosaurs, to the more dynamic and cooperative logic of mammals? All it takes is one imaginative business to lead the way (most likely starting in digital).

I just finished an advance copy of Tim O'Reilly's important new book, WTF?: What's the Future and Why It's Up to Us.* My focus was Tim's perspective on how we are now confronting "the beginning of the end of a failed economic theory," because my work on FairPay is aimed at a simple change in how we structure customer relationships that can enable individual companies to lead toward "an economy where people matter, not just profit."

Tim's WTF? provides a sweeping and insightful synthesis of how technology has been reshaping all aspects of our civilization -- not all for the best. It paints a compelling picture of the forces driving the problems we now face, and of the wide variety of hopeful vectors for change that are emerging. But it only hints at the idea that there are simple things that companies can do now on their own initiative (with the aid of consumer support) to begin to change the game unilaterally, in a way that can begin to shift perspectives more broadly. Just as Eastern sages say "there is nothing you must do first to achieve complete and perfect enlightenment," there is nothing we must do first to allow companies to align profits with human values (at least to a far greater degree than we do now, in some contexts).

First some initial comments on why Tim's book is important and compelling, then some observations on how FairPay highlights possibilities now at hand that promise to enable us to change direction even faster than Tim seems to suggest.

WTF?: What's the Future and Why It's Up to Us

Tim draws on his established position as thought leader with ties to the increasingly broad range of "alpha geeks" and entrepreneurs that have shaped our digital world, and his perspective as a publisher and communicator concerned about the broad human effects of technology on our civilization. He richly explores the double-edged effects of technologies such as platforms, automation, algorithms, and AI, and how they seem to be making life worse in many ways, even as they work miracles.

Tim makes his case in terms of a fitness function, the quantified objective function that guides the evolutionary optimization of an organism (or a system) to fit an environment. Through a wide range of contexts and examples, Tim suggests that we need to change the rules and incentives of our markets -- not only markets for goods and services but also financial markets -- and layers of internal and governmental rules that regulate them -- to better address the conflicts between people and profit, to turn the invisible hand to guide corporations fairly. On the long-term effects of algorithms and automation, he wisely observes that we need to not only manage these to protect and augment people (rather than simply replace them), but also to shift our focus to not simply protect jobs, but to the guide ourselves to the work that needs doing.

Tim points not only to emerging problems, but also to many signs of hope, and to how to build on that. He draws our attention to the many vectors of change (forces characterized by both intensity and direction) that shape the future. He points to both the urgent need, and the rich potential, that we have at this pivotal time, to remold the world closer to our heart's desire.

WTF?: What steps can a business take now to jump-start  that future?

My focus here is to synthesize and build on some of the vectors that are already pointing to ways to do this without waiting for systemic change in the underlying rules and regulations of our markets. There are already shoots we can build on, to work within the logic of our markets, to be more focused on human values.

There is nothing we must do first: we have already entered an age where profit can be increased by better serving customer values. Just be customer-value-first. 

What does that mean? Many businesses are realizing that it is not enough to be customer-centered (just seeking to extract maximum value from customers). We are entering an age of relationship capitalism -- most visibly in the emerging subscription economy where it is now understood that the key metric is not quarterly profit but customer lifetime value (CLV). Companies of all kinds are looking to customer journeys and loyalty loops, and seeing the need to be customer-value-first -- to work with each customer to maximize the value they perceive (and thus get the most from them in return). CLV is maximized when the company looks not to what its customers can do for it, but what it can do for its customers.

Value-based pricing has emerged in the B2B world as a way to align the business with the value it co-creates with its customers, to share fairly in that value surplus, and to drive that directly to the bottom line of pricing and thus profits. Less need for multiple bottom lines that tack on social values, if those values are priced in to the financial bottom line. Less need for external controls to manage externalities, if those are baked into value-based prices. Less conflict with investor demands, if prices and profits are aligned with customer values.

Translating that value mind-set into the B2C world has lagged because doing value-based pricing in a scalable way for mass-consumer markets has seemed so impractical that few even think about it. But we are seeing hints of a sea-change. Tim mentions Patreon and other new crowdfunding strategies for consumer funding of creation as "having a lot to teach us about [the economy's] future direction." Similar shoots can be seen in the move toward membership models in which readers fund journalism (or other services) that they care about. Behavioral economics has studied such participative pricing models (including the often-too-extremely customer-value-first model of pay what you want) to find that they are surprisingly effective, and that the classical economic model of a purely financially motivated homo economicus misses the actual behavior of real people. (Tim also mentions cooperatives, like the Green Bay Packers, REI, and Vanguard, and how they succeed at better aligning profit with human values.)

It is encouraging that a theoretical base for deep changes in corporate mind-set has been coalescing in the work of some marketing scholars and businesses who are re-examining the “goods-dominant logic” of the past, versus the “service-dominant logic” that we now are faced with. This meshes with recognition that value is not created by “producers” and purchased by “consumers,” but that “actors” in ecosystems work together to co-create value, which flows in multiple directions. Customer-value-first thinking is just one aspect of that (and platforms are another).

Tim quotes William Gibson, "The future is already here -- it's just not evenly distributed." My work on FairPay seeks to build on these shoots of a more participative, win-win future, to drive simple changes to the structure of the game that a business offers to play with its customers, changes that can make that relationship far more cooperative in seeking a fair sharing of the business and consumer surplus.

FairPay and the invisible handshake

Tim describes how the invisible hand of competition in our markets does its work to balance supply and demand. The invisible hand works by rationing scarce supply against demand. But, increasingly, we have markets in which supply is not scarce, but essentially infinite (especially markets for digital goods and services). Furthermore, increasingly we expect our markets to work for goods and services that are not commodities, but experiences that have very different values to different people.

We still think with the economic logic of the invisible hand, but it no longer works so well in many domains (especially digital). For example, many digital businesses feel driven to create artificial scarcity, in an effort to prop up the invisible hand to maintain their profits under this obsolete fitness function. Customers easily see through that, and wonder why they should pay what is demanded (or anything at all) -- they resent being manipulated in ways that they see as patently unfair. Even publishers are realizing that information wants to be ubiquitous (except in special markets like time-sensitive financial information in which customers want scarcity and are willing to pay a premium for that). Furthermore, artificial scarcity is an enemy of the economies of scale that benefit business, customers, and society alike -- it limits the fruits of creation to those with high ability to pay.

Tim says "I am a strong believer in the social value of business done right. We should aim to build an economy in which the important things are a natural outcome of the way we do business, paid for in self-sustaining ways rather than as charities to be funded out of the goodness of our hearts." I agree completely -- that is the objective of FairPay.

Tim is concerned about how capital markets get distorted to focus on the narrow interests of shareholders (and management), and looks to ways to change that. That is a deep and urgent concern -- I do not mean to suggest any weakening of Tim's points regarding that. But I suggest there are complementary ways to make our fitness functions work better -- for businesses, customers, and society -- from inside our businesses, in the current market environment. Let's do what we can to change from inside, now!

FairPay builds on the recognition that many businesses are now much more strongly a matter of relationships. Subscription businesses are beginning to see that they are living a new kind of social contract with their customers. Customers rightly question why they should pay for existing content (since it can be provided at negligible cost). They understand what they need to pay for instead is the continuing creation of more such content. (The recent dramatic increases in news subscriptions is an example.)

A business applying FairPay makes this social contract explicit, in the form of a repeated game that motivates cooperation. "I will be more flexible (and give you more say) in how I price my services, as long as you are fair about paying for the value you receive" (as explained in FairPay Changes the "Game" of Commerce). Instead of an invisible hand, think of this social contract as an invisible handshake that drives pricing toward equitable sharing of the value surplus, however that varies in any specific context (including widely varying abilities to pay). (This is explained in An Invisible Handshake for The Digital Wealth of Nations and Harnessing the Demons of The Digital Economy.)

No one else needs to change any rules to apply this invisible handshake -- it is just a matter of a single business being clear about the structure and intent of the game it offers to play, and being smart about framing its offers, learning what the customer values and working to deliver it, and nudging the customer to accept and hold up his end of this social contract. This can be done in many market sectors, among selected segments of users who (1) value the service, (2) want more flexibility in pricing and offers, and (3) are willing to make an effort to be fair about it.

Businesses of all sizes using current emerging models like Patreon and membership are pointing in this direction already. (And effective SaaS platforms can facilitate this to make it easy for small businesses and even individuals -- with significant scale economies and data network effects -- a major entrepreneurial opportunity there! Think not just of CRM, but of pricing and relationships as a service.)

Tim emphasizes the importance of tight feedback loops to achieve fitness functions, and to ensure product-market fit. FairPay is driven by an adaptive feedback loop that underlies every touch-point between the customer and a business and its products/services, to seek to jointly measure and maximize value at all levels -- as both the business and customer agree to define it.

Tim explores the dark side of business models that seek engagement (like Facebook and other ad- or commerce-driven businesses). FairPay fosters a form of consumer engagement that is win-win for all of us.

Tim suggests thinking of the economy as a game. FairPay shifts our micro-economics to see commercial relationships as a repeated game that works not for single transactions, but over a relationship, to align business and customer incentives to produce what we want, when and how we want it, for everyone who values that -- and to divide the surplus value so that both profit well from doing that. That harnesses the law of attractive profits to incentivize companies to profit from competing on creating customer relationships that maximize human values. That in turn leads to a macro-economics in which bottom-line revenues and corporate profits correlate with the creation of real human value.

A vector to broader human values (and other WTF? improvements)

Taking this farther will take skill and continuous learning and refinement, but, if done with care on the part of the business, customers will increasingly see that it delivers the value they seek, on terms they are be happy with. That value can include not only the narrow aspects of value addressed by the invisible hand, but whatever human and social values the customer wants to factor in (including people, planet, and purpose, to the extent the business will agree that is reasonable).** All of the vectors that Tim describes support and facilitate moving in this direction. Early success will lead to wider use across broader segments of consumers. Even costly real goods can be partly amenable to this logic, especially if they are based on human creative work (which Tim points to as another important vector).

Seeing this invisible handshake work will help create a climate for the more broadly systemic changes in business (and how it is regulated) that Tim points to. Businesses and the capitalist system will find themselves driven closer to our heart's desire. That will reduce the need for external remedies, and will create a more cooperative climate in which those remedies that are still needed will be seen as less objectionable.

...All it takes is one company to give this a try. (...Maybe O'Reilly Media?)

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On a personal note -- as one who has spent his career watching, developing, forecasting, and inventing the future since the 1960s -- I very much relate to Tim's perspectives. I hope many will think seriously about this future and "why it is up to us." Now, more than ever, our future depends on that.

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For a full introduction to FairPay see the Overview and the sidebar on How FairPay Works (just to the right, if reading this at FairPayZone.com). There is also a guide to More Details (including links to a video).

Even better, read my highly praised new book: FairPay: Adaptively Win-Win Customer Relationships.

(FairPay is an open architecture, in the public domain.)

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*A preview of WTF? is provided in Tim's August post on Medium (which I commented on). A sample chapter is also available. Publication date is tomorrow, 10/10/17.

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**[UPDATE -- comment from Tim O'Reilly] 

My one critique: there is already a lot of focus on creating value for customers. What about workers, suppliers, communities?

— Tim O'Reilly (@timoreilly) October 9, 2017

Thanks very much Tim!  To your very relevant point of concern, I should expand on how FairPay enables customers to have a much greater say about that...

FairPay seeks to define value to "include not only the narrow aspects of value addressed by the invisible hand, but whatever human and social values the customer wants to factor in (including people, planet, and purpose, to the extent the business will agree that is reasonable)."

When pricing is sufficiently participative, through a process like FairPay, customers can nudge businesses to have their price factor in whatever aspects of value they want it to include. That can be soft customer values like service and support, but can also include broader social factors like how a company treats its employees, sources its goods, supports its community, and protects the environment. It can include bonuses to journalists or musicians or other contributors. It can factor in credits for being a good corporate citizen (much as some companies already enjoy a level of premium pricing because of their good reputation), and, conversely, can factor in debits for bad behavior (much as the market now punishes known bad actors). Just as old fashioned negotiation or tipping often factor in such broader considerations, the new invisible handshake of FairPay can do that in a way this is more explicit and powerful.

This is not to suggest such "customer nudging for good" will fully address all important aspects of human and social values, but that it can lead to enough of a shift in how prices reflect such values to have dramatic effect -- and thus can reduce the need for external measures (and "multiple bottom lines").

This is expanded on in my post, How Market Commerce Can Become More Cooperative, Fair, and Human.

[UPDATE 1/16/18] 
An interesting complement to WTF? is Niall Ferguson's new book, The Square and the Tower: Networks and Power from the Freemasons to Facebook. It provides interesting historical perspective, which I explore and expand on in a review on my other blog: "The Square and the Tower" — Augmenting and Modularizing the Algorithm (a Review and Beyond)

An Invisible Handshake for The Digital Wealth of Nations

It is time to replace the venerable "invisible hand" of Adam Smith with something new and more suited to the strange and challenging nature of digital products. Think instead of an "invisible handshake," that draws producers and consumers into a more cooperative, balanced, and productive relationship. It takes a handshake, because digital is a post-scarcity economics. What matters here is not a balance of demand and finite supply over a population of producers and consumers in a single market -- but a compatible understanding of value between individual pairs of producers and consumers who can act without that producer constraint.

Let's indulge in some armchair economics to explore some big-picture ideas derived from previous posts.  This draws especially on the prior post -- about my thought experiment of an all-knowing economic demon, that leads to the idea of an invisible handshake, as replacing the invisible hand.

(This sequel is best understood after reading that.)

I suggest a kinder, gentler kind of scarcity. Some scarcity is unavoidable, so our solution is not the extreme peer-to-peer "economics of abundance" that some now advocate -- with its limited ability to motivate and sustain serious production of value.  The solution is to re-imagine the socio-economic contract between consumers and the producers that create value for them, to ensure a business model for producers. To maximize the value produced, and the entrepreneurial creativity, we need to motivate organizations that are selfishly driven by a desire for profit. I suggest a new kind of market that rewards the production of intangible stuff, based on a this new socio-economic contract -- neither the limited motivational power of pure altruism, nor the deadweight loss of artificial scarcity. And I suggest that this new economy can evolve from where we are, starting now, with the FairPay architecture outlined in this blog.

Allocating scarce resources with the invisible hand

The beauty of the Smith's invisible hand is that it set prices in a way that worked not only at a micro level, but also as a basis for an allocation of resources for society at large. The whole edifice of market economics has been based upon this.

But now the digital world creates strange new rules, at least in that special portion of our markets.  So then, for the digital domain, what now?

• We now have freemium and other new models, but do they have any real economic rationale? Do they tell us how to allocate resources in a way that is good and efficient for individual producers and consumers, and across society? 
• Many producers rely on some form of artificial scarcity as a way to sustain revenues, but put the accent on artificial -- this has no fundamental basis, and creates no balance or fairness in resource allocation,  "The inefficiency associated with artificial scarcity is formally known as a deadweight loss" (Wikipedia article on artificial scarcity),  This may help keep producers solvent, but is fundamentally very hit or miss.
• We also have the sharing economy, that recognizes digital abundance with its emphasis on collaboration and open-source, but with questions of efficiency, effectiveness, and sustainability at scale. 

Can we do better?

The core challenge of the economics of real goods and services is the allocation of limited resources: physical resources, labor, and capital. As Adam Smith said in 1776 in The Wealth of Nations, "...price...is regulated by the proportion between the quantity...brought to market, and the demand of those...willing to pay...." Smith went on to describe how "...he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. ...By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it."  So in the face of scarcity across a market, prices are set by the invisible hand to allocate the supply where it is most wanted. Hayek expanded on Smith to argue that an economy needs prices as the only effective way to signal how resources should be allocated. Debate on how well this works for society continues, but it is widely recognized that it works to build wealth. Is there something to replace that in the digital world?

An invisible handshake -- allocating share of wallet in a post-scarcity digital economy

I propose doing allocation in digital markets with an invisible handshake, because the game changes without scarcity of supply. What matters is no longer a dance of a market as a whole at a given point in time, but a dance of each consumer with each producer over time. So what should determine price?

• Each producer can provide as much as is desired by each consumer. There is no inherent supply constraint -- all that matters is whether the compensation from that consumer satisfies that producer. 
• Prices for different consumers need not bear any relationship. What does it matter if some pay more and some pay less? Maybe that depends on how much they want to use, what value they get, and how able they are to pay. We are conditioned to think price discrimination is unfair (and sometimes illegal), but that is true only when unilaterally enforced by excess producer power, not if done for reasons acceptable to consumers. 

The new allocation is not one of supply, but of share of wallet. If each consumer deals with a market full of suppliers for all of their digital products and services, the relevant scarcity is of their wallet -- how much can I spend on all of my digital desires, and how do I split that among my providers?

• If I negotiate over time, in "dialogs about value," to share the economic surplus of my digital purchases, I am forced to allocate my spending within some digital budget, across all of my suppliers. I can do that any way I wish (to the extent that each supplier agrees to permit).
• If all consumers do that, then all suppliers get their fair share of all of the wallets for all of their consumers.  They sell as much as their aggregate market population desires, at a sum of prices that is the maximum each market particpant is comfortable allocating.  
• Given a scarcity of nothing but wallet, what works for each individual pair in the market leads to a result for all pairs that approximates a market-wide optimum.* 

So, like the invisible hand, the invisible handshakes between each of the individual pairs leads indirectly to a socially beneficial allocation. Like the invisible hand, it refers to an emergent process that by seeking local solutions, leads to globally optimal solutions.

• The invisible hand applies external market-wide forces (supply vs. demand) to producers and consumers at a given point in time (actually a short interval), It pushes them together to a market price. That pricing process indirectly leads to an approximately optimal distribution of scarce supply resources.
• The invisible handshake is driven by an agreement between individual consumers and producers to seek a mutually beneficial relationship. That binds them in an emergent process that generates prices over the course of the relationship, and indirectly allocates the wallet share of each participating consumer to demand as much digital wealth as each is willing to pay for -- at prices that work for each of them individually -- to compensate producers for producing as much as each one -- and thus the total population -- values. 

Thus the handshake is essentially a moral contract between the individual parties. That may sound utopian, but as outlined in the prior post and elsewhere in this blog, it is a moral contract with teeth. There are strong practical incentives to adhere -- and data that can be applied to help verify adherence. (This is the process I call FairPay, as described throughout this blog -- see sidebar.)

• Digital products and services can be instrumented to generate detailed usage data that correlates to the actual value received.
• Both parties participate in ongoing dialogs about value, which add subjective insight, but still can be partially validated by the usage data.
• Based on these dialogs, the producer extends pricing "credit" to the consumer. If the consumer abuses this credit, they get less credit, and lose some or all of the ongoing privileges of the handshake.
• This process generates consumer reputation ratings for fairness with each producer.  Since a good reputation rating has benefits (much like a credit rating), consumers will seek to maintain it.

It is this balance of forces -- the subject of the handshake -- that governs the allocation of wallet (in an approximation of the wisdom of the pricing demon).** Different producers can manage their own policies to make their handshakes very strict and demanding, or more loose and forgiving. Different segments of the population may play the game more or less fairly and honestly. But the process will adapt, and find workable relationships for most segments of the market. (And conventional pricing can be applied for those segments that fail the handshake.)

This provides the basis for a post-scarcity economy, at least for digital -- and perhaps more broadly. The digital goods and services are not scarce, but the willingness of consumers to sustain producers is scarce. The invisible handshake governs an allocation of that willingness to sustain. To/from each consumer according to his willingness and ability to pay. To/from each producer according to their ability to create realized and recognized value.

As noted in the prior post, this handshake enables a kind of first degree price discrimination. Conventional economics views first degree price discrimination as economically efficient, but not feasible. But what emerges from the handshake is a new kind of first degree price discrimination that is feasible and agreed to by each consumer.

A kinder, gentler -- and more sustainable -- market

This enables a broader sense of economic value than is generally addressable in conventional markets.

• The invisible hand allocates supply and demand for particular items at particular times, thus narrowing consideration, in ways that ignore sustainability and other aspects of social value ("externalities"). Many have sought to broaden the focus of producers with notions of "Creating Shared Value" (CSV) and triple or quadruple bottom lines, that factor in financial, environmental, and social (and other) dimensions.
• The invisible handshake creates prices that reflect not just financial value, but whatever dimensions of social value the producer-consumer pair want to reflect in the dialogs about value. There is no need for added bottom lines, or separate CSV objectives -- CSV is integral to the handshake. 

This handshake is not on a transaction price, but on a continuing relationship. As a result, it fundamentally changes the our economics from working across markets without regard to past or future, to taking a longer term view:

• It is the lack of past and future that create many of the problems in conventional market economics. We balance supply and demand in the short term, with no direct way to factor in long-term consequences for the individual parties, or society as a whole. Addressing those "externalities" by bolting on special measures (taxes, subsidies, etc.) is artificial and very problematic.
• With the invisible handshake, the whole focus is on a relationship over time.  Value shares may fluctuate in the short term, but move toward a desirable sharing over the life of the relationship. Sustainability can factor in directly.

Instead of trying to find a price, we need to find a broader kind of agreement. Instead of agreeing on price. we price out of agreement.  That agreement will naturally vary from person to person and from time to time. The effect of this "invisible handshake" is to draw producers and consumers into a more cooperative, balanced, and productive relationship.

Now that our digital market has been shattered to bits...

Moving from here to there will take learning and adjustment by all market participants. But digital has already shattered the market for content to bits -- shouldn't we take advantage of this opportunity?

Ah, Love! could you and I with Him conspire
To grasp this sorry Scheme of Things Entire!
Would not we shatter it to bits--and then
Re-mold it nearer to the Heart's Desire!

-- Rubaiyat of Omar Khayyam, Edward FitzGerald translation

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*There is of course the important case of ad-supported digital services that take no share of wallet. It seems clear that this is not sufficient to support all digital services but it will remain an important contributor. The handshake process can factor in the value of ad viewing as one part of the compensation that offsets any monetary price, and thus takes less share of wallet. In fact, any aspect of value (attention paid to ads, personal information made available for sale, referrals, etc.) can be factored in as credits into these dialogs about value.

**Of course conventional set prices (or any pricing scheme at all) will also effect some kind of allocation of wallet. But is there any economically sound rationale? -- it is arbitrary, crude, and not personalized (as the pricing demon would suggest), and thus results in significant deadweight losses (notably the value not provided to those who would benefit from and pay fairly for it).

Harnessing the Demons of The Digital Economy

The dynamics of networked commerce combined with the essentially free replication of digital offerings has created devilish problems that our current economics has yet to tame.  Sellers have no clear rationale for setting prices and consumers feel they should not have to pay anything at all.

One way to step back and re-think this is to do a "thought experiment," as has proven valuable in the development of science. Some notable thought experiments involve imagining benevolent "demons" with special powers and/or knowledge: Laplace's demon, with its perfect knowledge of the state of the universe and all its natural laws, and Maxwell's Demon, with its ability to individually sort hot from cold molecules.* Maybe we cannot build such demons, but thinking about them can clarify concepts and possibly point to approximations that can be built, or can suggest directions for looking outside the box.

The demon I propose is one that can power a system of commerce.  Imagine a demon that has perfect ability to read the minds of buyers and sellers to determine individualized "value-in-use" -- the actual value perceived and realized by each buyer, at each stage of using a product or service -- such as songs or articles or e-books, either in a subscription or item-by-item context.

• This "value demon" knows how each buyer uses the 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 the ever-changing attributes of current context, where the value of a given item can depend on when and how it is experienced.
• Furthermore, 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 act as an arbiter of how the economic surplus can be shared fairly between the producer and the consumer. How much of the surplus should go to the consumer, as a value gain over the price paid, and how much of the surplus should go the producer, as a profit over the cost of production and delivery.

This commerce demon could thus serve as the brains of a system that sets prices that are adaptive and personalized -- to set a price for each person, at each time, that is fair to both the producer and the consumer.

Imagine we could build an e-commerce system, with advanced programming and data that worked as an artificial intelligence version of this demon. We could build services like Amazon, iTunes, Netflix, or a newspaper subscription that were priced by the demon. Prices would not be pre-set by the seller, but would be set dynamically by the demon at levels that would be fair and acceptable to both the buyer and seller.

(This takes us in a direction very different from the ideas from the early days of e-commerce of "bots" that would negotiate prices for us. The demon is in some ways analogous to a bot, but instead of negotiating a single transaction, it works at a higher level that centers on value, not just negotiating power.)

With such a demon setting prices, we could reap the cornucopia of goods and services that the infinite replication of digital offerings promise ("information wants to be free") while still providing fair profits to the producers ("information wants to be expensive"). Every consumer who is willing to pay more than the marginal cost of production would be able to buy, while those who get and can pay for significant value would pay appropriately higher prices.

This may sound pointlessly fanciful, but thinking about it can suggest new approaches that are practical.**

One such approach, the FairPay architecture I have been describing in this blog, works very much like an approximation of this demon. Not perfect, but still workable as an emergent process that uses simple procedures and dialogs to approach what this demon knows. Details are in other posts and the sidebar, but some basic points:

• FairPay shifts our perspective from individual transactions to a series of transactions over time in a relationship.
• Instead of the invisible hand of supply and demand pushing from outside, it brings an invisible handshake in which the buyer and seller agree to cooperate to find a fair basis to exchange value.  This can inform a new balance of powers, based on "dialogs about value." 
• The buyer's power is to set prices for a current transaction -- "fair pay what you want" -- with the understanding that he agrees to be fair, and that this is a temporary privilege that the seller will continue only as long as he agrees the prices set by that buyer are usually fair.
• The seller's power is to decide whether to continue these attractive offers, or not. That gives the buyer full buy-in on all prices, but motivates him to keep up his end of the bargain.
• Additional data feeds in to the process, including the seller's suggested price to each buyer, the buyer's reasons for pricing higher or lower, and all of the increasingly rich individual details that digital system instrumentation can make available about usage levels, patterns, and contexts, to inform and validate these dialogs.
• Based on all of that, the seller tracks each buyer's fairness rating, much like a credit rating. Consumers will warm to the idea of this pricing privilege, and will seek to protect their fairness rating just as they do for credit ratings.

The result is an emergent process that seeks to discover the price, just as the demon understands it. The approximation may start out being quite crude, but digital sellers can afford some unprofitable cycles in the early stages of each relationship, if that soon leads toward convergence on fair prices. As experience is gained, this will become a science of Big Data and predictive analytics -- one that works to serve both the buyer and the seller.

So this FairPay process acts as an engine that approximates what the demon knows. It draws out the knowledge of the buyer, encourages truth-telling, nudges that with the views of the seller, and provides a context for the dialogs about value that lead to a fair split between the producer and consumer surplus. Such a process can totally change the game of selling digital stuff, for more profit, and more value to society.


[Update 5/18/15]
To consider the broader implications of this new approach, see this sequel: An Invisible Handshake for The Digital Wealth of Nations.


**[Update 8/3/15] 
I should have added that there is a proven way to approximate my value demon -- but one that has been restricted to high-end, sophisticated industrial markets, and generally ignored in most other markets. As described in a 2014 HBR article, companies like GE are increasingly realizing that set prices are not best for either the supplier or the customer --and for large industrial products or services, it is better to develop custom prices very much along the lines of what the demon knows. These "value-based" pricing or "outcomes-based" models work well for such industrial equipment where a cooperative team of both producer and customer can negotiate not a specific price, but a method of analyzing value as actually achieved by the customer in use, and then basing the price on that after the data is known. Just as the Internet of Things is making that more widely applicable, FairPay points to how a lightweight, heuristic variation on that theme can work for computer-mediated mass consumer markets..



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*Expanding on these demons, and the two well-known examples...

• Laplace's Demon, has been influential in philosophy and physics, as one who has perfect knowledge of both the current state of the entire universe, and all the laws of nature. Thus Laplace's demon can look forward or backward to derive the exact state of the world at any past or future time. This is relevant to questions of free will versus determinism, and to quantum uncertainty.
• Maxwell's Demon, has been influential in thermodynamics, as a gatekeeper in a box with two chambers separated by a small hole with a door. The demon can control the door to allow high speed molecules to go from left to right only and low speed molecules to go from right to left only, thus making the left side get colder while the right side gets hotter. This would violate the second law of thermodynamics.

(There are reasons why both are infeasible, but thinking about them sheds light on why that is.)

Adam Smith's invisible hand can be thought of as a similar demon that helps balance supply and demand in a market at a given point in time. As we know, Smith's demon actually works fairly well for many markets.

Economics has generally ignored my demon, but it has been lurking in the background. First degree price discrimination was defined by Pigot as applying this kind of information in idealized monopoly situations -- but has been viewed as not realistic for reasons such as arbitrage (those who bought cheaply could resell to others so they did not have to pay the full amount they would be willing to pay).**

I propose that the workings of FairPay enable something much like first degree price discrimination, but instead of all the surplus going to the monopoly, my demon shares it fairly between producer and consumer.  And since resale of digital services can often be made impractical, the arbitrage problem generally does not apply.

[Update 1/1/16]
A nice bit on how Einstein's thought experiments changed the world is Walter Isaacson's "Light Beam Rider" piece in the NY Times (10/30/15).

Pierre Omidyar: Adventures in New Business Models for Journalism ...and FairPay

As a follow up to my post on Jeff Bezos and The Washington Post, I turn to another exciting entry into journalism by a top-tier e-commerce innovator with very deep pockets, and how the new FairPay business model can work for that adventure as well.

Pierre Omidyar, billionaire founder of eBay, also considered buying The Washington Post, but revealed in his blog that he decided instead to actively participate in developing an entirely new media platform intended to support and empower independent journalists. 

Such a platform is especially well suited to the use of the FairPay architecture, with its ability to engage readers to partner with journalists, by serving as patrons for work that they value.  My earlier post on Bezos and The Post outlines the fundamentals of how FairPay addresses this business challenge.  This post builds on that.

***Second in a series on tech billionaires (Bezos and Omidyar) reinventing the business model for journalism, not as their personal charity, but by creating a new kind of reader/patron empowered by e-commerce technologies.***

In tune with Bezos, Omidyar points to the primacy of customer relationships in e-commerce  (in his interview by David Carr):

Technologists understand our users and break down how user engagement increases from somebody that maybe just tries your product once and then goes away, to a different kind of person that progressively gets more and more engaged and then becomes just totally locked into your product. That’s something people in Silicon Valley spend a ton of time analyzing, working on and thinking about.

FairPay integrates this kind of engagement directly into the value exchange process (as described in my Bezos post). Here I highlight additional aspects of Omidyar's focus on "elevating and supporting" individual journalists, and how FairPay supports that.

Omidyar says (to Jay Rosen) he wants to run his venture as "a company, not a charity." That means generating a revenue stream (presumably from readers, not advertisers). Rosen describes this as "the personal franchise model." The ability to engage readers to serve as patrons is essential to that. 

FairPay naturally integrates the reader's evaluation of a journalist's value directly into the pricing process.  It engages the reader in ongoing "dialogs about value" on how the reader values the work of each journalist over the course of their relationship.  Readers intuitively recognize many dimensions of value, and the dialog can easily be structured to elicit pricing that factors in this judgment with regard to such dimensions as quality, style, investigation, reader value, and social value .

With FairPay, an Omidyar media platform can get direct feedback from each reader on the perceived value of each article, the body of work by that journalist, and the media service as a whole. 

• This can be directly linked to compensation for each journalist, thus increasing engagement and the quality of the relationship on both sides. 
• Readers will know that a significant portion of their payments go to the journalists, and that their feedback bears directly on how journalists are paid (and what investigations are funded).  
• Conversely, journalists will be motivated to create a body of work that readers recognize as valuable by voting for them with their wallets. 

This gets to the issue of "Creating Shared Value," as described in the influential 2011 HBR article by Porter and Kramer, which suggests the need to "reinvent capitalism" with broader ideas about value creation that will "unleash a wave of innovation and growth." They propose that "creating shared value represents a broader conception of Adam Smith's invisible hand." Another of my earlier posts  shows how FairPay operationalizes that idea to reflect judgments of shared social value directly into pricing dialogs, creating that broader conception of the invisible hand.

FairPay is uniquely focused on creating the multidimensional dialogs on value that are needed to turn readers into patrons of important journalism. It not only supports the journalistic effort, but guides it to the tasks that the reader/patrons consider important. 

• It builds a deep relationship with readers that can feed directly into the key editorial processes that determine which journalists to support, in what investigations, and how they are paid. 
• It builds a value discovery engine into the heart of the media platform, to drive it toward work that is good and important, and to get readers engaged as patrons who pay for that, both for themselves and for the common good.

And given a model in which (as Rosen reports) "all proceeds...will be reinvested in journalism," readers can be strongly motivated to be generous patrons. Omidyar is quoted as saying he started eBay on the premise that "people are basically good." Modern behavioral economics demonstrates that his faith is well founded. FairPay offers a way to apply that virtue to support a wide range of valued services, including support of quality journalism.  In doing that, it leads to the answer to Jeff Bezos's central question: "Why should I pay you" (see previous post).

"Why should I pay you?" - Bezos' Washington Post - Mapping a New Business Model for Journalism

Jeff Bezos' central question about The Washington Post, is stated in his recent interview: "Why should I pay you for all that journalistic effort when I can get it for free?”

I suggest a process that can generate the answer.

***First in a series on tech billionaires (Bezos and Omidyar) reinventing the business model for journalism, not as their personal charity, but by creating a new kind of reader/patron empowered by e-commerce technologies.***

In his letter to Post employees, Bezos said "There is no map" -- but I suggest this process provides a map -- it may be crude and in need of some correction, like early maps of "The New World" but, like them, it is good enough to start a journey in the right direction, even if that journey may take some unexpected turns.

As Bezos encapsulated it in his interview:

The Post is famous for its investigative journalism. It pours energy and investment and sweat and dollars into uncovering important stories. And then a bunch of Web sites summarize that [work] in about four minutes and readers can access that news for free. One question is, how do you make a living in that kind of environment? If you can’t, it’s difficult to put the right resources behind it. . . . Even behind a paywall [digital subscription], Web sites can summarize your work and make it available for free. From a reader point of view, the reader has to ask, "Why should I pay you for all that journalistic effort when I can get it for 'free' from another site?"

"Why should I pay you?" is the central dilemma of Internet content, and exactly the question the FairPay process is designed to answer. There is no one simple answer, but I suggest the general shape of the answer is this:

• We ask you to pay only what you think fair for the value we provide you -- isn't that fair? The quality journalism we provide is expensive to produce, and if people like you who value it do not pay a fair price, how can we continue to provide it?
• We will treat you as an individual patron -- we will listen carefully to what you want, and you will get our best efforts to produce and deliver it to you.

There is no one simple answer -- but FairPay offers a reasonably simple process for seeking the answer in all its complexity, by fully applying the one-to-one power of the Internet:

• The answer is an individual one.  It will vary from person to person, from day to day.
• Finding that answer requires an ongoing, individualized process.
• It also requires individualized pricing, a concept that is challenging as well.

This is a problem that was made difficult by the Internet, as Bezos observes, but it is also a problem that can now be solved using methods enabled by the Internet. 

So "Why should I pay?" -- The essence of this FairPay process is to undertake deep, computer-assisted dialogs with the reader on just that question: 

• The answer must be individualized to pin down what value The Post actually delivers to me.
• It must structure a dialog to learn what I think The Post is worth to me -- and to help frame my evaluation to fully appreciate the value I receive.
• It must close the loop to drive toward a fair exchange between me and The Post over time.
• The first cycles of this dialog may give poor results, but with good feedback and direction, this can drive an emergent process that delivers value, sets prices for that value, and converges toward a fair value exchange.

Bezos emphasizes that there is a need for experimentation and patience -- FairPay offers a structured process for ongoing experimentation that can be expected to move toward convergence, and to provide data to shed light on any rough spots so the process can be altered to work even better. Think of it as an adaptive value discovery engine:

FairPay centers on the idea of customers as patrons who have only to be motivated.  It provides a mechanism for them to be patrons of journalism.  (It works similarly for patrons of books, music, video, apps, and other digital offerings.)

The essence of FairPay is in the workings of this engine:

• to view transactions not as ends in themselves, but as steps in a process that builds a relationship based on fair value exchange
• to let you learn and adapt, to provide what your patrons value
• to let the patrons learn pay according to the value they perceive, and to be fair about that
• to guide these dynamics, to motivate both the patrons to pay a fair price, and your efforts to seek to delight them

FairPay draws on three main enablers:

• Modern behavioral economics that shows that people are not heartless profit maximizers, but can be motivated by a sense of fairness and related aspects of reciprocity, altruism, and self-image to pay more than they have to (share their "value surplus"), when given a good reason.  Supporting the quality journalism of The Post, for my own benefit, for the common good, and out of fairness, is just such a reason -- if given in terms that are specifically relevant to me and responsive to my concerns. Think of me as a patron, and make me want to be a patron.
• Computer-assisted dialog, and the growing ease of use and power of such dialogs to inform the process of understanding what I value, and to help me to recognize what value I have received. Engage me as a patron and show that you understand what I care about.
• Predictive analytics that can help The Post to shape both the service it offers me and the dialog it has with me in a way that gives me what I really care about, and makes me want to pay a fair price for it. I will be a patron if I feel what I patronize is worthwhile and respects my desires.

How much should I pay? FairPay treats that as a matter for dialog.  Only I can determine what I value, and what price I think fair for it.  FairPay lets me pay what I think fair. ...But it does not stop there.

Why should I pay fairly? FairPay enables The Post to suggest what I should pay, track what I do pay, understand why I think my price is fair, and tell me whether they agree it is fair. All of this is specific to what I read, how often, how much, for how long; whether I read it for business or pleasure; how affluent I am; and many other details. The Post can measure and report that to me, consider what I say about the value I perceive, and factor that into their suggested price. They can tell me they think I am being unfair, and limit what they offer me, or they can tell me that I am being generous and enrich what they offer me. If The Post plays this game well (mostly carrot, a little bit of stick), they can give me what I value, and motivate me to pay a fair price for it.

These enablers and this value discovery engine inform a new invisible hand, one that can entice readers to happily pay a fair price for the content they consume. It gives the reader the power to set a price they are comfortable with, but gives the publisher the power to nudge that to a level the publisher is also comfortable with over time (or to cut back on what is offered).

That new dynamic balances my goals and The Post's. The Post can gamble on my fairness for a time, to see if am willing to be a patron. (Doing so costs them almost nothing.) If not, it can leave me to deal with a conventional paywall subscription, or to fend for myself. If I am willing to be a patron, The Post can serve me at whatever level I justify that I pay fairly for.

I suggest this fits perfectly with the guidelines Bezos outlined in his letter to Post employees:

"We will need to invent..."
...this map is both an invention and a framework for continuing invention

 

   "...which means we will need to experiment"
...FairPay is a method for experimentation in the form of structured dialog with readers, for dynamically learning what they value, at what price, and for guiding the Post's adaptation to provide it.

 

    "Our touchstone will be readers, understanding what they care about .... and working backwards from there"  

...that is the touchstone of FairPay, turning the invisible hand to drive just that, in a new kind of emergent pricing process.  

(More details are provided in the sidebar, other posts on this blog, and on the FairPay Web site.)

***First in a series on tech billionaires (Bezos and Omidyar) reinventing the business model for journalism, not as their personal charity, but by creating a new kind of reader/patron empowered by e-commerce technologies.***

Value2Me -- The Heart of a New E-Commerce

In the quest to introduce a new way to think about commerce and transform our economy, I am considering a new name that might better capture the heart of the strategy that I have been calling "FairPay." That new name is "Value2Me" -- suggestive of the core pricing issue facing the consumer:

What is the value to me? (and why?)

Does anything else really matter?

The Value2Me process builds on the Value2Me in each transaction -- as the basis for a dialog about value between the buyer and the seller -- in the context of an ongoing relationship.  That dialog, as it unfolds in a series of transactions, serves as a price discovery process that seeks economic efficiency, in a relationship that is beneficial to both the buyer and the seller:

1. The buyer side driver:

• What is the Value2Me (as experienced, after trial)?
• Why should the seller accept that as fair compensation from me?

2. The seller side counterbalance (which the buyer must also consider):

• Agreeing to treat each transaction as a trial offer, in which any Value2Me price I (the buyer) choose to set is final.
• Deciding based on my Value2Me price--and the reasons I give for it--whether I am being fair enough that the seller should continue making such offers to me going forward.

This balance -- of buyer-set Value2Me versus seller-controlled judgment of the buyer's fairness as the condition for continuing the relationship -- provides the central dynamic for a new invisible hand. All else is implementation details.

****PLEASE TAKE OUR SURVEY ON THE NEW NAME****
 
Renaming FairPay? This new model has been widely discussed under the name FairPay (derived from Fair Pay What You Want), but it seems Value2Me may more positively capture the focus on value as it is uniquely perceived by each consumer.  This post seeks to test re-casting the concept in those terms, and to request your opinion on that.  "Value" is the core of all economic value exchange -- we all want value.  "Value2Me" focuses that on the individualized, personalized nature of value perception.

Value2Me for B2C! 

I submit that value to me is the essential criterion for economic exchange, and that the Value2Me process dialog is the best sustainable basis for a new economics.  Value2Me is the best possible sustainable price -- free or other lower prices are nice for consumers, but not sustainable. Seller-set prices almost never reflect Value2Me -- they are usually either too high or too low for most buyers.

The digital economy helps make Value2Me feasible because it enables infinite replication of products/services at almost no cost ("value"), and facilitates mass-customization ("2me").

• Sellers can afford to continue to make Valeu2Me trial offers to a buyer as long as the buyer does not exploit them unfairly. Any revenue above marginal cost is profit. The only limit needed is to nudge each buyer to pay a price that fairly reflects their personal Value2Me, for that transaction, even if other buyers have a higher or lower Value2Me. 
• The dialogs are designed to elicit that Value2Me, and to make it clear that it may differ from the value to other buyers due to different contexts:  different usage levels, features, needs, benefits, and ability to pay. 
• This can be done by presenting usage reports, so buyers appreciate what they received (to focus them on experiential utility)
• Suggested prices based on that experience can also be provided, so buyers have some guidance of seller expectations (an "anchor" in behavioral economic terms).
• Cost data can also be provided (as it depends on usage), so buyers can factor in a fair profit level.
• The "Why" of the buyer's Value2Me response would be relative to the usage, the costs, and the corresponding seller-suggested price.
• Buyers who stretch the limits of fairness in setting Value2Me can be warned that if they are not more reasonable in the future, they will lose the privilege of paying based on Value2Me, and will have to buy at a conventional fixed price.

Value2Me enables totally adaptive and dynamic pricing in a way that enables a new kind of buyer-sanctioned "price discrimination" -- it is not imposed on the buyer, but actually set by the buyer.  This reaches new levels of economic efficiency by allowing sellers to reach every potential customer who values the product above its marginal cost of production (see The Long Tail of Prices).  Yes, many will pay less than under fixed pricing, but some will pay more, and large numbers who would not have paid at all can now buy and pay enough to expand the total profit. Fixed prices may provide a higher average price, but for a much lower volume. (Free and freemium have similar problems and more.)

Making this work as well as possible will take sophisticated automation to track buyer Value2Me, and "choice architectures" that apply behavioral economics to nudge buyers to fully recognize that value--with consideration to the costs of providing it (and to a fair profit). That is outlined elsewhere in this blog and the FairPay Web site. But the core idea is simple, and the process can be made simple and intuitive.

The term "Value2Me" also helps in emphasizing how this new perspective on commerce not only makes pricing and marketing more efficient, but can empower more effective product design and development. It focuses sellers on measuring perceived value, and on seeking to deliver maximum value to each of their customers on a customized basis. It facilitates a more adaptive and dynamic product development process that seeks to offer each customer the features and services that he needs to maximize his Value2Me.

In the past commerce relied on fixed prices that had to dance around the question of Value2Me -- now it can zero in on it. Value2Me for B2C!

 

All of this is consistent with previous discussions using the term FairPay. It is just a subtle shift of emphasis -- a use of words that may have a more positive appeal to consumers, and a more direct suggestion of the basis in value as perceived by each buyer.

Comments are invited! And please take our survey on the new name.

Free AND Paid! -- To Each His Own Price

The current hot debate in the blogosphere on free versus paid really points to the failure of our current models.  Dalton Caldwell's "Announcing an audacious Proposal," is an eloquent cry for services that serve their users, not advertisers.  Fred Wilson has countered with "In Defense of Free," which champions the value of a mass audience that seems only reachable by free and freemium.  And often neither paid nor free works very well -- just look at the newspapers on the ropes and the musicians eking out a living selling teeshirts instead of songs.

Yet we are in a new age, and new thinking can provide a way to have it both ways, and to do even better at it.  It is time for the invisible hand to meet the cloud.  Free is just another price.  Why why can't we build services that dynamically customize both the service and the price?  We need a new approach to pricing that looks beyond the scarcity of pre-digital times, and that exploits the new abundance, applying the dynamic intelligence of the cloud that can enable a single service be both:

• free for those who want free (and are willing to "pay" with ads or content submission), and/or 
• paid for those who place value on getting what they want.

The FairPay pricing strategy that I have been developing is an attempt to rethink how we set prices to do just that.  FairPay provides a new process for setting prices individually and dynamically.  It does this through a "dialog about value" between users and service providers (services, platforms, creators, authors, artists, editors, producers, etc.).  It applies an automated price discovery engine to manage that dialog and nudge it toward fairness.

Because it is dynamic and individualized, FairPay services can transcend all pricing options to find the one that works for a each user.  

• Those who want an ad-free service can work out pricing that buys out the ads.
• Those who create user generated content can obtain pricing that factors in the value they contributed (and maybe even make money at it).
• Those who want if free can get an ad-supported package
• Those who want to save just a bit can get a light ad + paid blend
• Those who want to try a no-ad version can try it, with no obligation to pay more than they find it worth--after they try it, and know the value.
• Those who do not play nicely can have their privileges withdrawn, and be offered just fixed price or ads.

FairPay combines an architectural framework that can include all of these models, with a dialog process that allows both buyers and sellers to reach a fair equilibrium, based on the actual perceived value, considering any and all factors.  Free and paid can coexist in the same service.  Caldwell is concerned that prices should be based on use, and that "the definition of use is very complicated." Smart dialogs about value can simplify that to the degree desired, and yet reflect any variable that each buyer and seller agree is important. (And most of that can be automated by sellers--and eventually by consumers as well).

The core idea is to view pricing not in terms of single transactions, but as a joint decision process that develops over the life of the relationship.  Sellers can lose revenue on some of the abundant product, as long as they converge on a fair price over time (in money, ads, or services), for each customer.  Customers who do not play nicely lose the privilege and must pay what and how the seller demands. 

This relationship view can turn the invisible hand to find the optimum value exchange, now that the cloud can provide abundance and manage the dialog about value.  All we need to do is let go of our old ideas about pricing, transactions, and scarcity, and develop a new and far more flexible process.  We need not force all users into one model.  One-size-fits-all pricing is wrong most of the time, for most of the users.  Lets' find an architecture that seeks the right size for each user!

Details of how this can be done are elsewhere in this blog and related Web site.  It is yet to be refined in practice, but isn't this the kind of economy that is best for society?  One that maximizes production, rewards producers fairly, and makes the abundance they create available to everyone on a fair basis?  Isn't this just the kind of smart economics the network economy was supposed to enable?

Turning the Invisible Hand to Create Shared Value -- The FairPay Strategy

"Creating Shared Value," the influential 2011 HBR article by Michael Porter and Mark Kramer, points to the need to reinvent capitalism with broader ideas about value creation that will unleash a wave of innovation and growth. They propose that "creating shared value represents a broader conception of Adam Smith's invisible hand."

I suggest that the FairPay revenue model provides a new market regime that reorients the invisible hand toward shared value, one that can be operationalized in business today, to offer an entirely new micro-economics for profit-seeking business transactions.

Porter and Kramer nicely draw the big picture for shared value, noting that, unlike calls for "Corporate Social Responsibility" that are at odds with profit motivations,

Shared value focuses companies on the right kind of profits - profits that create societal benefits rather than diminish them. ...

The moment for an expanded view of value creation has come. A host of factors, such as the growing social awareness of employees and citizens and the increased scarcity of natural resources, will drive unprecedented opportunities to create shared value.

We need a more sophisticated form of capitalism, one imbued with a social purpose.

They suggest what we need is not "a redistribution approach," but one for "expanding the total pool of economic and social value.

FairPay takes this CSV big picture and provides methods for "doing business as business" that support that vision. These methods can be applied now, in a wide range of businesses, and will point the way to applying similar new thinking more generally. (FairPay was designed for, and clearly applies now, in markets in which marginal costs are low, such as for digital products or services. Digital markets, especially for content, are widely recognized as being markets in which traditional capitalism has been unable to adapt effectively to the new digital economy, and new business models are urgently needed.)

FairPay turns the force of the invisible hand to span ongoing relationships. It guides pricing to create shared value between customers and businesses over long-term relationships (in which customers have a say in the creation of shared value). It looks beyond one-time transactions, to ongoing dialogs about value.

• Adam Smith's invisible hand works at a transaction level:  it optimizes the balance of  supply and demand in terms of prices for large numbers of individual transactions.  Transaction prices drive supply and demand into balance, by shifting supply or demand until balance is achieved. This invisible hand does not know or care about repeat business or shared value (except as it affects demand in aggregate).
• FaiPay turns the invisible hand on its side, to work over time, at the relationship level: it optimizes the balance of supply and demand in terms of prices over time, with respect to individual customers. Relationship pricing is balanced through an ongoing series of pricing conversations, to achieve an agreed upon level of shared value in each of a multitude of ongoing buyer-seller relationships. Shared value is integral to these pricing conversations.

The invisible hand of FairPay creates a new kind of balance that emerges over a series of transactions, with a simple balancing dynamic:

• For each transaction, the buyer is given the full power to set prices based on the value actually received (Fair Pay What You Want). This is done retrospectively, when the value is known to the buyer.
• The seller must accept the buyer's price for that transaction, but the seller holds the power to decide if the buyer's pricing is fair enough to want to extend the relationship by continuing to make FairPay offers for future transactions (considering what has been learned about the buyer's pricing behavior and reasons).

This leads to an ongoing balancing process based on longer-term considerations of shared value:

• Buyers have full freedom regarding the pricing of single transactions, but have the incentive to be fair to sellers and divide the shared value surplus in a way that is fair to the seller. They are also invited to give reasons for their pricing that indicate why they think their perception of shared value is more or less than the seller has suggested. Based on guidance from the seller on suggested prices, costs, usage, social norms, and the buyer's reasons, both sides can learn whether and how they can agree over time on criteria for fair pricing that creates the maximum shared value (even if they do not agree on each transaction).
• Sellers yield power over a limited number of individual transactions, but gain new power to truly understand the value they provide to individual sellers in each transaction, and to engage in a substantive dialog with their customers about that value and how they should share in it. Sellers manage the "choice architecture" that frames the value proposition and the factors to be considered, and can signal what buyer pricing behaviors they accept as fair or unfair. The seller learns how loosely or rigidly to manage each customer relationship to create profit and grow its share of the pie.

The new invisible hand of Fairpay emerges from this balancing mechanism for discovery and maximization of shared value between buyers and sellers over time.

• FairPay pricing can be used in combination with conventional pricing as a back-stop, and positioned as a privilege offered to those who desire a relationship based on shared value and respect for the obligations of fairness that entails. 
• Sellers can manage the "choice architecture" by using premium tiers and perks as rewards, and the threat of withdrawal of such premiums as penalties, to nudge buyers to price at the highest levels the buyers consider justifiable.  Sellers also hold the threat of complete withdrawal of future Fairpay privileges (returning an "unfair" buyer to fixed pricing for future transactions) as a powerful incentive to deter abuse. 

The essence of Fairpay is that buyers and sellers engage in a continuing individualized dialog about shared value--both at a personal and a social level--as actually realized in every transaction. 

• FairPay seeks maximum shared value for each customer, by being specific to the value sought and received by that consumer, at that time, in that context. 
• It reflects individual variations in need, value perception, willingness to pay, ability to pay, and all relevant criteria. It provides sellers with fine-grained, in-context "market" data for segments of one, that enable the sellers to fully understand market needs, and learn new ways to meet them, and to delight their customers, one by one. 
• It naturally reflects broader considerations of shared social value beyond the individual customer, by sharing responsibility with the customer for the social valuation process. Buyers are free to consider whether a seller is socially responsible in the larger sense, and to factor that into their willingness to pay (to whatever extent they desire). What might have been an externality to the seller may be internalized by the buyer, so that the seller must internalize it as well. Social values shift from external constraints at odds with profit maximization to natural subjects of the value dialog with the buyer.
• It changes the equation from a zero-sum game of buyers shopping around for the lowest prices and sellers seeking to be the low-cost provider, to a win-win collaboration for achieving shared value. 
• Instead of consumers seeing profits as coming at their expense, profits are framed as a valid and deserved sharing of their value surplus with a company that is a respected partner in value creation. This gives a new legitimacy to profit-seeking, as integral to collaborative creation of shared value.

Traditional transaction-level pricing models foster a purely price-based race to the bottom, which makes it hard for a company to see at a micro-economic level how social responsibility to their customers and the larger public can benefit their bottom line, well intentioned as they may be. We can talk of shifting the view to long term profit maximization, but how do we do that? The ongoing, relationship-based structure of FairPay micro-economics directly considers shared value, at both the individual and larger level, in a way that removes the conflict.  It aligns profit maximization for the firm with maximization of social value (at least as perceived by individual buyers). Thus Fairpay provides a new micro-economic mechanism to seek long-term profit maximization in ways that directly align with social value maximization.

Where and when can FairPay fit in? It is most clearly applicable to businesses in which marginal costs are low. A major segment is in markets for digital products and services. Such markets already make extensive use of free trials, freemium models, and even pay what you want promotions. These markets already exploit the low incremental cost of producing additional (marginal) items, to give away some product in order to sell more in the future. FairPay can be introduced immediately, to do this in a much more economically efficient way. Some controlled level of zero-revenue transactions are accepted as a market learning cost, in order to discover what buyers are willing to pay and whether they are good partners. With FairPay, instead of "free" offers, the offers are value-based (but are similarly risk-free to the buyer). Similar immediate opportunities for FairPay arise in markets where physical goods and services are perishable (such as those currently addressed by Priceline's "name your price" model). As businesses and consumers get used to FairPay, opportunities to exploit it will expand.

Turning the invisible hand to the broader aspects of shared value. FairPay naturally guides better economic efficiency, while significantly reflecting the broader context of shared value. When this new turn of the invisible hand gives consumers a say in pricing, social values will be served as just another corporate profit opportunity, not a "Corporate Social Responsibility" cost.

• Price efficiency and legitimacy:  FairPay provides a structure for pricing that is dependent on buyer acceptance in a way that legitimizes differential pricing - to efficiently address varying value perceptions, usage patterns, and abilities to pay. Price "discrimination" becomes an equitable method for maximizing shared value when the buyer participates in the discrimination and accepts the rationale for paying more or less than other buyers. This can enable usage-based and other value-based pricing in ways that buyers can agree to and temper as desired (such as paying little extra for an unintended and atypical overage in usage). Many current markets are very inefficient because of consumer aversion to metering and other rate discrimination. "All you can eat" pricing plans have popular appeal to narrow customer interests, but their wastefulness and inequity will become very apparent when customers participate in pricing decisions.
• Disadvantaged markets: This buyer acceptance of "fair and reasonable price discrimination " also enables new ways to efficiently address low-income and disadvantaged markets at a profit (and social benefit).  For example, it becomes clear that those who can afford to pay more than others should do so. Information and digital services that may expensive in high-value/high-ability-to-pay markets can fairly be offered far more cheaply in disadvantaged markets without cannibalizing the markets where buyers know they can and should fairly share their large value surplus. When treated as partners in shared value pricing decisions, consumers will recognize that companies should be able to profit more (and recover more of their costs) from those who can afford it than from those who cannot, and companies will be able to expand and differentiate their markets accordingly.  
• Innovation and productivity: FairPay's individual dialogs about value give companies both the incentive and the market information needed to innovate to better serve existing and potential customers, and to communicate how they offer value to different customers. FairPay pricing dialogs will capture rich and detailed transaction level data on individual buyer value perceptions, needs, and desires. They can re-conceive products and markets, identify new needs, create efficiency, and expand markets, in a natural partnership with their customers.   

All of this can start now in markets that Fairpay is particularly well suited to:  those in which marginal costs are low, such as for digital products and services, and for perishables. As such uses of FairPay develop, our concept of how to think and talk about pricing will change, and our understanding of business as a game of relationships, not just transactions, will grow.

From there we can learn how extend the principals underlying FairPay to other markets, and perhaps develop similar models of relationships and of dialog about value that can work even for products and services where marginal costs are not low. We will enter a new era in capitalism as a way to collaboratively create shared value, guided by a new and broader sweep of the invisible hand.