The Relationship Economy -- It's All About Valuing Customer Experiences

Few grasp how fundamentally the dynamic richness of computer-mediated relationships is changing the very nature of business. We see that we are shifting from a world of products sold in one-shot transactions to a world of "Anything as a Service" delivered in recurring revenue relationships. We see that subscription businesses are emerging in all kinds of industries and growing at much faster rates than their more conventional competitors.

It is less apparent is how deeply this changes the nature of businesses relationships, and how all aspects of a company are transformed by the shift from a linear product pipeline to the cycle of a recurring relationship. What we have seen is just the beginning. First a look at how far we have come, then a look toward the next level.

Foundations: "The Subscription Economy"

A thought-provoking view of how deep this change already is, is in the new book, Subscribed: Why the Subscription Model Will Be Your Company's Future and What to Do About It. I read a pre-release copy and see it as a must-read for anyone with responsibility for designing, managing, or even just executing on business models of any kind -- even if you think subscriptions are not relevant to your business.

Author Tien Tzuo (with Gabe Weisert) speaks in terms of "subscriptions," but this book is is very relevant to recurring business relationships more broadly. Relationships are the future of business. Call it a subscription, a membership, or just a loyalty loop in the customer journey. In our connected digital world, relationships will deepen -- or they will die.

Tien applies the experience of his journey from the very early days of Salesforce to founding Zuora and its fast growth to a recent $1.4B IPO -- where he has had a unique view into the guts of thousands of subscription businesses and their growing pains. Zuora has popularized the term "The Subscription Economy" and provided thought leadership in this space, including well-attended conferences and a rich body of Web resources. (I have spoken several times at Zuora events, beginning in 2011.) Zuora also provides rich data on "The Subscription Economy Index," drawn from the anonymized system activity of hundreds of subscription companies around the world (summarized in the book). His book provides a compelling call to arms and compendium of key concepts and best practices.

The next level -- it's all about valuing customer experiences

This book also provides an excellent foundation for looking further ahead, to a next level in recurring business relationships. My work on FairPay suggests that next step is a sharper, deeper, and more cooperative focus on the value of experiences. I see that shift of focus, leading to a deepening of relationships in which customers are more equal partners. Subscriptions are the most explicit form of recurring relationship, but the essence of what we must now seek to master is how to value experiences, in what I would describe as The Relationship Economy (or The Relationship Value Economy).

We all know that the essence of business is value exchange, but how deeply and broadly do we think about value? How often do we ask our customers about value as they see it? 

I build on what Tien covers, adding exploration of the largely neglected layers of value, and how closer attention to value can enhance relationships.

My focus here is primarily, but not entirely, about B2C relationships. Those are generally asymmetrical, with a human on one side, and an organization on the other side. Our current mind-set is that businesses set the rules of the game, and consumers play their role within those rules. But I suggest that is a temporary anomaly that will revert to a more balanced model.

From products to services -- from transactions to relationships -- Service Level Agreements

Tien quotes Forrester as calling this "The Age of the Customer," and explores how this involves a shift from the old linear flow business model of products through channels to customers, to a new cyclical flow business model that puts the customer at the center -- surrounded by a customer journey cycle of interactions (supported by a corresponding cycle of back-end business processes). (Forrester describes this as a transformation that is driven both from top-down and from bottom up -- drawing on a mind-shift, big-data-based business insights, and transformation of the customer experience, all based on digital transformation.)

Tien describes the thought experiments his team did in the early days of Zuora, thinking about what the limits of subscriptions might be -- could you apply it to refrigerators? floors? elevators? roofs? "Here's the secret we used to answer all of them in the affirmative -- tease out the service-level agreement that sits behind the product. It works for everything. So instead of a refrigerator, it's the guarantee of fresh, cold food..."

Recurring relationships as a repeated game

Whether you think of it as a subscription, or a membership, or just a service agreement, the essence is this recurring cycle of interactions -- the result is that the flow of business changes from linear to circular. This has deep implications, both as to operations, and as to the nature of the relationship. Game theory tells us that one-shot games create very different player behaviors from repeated games. All recurring business has elements of a repeated game, but effective game design can make the game more productive, cooperatively win-win, and long-lived. Let's start with the operational aspects, then consider the broader game.

[Zuora]

Tien explains how recurrence changes business operations to center on the customer interaction cycle, as shown in his diagram (here). He explores how this changes all functions, from innovation, marketing, sales, finance, and IT.

For example he explains how a fundamental change in finance is needed, from the backward view of one-shot product sales inherent in Generally Accepted Accounting Principles (GAAP), to a new kind of accounting that is forward looking toward Customer Lifetime Value. A meaningful accounting must recognize that what matters is not the revenue in the last quarter, but the recurring revenue stream for many quarters forward (decreased by churn, and increased by customer acquisition and up-selling/cross-selling). He explains how he convinced his investors that growth expenses are much like capital expenses, in that they pay off not in the next quarter, but over an extended time -- and that Wall Street has been slow to recognize this.  Similarly, he explores how this cyclical pattern affects all other functions, and requires greater cross-functional cooperation to assure a good customer experience at each touch-point.

This deep enterprise strategy focus draws on Tien's role at Zuora, competing with the likes of Oracle and SAP. That focus makes his book a strong complement to the excellent existing books in this space that are more marketing-focused, including Anne Janzer's Subscription Marketing and Robbie Kellman Baxter's The Membership Economy.

Pricing and packaging as "one of the most powerful growth levers"

In his discussion of marketing, Tien highlights the importance of a topic few businesses think very much about:

"Pricing and packaging" is an old-fashioned-sounding term that might remind you of stocking grocery store shelves, but for subscription business it is one of the most powerful growth levers you can have...In fact pricing is the most important of the four P's [Product, Price, Promotion, Place, from Marketing 101]. 

... Subscription pricing is trickier...at the end of the day, you're not pricing an object, you're pricing an outcome...what do you do about the fact that customers may assign different value to the same outcome? This ambiguity is intrinsic to the subscription model, and it can be either empowering or paralyzing.

...But what happens when you get it right? Whoo boy. Well, customer acquisition gets much easier, and churn gets reduced. Better yet, as your relationship with each subscriber deepens, as you become a bigger part of their lives, that value is translated into revenue...creating a virtuous cycle...You can create intuitive customer journeys...with relevant tipping points along the way. And when your pricing model locks into that subscriber journey, this is when (click) your business model locks into subscriber relationships, and a valuable company is born.

That nicely sets the stage for the next level, which we will get to shortly (but first a broader view).

Customer journeys and loyalty loops -- virtuous cycles

The description above shows how pricing and packaging is what powers the customer journey. The essential issue is the recurring business relationship, and this applies more broadly -- whether a "subscription" or not. In fact, even in product businesses that have no explicit recurrence, modern marketing has recognized the critical importance of repeat customers to profitability. This is seen in  how customer journeys form loyalty loops, as Edelman and Singer explained in HBR:

Rather than merely reacting to the journeys that consumers themselves devise, companies are shaping their paths, leading rather than following. Marketers are increasingly managing journeys as they would any product. Journeys are thus becoming central to the customer’s experience of a brand—and as important as the products themselves in providing competitive advantage.

In the classic journey, consumers engage in an extended consideration and evaluation phase before either entering into the loyalty loop or proceeding into a new round of consideration and evaluation that may lead to the subsequent purchase of a different brand.

The new journey compresses the consider step and shortens or entirely eliminates the evaluate step, delivering customers directly into the loyalty loop and locking them within it.

Thus, recurring relationships are based on "locking" customers into this loyalty loop. The question is whether you try to lock them in by using zero-sum manipulative strategies, or by gaining their trust and cooperation with win-win strategies that deliver value to the customer. As Tien points out, early subscription businesses such as book or record of the month clubs "shipped products by default and made customers pay the price...when they fail to cancel in time... Sadly, lots of companies still depend on customer neglect in order to sustain their zombie business models." Manipulation can work in the short-run ("you can fool all of the people some of the time..."), but which path leads to winning in the long term?

Rooting the customer journey in value

Smart marketers increasingly recognize the importance of customer journeys and loyalty loops. Tien and the others teaching us about these subscription and membership models clearly argue for customer experiences that build trust and loyalty. Tien and many others see value-based pricing as a key factor in doing that.

To that end, I suggest we focus on the unseen connecting layer in Tien's diagram. It shows the inner circle of the customer's view (subscribe, renew, ...) and the outer circle of the business operation's view (quote, order, provision, ...). But what connects these layers?

• Operationally, it is dialog between the customer and the business. This is increasingly a digital connection that can become much more fully bi-directional and nuanced. We are just beginning to tap the power of these connections, using CRM systems (now mostly just for problem handling) and social media (still erratic and largely decoupled from operations), and nascent uses of chatbots (voice and text, powered by AI) that will give this more depth, breadth, and nuance -- and more bi-directionality.

• But what is the substance of these interactions? Value exchange and value propositions that underlie the interactions. Customer consider, evaluate, buy, enjoy, advocate, and bond because they are seeking value. Everything else is just a a means to that end. There is specific monetary quid pro quo (typically in the form of price per unit of service), but that is judged in terms of a rich world of factors such as usage, outcomes, service, and support -- and fuzzier values such as responsiveness, risk, social values, transparency, and trust.

We need this layer of dialog about value -- in all its relevant aspects -- to build a strong loyalty loop. Much like flows through the semipermeable membrane of a cell, this dialog about value is what connects the customer to the business. If the membrane is smartly permeable in both directions, and well-centered on value, the loyalty loop grows strong, and stays strong -- a symbiosis.

How do businesses deal now with dialogs about value? Doesn't it seem that most business want to talk at the customer about value, but rarely want to hear from the customer about value? Even when there is good dialog about the trappings of value, how often does it get to the core issue? Rich dialog about value is typically limited to occasional offline focus groups that bear little relation to reality, supplemented by haphazard social media interactions.

Aligning price and value

In commercial relationships, we have a broad landscape of value, but it all comes back to the exchange -- what do I get and what do I give. Price is the monetary part of the exchange that balances all the other aspects of value.

But how do we talk about price? Businesses set price unilaterally (especially in B2C). They say what they must about price to get initial sales, then seem to avoid the topic like the plague, bringing it up only when they want to initiate a change. Prices are mostly take it or leave it -- even though subscription businesses concerned about churn sometimes negotiate discounts on an exception basis to retain a customer who seeks to cancel. The squeaky wheel may get a bit of grease, but customizing value propositions is the reluctant exception, not the rule. 

Pricing can be cost-based, competition-based, or value-based. In the B2B world, it is widely recognized that value-based pricing is most effective. The problem is that such pricing can get very complex, considering many dimensions of usage, performance, and outcomes. For large accounts there may be meaningful customer participation in pricing, with ongoing price negotiation and adjustment processes. In the B2C world, value-based solutions are generally sacrificed in the interests of simplicity and scalability.

But, as Tien observes in the passage above, pricing and packaging is too important to just take the easy way out. Now we can conduct dialogs about value that work for consumers, if we get smarter about how to do that. Many say consumers require simplicity, but they also want fairness. Dialogs about value are a traditional behavior, engaged in throughout human history. It is only in the past century and a half that we opted for the scale efficiencies of uniform, pre-set, seller-mandated pricing and sacrificed these customized dialogs about value. Having grown up with this mind-set, we forget that things were ever different.

But now we have the tools to get back to individual dialogs about value, even between a business and a mass of consumers. Computer-mediated dialogs are getting powerful, and AI support will increase that power. As Tien said, 

You can create intuitive customer journeys...with relevant tipping points along the way. And when your pricing model lock into that subscriber journey, this is when (click) your business model locks into subscriber relationships, and a valuable company is born.

How do we get that lock in? A key aspect of pricing is whether it is usage based. Tien's view across both B2B and B2C businesses reveals some key points about the metrics of value. He notes that "at its heart, usage-based billing is a way of quantifying value...how they actually use your service...a 'value metric.' Simply put, a value metric should do three things: align to customer needs, grow with customers, and be predictable (both for customers and the organization)." But his firm's analysis of the subscription businesses they track finds that "only about 27 percent...use some sort of usage-based pricing today." He finds that those who do grow significantly faster. In B2C, unlimited usage plans are generally the norm. But, referring to cable companies, Tien says "smarter usage-based billing...will make their video content services more responsive and valuable."

Conventional wisdom is that consumers don't like usage-based models, but I suggest that is just because we have not yet gotten creative about applying modern technology to let us do usage-based pricing in a smarter way. We need to find pricing strategies that are truly aligned with the value that each customer perceives.

The FairPay architecture for valuing customer experiences

FairPay is an open architecture that seek to align price with value in its broadest sense -- at all relevant stages in the customer journey -- and on an individualized, dynamic, context-specific basis. (See this article in the Journal of Revenue and Pricing Management, or this illustrated summary from ESADE Business School.) FairPay transcends profit and non-profit orientations, and applies controls that can be as tight or loose as desired by each business.  FairPay centers the customer journey on dialogs about value, and drives that by empowering the customer -- while enabling the business to maintain control based on tracking the customer's reputation for fairness. These levers are applied in a cyclic game that encourages cooperation to continue a mutually rewarding relationship. 

Value-based pricing and packaging can now be increasingly dynamic, adaptive, and individualized. FairPay highlights how pricing and packaging that reflects the value of each customer's experience is best done after the experience, when real value is best known. This relates to pricing risk -- does the customer risk not getting their money's worth? The value is also best assessed with user participation, to ensure alignment with diverse customer perceptions. Again, this can be done at varying levels, which shift from the pre-set nature of conventional mass-marketing practices in some or all of the following aspects:

• Pre-set packaging -- are packages (bundles) locked-in in ahead of time, or as items are desired? Does the customer need to know in advance what content they will want, or how much of it?
• Pre-set usage levels -- does pricing ignore usage, or relate to pre-set usage tiers, or does it depend on other aspects of value and outcomes? What of customers with widely varying usage levels? Does all-you-can-eat pricing make any sense for the majority of users who are not "average?" If pricing is usage-based, are there reasonable discounts for volume (and perhaps price caps or rollovers to minimize customer risk)?
• Pre-set price schedules -- does the business have unilateral control of price schedules, or does the customer participate in determining price based on their perceptions of the value experience? How is ability to pay factored in, if at all?

Advanced forms of FairPay address all three of these aspects. Think of this as finding prices and packages that map to value with customized fidelity, considering timing and risk. 

(Even without giving customers any direct power over price schedules, sellers can reduce customer pricing risk, while adding little risk to themselves, especially for digital services. Some simple strategies for that relate to delayed pricing of bundles and usage plans that give customers more "optionality" by not forcing them to commit to specific bundles or usage levels in advance. As noted above, Tien argues for "smarter usage-based billing" for cable TV -- I have proposed just such a smarter, more adaptive, value-based model, which I call "post-bundling."
[Update 3/31/18:] A fuller and more broadly applicable discussion of this important -- and only mildly unconventional -- "post-bundling" / "post-pricing" strategy is now in "Risk-Free" Subscriptions to The Celestial Jukebox?) 

A value loop that is cooperative, adaptive, and self-sustaining

FairPay is driven by the cyclic process of recurring business relationships -- it fits with subscription cycles, and customer journey loyalty loops of any kind. The most advanced form of FairPay applies a balanced level of both business and customer control of pricing across multiple customer journey cycles (as depicted here). This applies a "new" balancing method:  the customer is granted full pricing power during each cycle, and the business continues to offer to grant that power going forward if it judges the customer to be reasonably fair about that. This shapes the relationship into a repeated game that motivates fairness on both sides.  (I say "new," because we tend to forget that this is not so unlike the kind of intuitive balance we have applied for millennia in traditional person-to-person commercial relationships.)

The breadth of this architecture is in how control is applied by the business. With the most strict control, we have the conventional, take-it-or-leave-it model of seller-set pricing. With the most loose control, we have voluntary patronship models (like those offered by Patreon, Indiegogo, and Kickstarter), voluntary membership models (like The Guardian), and pay what you want (perhaps most successfully applied by Humble Bundle), where customers have full control of pricing. 

But however strict or loose the control, the focus is on the cyclic nature of the relationship. Too tight, and too many customers are unhappy and leave the relationship. Too loose, and free-riders may make the business unsustainable (ending the cycles). The right balance depends on the nature of the business, the customers, and the service and how its value is perceived. This membrane of value is what brings these factors together, and empowerment, dialog, and reputation are the tools a business can manage to find the right balance -- as that balance changes from customer to customer, and from cycle to cycle. Throughout the customer journey, effective dialogs about value are essential to keeping this pro-actively on track, building cooperation and trust, for a wide range of customers, over time-varying contexts.

From this perspective we also see that Customer Lifetime Value (CLV) is just one of two critical success metrics -- it reflects one side of the total picture. Businesses fail to recognize the equal importance of the complementary metric, Vendor Lifetime Value (VLV) -- the value the business provides to the customer over the lifetime of the relationship. Recurring businesses flourish when the customer looks to the business not for the best bargain right now, but as a reliable and trustworthy source of continuing VLV, The way to sustainable profit is to change the conversation from price to value, and from short-term to long-term.

A next level in customer-experience-centricity

Tien makes a big point of how customer-centricity and customer experience become critical in subscription businesses. FairPay takes this to a new level.

Tien points out how "...IoT [the Internet of Things] allows you to rediscover your customers. It lets you learn what they really want. In fact, I would argue that the only true competitive advantage is your relationship with and knowledge of your customers." I have written about how IoT provides a new kind of data about value (an IoT Cloud of Value), and how FairPay's dialogs on value complement that with direct input from customers (and how that IoT data can help validate what customers say about value).

Much as I have done, Tien alludes to traditional modes of commerce: "Once upon a time, we used to know the people we bought from...we used to know the people we sold to, the neighbors in our village. All that knowledge got lost a long time ago...But it's coming back in a big way."

Price is the visible metric of net value, and competitive success is really a matter of value propositions and how a business orchestrates them. Tien speaks of a new "golden age of marketing" and how "the marketing department becomes a giant test laboratory." He speaks of how "subscription businesses need to constantly be optimizing revenue through pricing," and how "price triggers match customer requirements and demonstrate value." FairPay shows how to take that from an occasional thing and operationalize it throughout each cycle of the customer journey.

Part of that can be seen in this more detailed view of the multi-layer, cyclic, repeated game structure of FairPay. It shows how the game serves as an adaptive value-discovery engine, providing an architecture for adaptively structuring products/services into tiers, and segmenting customers based on what they value, their willingness to pay, and their fairness.

By embedding these dialogs about value deeply into the customer journey, businesses can turn their everyday operations at each touchpoint into ongoing and continuous business experiments. This centers on price and value propositions, providing a base on which to become adaptively experimental about not only pricing and packaging, but also about product/service design. With detailed, realtime data about what customers do and do not value (potentially for each unit of product/service), the business becomes an adaptive engine for co-creating value with your customers in ways that can maximize Customer Lifetime Value (and Vendor Lifetime Value) across the fullest accessible market -- and as that market changes.

It is all about maintaining a shared understanding about valuing customer experiences in diverse and dynamic contexts. Doing better at that will bring more success for both business and consumers in this digital age of mass-customization. Our Relationship Economy will increasingly shift from the impersonal invisible hand that rations scarce products, to a more human and personal invisible handshake in which both partners in the relationship cooperate on sustainably creating value.

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More about FairPay

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). 

My article in the Journal of Revenue and Pricing Management, "A Novel Architecture to Monetize Digital Offerings" also provides an overview of FairPay (summarized more briefly in the ESADE Knowledge article "Three building blocks to monetize a digital business," and previously in Harvard Business Review, "When Selling Digital Content, Let the Customer Set the Price.").

Even better, 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.)

Profiting from Habit -- Seamless Monetization

Marketers increasingly recognize how essential habit and seamlessness are. "How to Win and Keep Customers" is the cover theme of the current Harvard Business Review -- the lead article says to focus on habit, not loyalty, while others say that "habit is how we build the connection" and "habit beats novelty."

Some people question whether FairPay is seamless enough, and whether it goes against habit, but I suggest that, done right, it actually builds a stable, self-adjusting relationship based on habit in a way that is natural and largely seamless.

Habit and subscriptions

Subscriptions are about as habitual as commerce can get. The dream of many subscription marketers is to get customers to subscribe, put them on autopay, and hope they never think about it again -- pure habit. Not even "thinking fast" as Kahneman called it, but not thinking at all.

But the reality of the subscription habit is not really so simple -- and poses financial risk to the subscriber. Seamlessness requires not just absence of effort, but absence of risk.

• Especially for unlimited digital subscriptions, customer usage -- and value -- varies not only from customer to customer but also from period to period. 
• Many customers are often nagged by the feeling that they are paying too much for a service they no longer find worth the price (and may not be using). 
• A price that sustains lack of thought from one customer at one period may not do so for another customer -- or for the same customer, for a different period. 
• Perceived value fluctuates, and when it goes below a threshold, the dreaded cancellation request arises. 
• Then things get hairy, as previously profitable customers may or may not be coaxed to stay. 
• Both businesses and consumers spend great cognitive effort (and service agent time) negotiating whether to cancel, or agree on some customized retention offer -- and if successful, that just kicks the can down the road a bit. 

No matter what your subscription price, there are problems.

• If the habit does not fail for many customers, the question is why not? Is it because your price is so far below the pain point that you are leaving money on the table for most of your customers? 
• Whatever the failure rate, what about the unseen base of the iceberg?
  ...those who do not subscribe because the price seems too high?
  ...the many customers who don't even consider subscribing because of fear they will regret it?
  ...those who decline even a free trial, because they do not want to have to remember to opt-out? (That barrier is reinforced by the consumer-hostile "roach motel" policy of most subscription businesses that make it painfully difficult to cancel.) 

So what seems a nicely mindless subscription process actually works rather crudely, and not always so mindlessly. (See Winning Back Lost Customers -- Before They Get Lost.)

At the same time, keep in mind that for some customers, seamlessness is not the issue. An important segment of consumers enthusiastically embrace behaviors that are far from seamless. Some consumers willingly bear punishingly high cognitive loads -- some in various forms of bargain hunting (such as to maximize credit card bonuses and airline rewards), others because they are "superfans" and actually want to be deeply involved.

Habit and FairPay

The new FairPay relationship strategy entails a learning curve that may seem burdensome, but it is risk-free, and once established, it can be simpler than conventional subscription (or membership) processes.

When managers consider FairPay, a common initial concern is that it is unfamiliar, and that it imposes a new cognitive burden on the customer. The burden is in the cooperative discovery process that leads to personalized prices, based on dialogs about value (and price) with each customer. In principle, that process is adaptive, forever. That may sound like a formula for a lot of "thinking slow," something humans try to avoid, and marketers rightly wish to help them avoid.

But that is not the full picture, for two reasons. The first, as explained above, is that the seemingly mindless subscription process often fails and becomes burdensome. It involves not only cognitive effort, but financial risk.

The other reason is that FairPay actually can become habitual, and ultimately become an even simpler habit than a conventional subscription (even when that subscription is working reasonably smoothly). As a buyer and seller gain familiarity and gain a shared understanding of received value, the FairPay seller can adapt the process to create a level of confidence and trust in its workings that reduces the cognitive load:

• After a short learning curve, the seller's algorithms can begin to predict the value that the buyer sees, and can suggest prices that the buyer will generally be satisfied with. These suggested prices can use predictive and anticipatory analytics and machine learning to reflect the dynamics of value, as perceived by the buyer -- reflecting how many and which items are consumed, with what intensity, and with what results -- and that can be shown in the usage report that goes with each pricing request.
• The buyer sees the progress of that learning as it emerges, and becomes increasingly comfortable that the seller's pricing suggestions are becoming properly personalized to reflect their usage and values. Such dynamic suggestions can become far more aligned with perceived value than any fixed subscription fee.
• Once that comfort level emerges and is sustained for a while, the buyer can simply put the process on autopilot (using autopay, just like a conventional subscription). The difference is that the buyer always has the option to review recent charges, and can go back to make a unilateral adjustment any time they might feel those prices are out of line for a given period. That can be a one-time adjustment, or can trigger a deeper re-calibration of the personalized pricing process.
• This process eliminates financial risk to the subscriber -- an important aspect of seamlessness. Customers need not fear subscribing under FairPay, because there is no roach motel -- they will not be required to pay by default, to pay for services they do not use, or to remember and go through hoops to cancel a service they no longer want. 

Because this adaptive learning can become largely automatic, with just occasional re-calibrations, this can actually become just as simple and impose no more cognitive load than conventional subscriptions. Done well, it can actually become more seamless.

And, perhaps more importantly, with a FairPay relationship, there is no financial risk to fear -- consumers need never doubt that subscribing is worthwhile, because they share in the power to set the terms, expending as much or as little effort as they deem worthwhile..

Easing the learning curve

Of course this is a new method of doing business, so early uses will not go as smoothly as they will after businesses and consumers have gained a good understanding of how to use it effectively. So for early uses it is important to be careful to select lines of business and customer segments where it is likely to work well, and where some cognitive load will be tolerated. Suggestions on how to do that are in a companion post, Finding Good and Fair Customers -- Where Are the Sweet Spots?

FairPay is a new pricing method that reduces risk, but involves joint learning. It will not be simpler for all people, all of the time. But it promises to reach a level of habit that will be simpler for many people, most of the time. And as businesses and consumers learn to use it effectively, it will be simpler for more people, more of the time. And that will generate greater CLV, from a wider market.

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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 Changes the "Game" of Commerce

FairPay literally changes the "game" of commerce -- from a series of independent one-time games of individual transactions, to a repeated game of relationship. Modern consumer commerce is built on seller-set pricing of transactions that is optimized for mass marketing to make sales in the short term. (Even recurring subscriptions have pre-set prices designed to get subscribers, not keep them. [See my 11/15/18 update below on how subscriptions are also a repeated game, but a very different one].) That model can now be seen to have two fundamental failures:

1. Despite the rise of 1:1 marketing, this model has little structural orientation to retaining customers by building long-term relationships that maximize loyalty and customer lifetime value (the games are essentially independent and zero-sum). 
2. Despite the growing prevalence of experience goods, this model gives little consideration to how individual variations in value received can affect the value proposition.

It is our habit to think of seller-set pricing as a given in consumer markets, but that only dates back to the mid-1800's and the rise of department stores. Traditionally (and still in much of the less-developed world), commerce and pricing were dynamically personalized, based on human negotiation and personal relationships. The strategies of FairPay may seem to go against what we are conditioned to think of as normal behavior relating to price, but, in reality, they merely return us to more natural human behavioral norms (See So Last Century!.)

How FairPay creates a new kind of relationship focus can be seen most sharply in a slight clarification of my older diagram that highlights its structure as a repeated game. This version makes the game as easy as 1, 2, 3 -- at the most essential level, it has just three repeating steps:

1. Set the rules (Seller)
   
   Just as in current practice (for mass-marketing), the seller sets the ground-rules of the game. The seller decides to whom to make an offer, on what terms and conditions. That gives the seller overall control. The seller makes the ground-rules clear to the buyer up front, so both parties understand the nature of the game. FairPay is a game that seeks fairness, transparency, and cooperation.


2. Set the price (Buyer)
   
   "Price it Backward." Reversing traditional practice, with FairPay the buyer is granted the power to set the price -- and does that after using the product/service and seeing its actual value in use, and in context ("post-pricing"). The buyer is the one who has direct knowledge of the perceived, realized value in the buyer's unique context -- and after use is when that value is best known and quantified. (Obviously the buyer has selfish incentives to set the price lower than the actual fair value, but FairPay provides a new way to balance that selfish motivation.)


3. Repeat the game? (Seller)
   
   "Extend it Forward?" This seller power is what makes FairPay work to converge on fair prices over the course of the relationship, balancing the power of the buyer to set the price. The buyer knows this is a repeated game, and must consider the consequences when exercising his price-setting power. The seller tracks the price, and determines, in the context of the overall history, whether it seems fair enough to the seller to continue the game for another round. That motivates the buyer to price reasonably fairly. FairPay offers are not always open to all -- they are a privilege that can be granted or withheld.

• Repeating the steps (back to Step 1, with a growing shared understanding)
  
  If the seller pricing is judged fair by the seller, the game repeats, returning to Step 1. At that point the seller can adjust the rules by changing what is offered, under what terms and conditions. If the buyer pricing is judged as generous, more attractive offers may be made. If fair enough, similar offers may be made. If fairness is questionable, more restricted offers may be made, and probationary warnings may be given. Fairness is determined not just from the current transaction, but with consideration to the fairness reputation score that buyer has established over the history of the relationship. If, after repeated tries to nudge the buyer, the seller concludes the buyer is just unwilling to play fairly, the seller may decide that game is not to be repeated further.

• Ending the game -- Fallback to conventional pricing relationship
  
  If the game is not repeated because the seller concludes the buyer is unfair, conventional set-pricing offers would typically be maintained as the fallback option. In any case, the buyer knows that if they want to maintain the FairPay privilege of setting their own price, they must satisfy the seller that they are being at least marginally fair about it, most of the time.

A new kind of balance of powers

The game of FairPay applies a central balance of powers, as seen in the dialectic of the two arrows:

• Price it Backward reflects the buyer's power (and privilege) of setting the price after he knows what the product was actually worth to him (unlike the conventional case where he risks buyer's remorse)
• Extend it Forward reflects the seller's power to gate the FairPay offers, to control the rules and to repeat the game or not -- to limit FairPay offers as a privilege granted only to those who set prices fairly.

This balance of powers drives convergence toward fair, personalized pricing, in the context of an overall win-win relationship.

This process is participative in that the buyer has real say in the pricing, but the seller still gets to limit their risk, and retain overall control of the business.  This participative process ensures that both parties continue only if they agree that the prices are fair.  The longer this continues, the closer the prices get to an optimal win-win value exchange.

This participative nature is what gives FairPay real power to enable a company to build a deep relationship with its customers -- to achieve high loyalty and sustainable competitive advantage. Instead of a series of largely independent zero-sum games (transactions), we move to a repeated game that seeks win-win (relationships).

Thus FairPay realizes the economic ideal of individually differentiated prices that correspond to the utility and price sensitivity of each buyer, in a way that avoids the feeling of unfair "discrimination." Unfair price discrimination is a problem of roles and perception -- there is nothing inherently wrong about price discrimination (done fairly, it increases our total economic welfare) -- if the buyer sets the price, then the "discrimination" is inherently acceptable and fair.***

How this changes B2C relationships is described in Harnessing the Demons of The Digital Economy, How it moves us beyond the invisible hand (which no longer works for digital products/services because there is no scarcity to allocate in balance with demand) is described in An Invisible Handshake for The Digital Wealth of Nations.

Playing the game

Of course the first few cycles of a new FairPay relationship may result in wildly unfair prices as buyers and sellers just begin to learn about one another and what value is obtained. But there is little real cost to that initial learning period when marginal costs are near zero -- as is the case for most digital products/services. The first few cycles are simply expendable learning experiments in relationship building. Throughout the process, the seller remains in control of how much of which products/services to offer to which customers before prices are set, and so remains in final control how much value to put at risk -- effectively limiting "FairPay credit" or value at risk. This is done using the buyer's fairness reputation score in much the same way as a credit rating.

FairPay creates Win-Win Customer Journeys -- With Dialogs on Value. By applying "dialogs about value" during these three steps of the FairPay game (an enriched form of "loyalty loop"*) the seller can explain why a suggested price seems fair to them, and the buyer can explain why they disagree and decided to set the price higher or lower than that, and the seller can use that information (plus other data) to determine how fair that price is. (The other data can include measured data on how the product/service was used, and other available data about the buyer and his usage, such as relating to value achieved, ability to pay, etc. All of that data can be used to validate the dialog.)

With transparent dialog, each side lets the other know what they think is fair, and what the other should consider. If they cooperate effectively, they converge toward a win-win relationship based on personalized prices that fairly reflect the actual value to that individual customer. Each side is motivated to build a reputation for fairness in assessing value. If either side becomes convinced the other is simply unwilling to be fair, the game ends. In that case the entire relationship may end, or it may revert to a conventional pricing relationship, based on conventional seller-set pricing.

A scholarly research paper on “The Evolution of Cooperation in Infinitely Repeated Games” observes that “cooperation does prevail … when the probability of continuation and the payoff from cooperation are high enough.” That supports the expectation that FairPay will generally work well if the business makes the repeated game attractive to the customer, and applies reasonable, but not harsh, controls on repetition and FairPay credit outstanding to limit the losses in cases where the customer fails to cooperate. (Some basic background on repeated games is in  Wikipedia and Policonomics.) [Update 11/30/16: Very relevant new research paper -- see Update note below.**]

Some perspectives

Letting the customer set the price after receiving the product/service may seem to businesses as a terrifying leap. But the seller's power to continue or discontinue the repeated game, and to adjust the rules on each cycle, make all the difference. The seller retains overall control of the game, and manages how much value is at risk. With products that have low marginal cost, the value at risk is small and readily managed.

Many readers will see a similarity to pay what you want (PWYW) pricing in FairPay -- but consider the important differences:

• First, keep in mind that PWYW has proven to be surprisingly effective in some applications. People naturally do want to be fair and generous (up to a point), even when they do not have to. This is well established by a wealth of recent studies in behavioral economics and actual business trials. (See Making Customers Want to Pay You -- Research on How FairPay Changes the Game,)
• The problem with PWYW is that most buyers pay, but many do not pay enough to be sustainable for routine business. Too much unfair pricing behavior can limit the usefulness of PWYW -- but PWYW is applied in the form of one-time games that impose no penalty for unfair pricing.  . 
• It is the motivation to continue the repeated game of FairPay that turns it into a totally different game -- one in which there is a very clear cost to the buyer for being unfair. 

Note also that no other B2C pricing method sets prices backward, after use.

• It is in hindsight that the true, realized value of a product/service becomes known, and that is when the buyer knows enough to set a fair price (especially for experience goods), without discounting for fear of buyer's remorse. That is also when the seller can see what value the buyer appears to have received, based on actual usage data -- how many items did they consume, when, and how. 
• This enables a value-based pricing strategy -- much like those that have proven highly effective in B2B contexts -- but in a form that is simplified and scalable for mass B2C use.

For more detail on how the process works, and how it integrates with conventional pricing, please see my post with additional diagrams, such as this one:

  

  More Diagrams and Process Explanation...

Toward a win-win market economy driven by fairness

Throughout most of history, market economies have had a orientation to human relationships that operated as repeated games -- apart from a historically short and dehumanizing detour through a regimented form of mass marketing that we have been conditioned to view as normal. Now our digital age presents a new way to restore that win-win human element -- one that exploits the scale efficiencies of modern marketing, but that returns individual human relationships and values to the fore.

*[Update 11/16/16: A Value Loop -- perhaps the best term for this would be a "value loop," since we are creating a positive feedback loop that seeks to maximize value. The business sees it as Customer Lifetime Value (a result of loyalty) and the customer sees it as Vendor Lifetime Value (as described in Chapter 23 of my book).]

**[Update 11/30/16: A very relevant new research paper,  The Pay-What-You-Want Game and Laboratory Experiments by Matthias Greiff and Henrik Egbert, examines the basic repeated game structure that FairPay applies, and gives strong support to the expectations of success as outlined here. (A blog post expanding on this research is planned.)]

***[Update 4/20/17: Think of this is "value discrimination." Marketers and economists think about "price discrimination" as the way to be efficient about getting the most revenue from each customer. But in recurring relationships, what we really want is value discrimination -- finding the optimal value proposition for each customer. Value discrimination involves optimizing not only the price, but the value of the product/service package that is provided for that price. See newer posts on Value-based Pricing and Finding Value in the Subscription Economy.]

***[Update 11/15/18: The current repeated game of subscription -- I should clarify that subscriptions are also a repeated game, but a very different one that only weakly drives cooperation. The simple contrast, is delineated in my Techonomy article:

• From today’s conventional repetition game: “Here is our monthly price, take it or leave it. We hope you will take the risk — and be satisfied enough to continue this game.”

• To the FairPay game: “We will grant you the power to pay what you think fair for you after each month’s use — but we will continue that game (beyond a few trial cycles) only if we agree that you are being reasonably fair.”

This changes the game from dominant control by the business, with hopes for enough loyalty to continue it, to shared control, driven by fairness on both sides.


----

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 Book Just Published / Related LinkedIn Group

My book on FairPay was just published. It is part of a series on Service Systems and Innovations in Business and Society, curated by Jim Spohrer and Haluk Demirkan of The International Society of Service Innovation Professionals (ISSIP), and published by Business Expert Press (BEP).

Some extracts from early praise (as cited on the book page):

Anyone responsible for monetizing digital content in consumer markets should understand this radically new perspective on pricing and how to maximize customer lifetime value.

...an innovative and visionary methodology …what disruption could look like...

...groundbreaking...

...compelling …promises to transform business...

Highly recommended for digital business entrepreneurs, as well as established firms...

The full title is FairPay: Adaptively Win-Win Customer Relationships. It pulls together a wealth of material from the blog plus new additions. The book has sections that are very pragmatically focused on how FairPay works in specific industry use-cases (as an alternative or complement to conventional freemium subscriptions, paywalls, and other methods). It also addresses the conceptual foundations in marketing, behavioral economics, game theory, and related areas.  It explains how FairPay can solve critical problems in pricing, value propositions, and customer relationships -- with a focus on the digital content and services businesses now in the throes of digital disruption, but also for other businesses.

I hope readers (both early followers and those new to these strategies) will find this not only a useful introduction to FairPay, but also a thought-provoking perspective on the broader issues of modern consumer commerce and how to make it far more win-win. As noted below, there is now a LinkedIn group dedicated to building on this theme.

Some of the new material in the book will be featured in added blog posts over the coming months.

Details on the book and how to get it are now online.

Order now from:

• Business Expert Press
• Amazon
• ISSIP (member discount)

Online Supplement

As an added feature there is a special online supplement to the book with links to updates, blog posts with added detail, and other resources (also accessible as FPZLink.com).  Even before you get the book, this can offer a preview of much of the content (but in less organized form).

LinkedIn Group for FairPay and related innovations -- Please join!

As part of the online supplement, there is now a LinkedIn Group called FairPay: Adaptively Win-Win Customer Relationship, to enable you to connect with others who share interest in FairPay and related innovations in participative co-pricing, relationship marketing, customer journeys, and behavioral economics - especially to maximize Customer Lifetime Value for digital services.

Background:

This is part of a collection curated by Jim Spohrer and Haluk Demirkan of The International Society of Service Innovation Professionals (ISSIP).

• Business Expert Press is a leader in concise and applied learning resources, and partners with Harvard Business Publishing
• ISSIP is an organization founded by IBM, Cisco, HP and several Universities with a mission to promote Service Innovation for our interconnected world.
• Jim Spohrer is IBM Innovation Champion and Director of the IBM University Programs World Wide,
• Haluk Demirkan is Professor of Service Science, Information Systems & Supply Chain Management, and the Founder & Executive Director of Center for Information Based Management at the Milgard School of Business, University of Washington (UW) -Tacoma

Early Praise for FairPay (the Book)

Available soon!  Pre-order now!

"Anyone responsible for monetizing digital content in consumer markets should understand this radically new perspective on pricing and how to maximize customer lifetime value. FairPay provides strategies and operational methods for creating better relationships -- to increase loyalty, market reach, and profits." 
- Shelly Palmer, Business Advisor, Author, Commentator

"Reisman unveils a new world of possibilities through an innovative and visionary methodology that introduces a reference platform for digital value exchange. FairPay is very versatile in its applications and compatible across industries. It is a great example of what disruption could look like in a new digital business era." 
- Lucila Pagnoni, News Corp Australia

"FairPay boldly explores the future of pricing from a co-creation of value perspective. Highly recommended for digital business entrepreneurs, as well as established firms working on their digital transformation." 
- Jim Spohrer, IBM and ISSIP.org

"A groundbreaking and definitive book on pricing strategy for the digital age. This highly innovative and practical work shows how enterprises can develop relationship-based pricing strategies leading to long-term customer relationships, based on principles of equity and fairness for both customer and supplier."
- Professor Pennie Frow, University of Sydney Business School

"This compelling book explains how a radical shift in how we set prices can help enterprises become more customer focused. It promises to transform business by providing a new operational dynamic for maximizing customer lifetime value."
- Professor Adrian Payne, University of New South Wales Business School

Available soon!

Pre-order now! / More details

• Business Expert Press
• Amazon
• ISSIP (member discount)

Customer Journeys of Value -- Measuring the Elements of Value

The Elements of Value, a new HBR article from Bain consultants, provides an excellent structure for measuring value in consumer markets. FairPay provides an adaptive process for managing customer journeys that center on value. These ideas can be applied in combination to drive loyalty loops around value, in order to increase Customer Lifetime Value.

Some interesting quotes from the article:

When customers evaluate a product or service, they weigh its perceived value against the asking price. Marketers have generally focused much of their time and energy on managing the price side of that equation...

What consumers truly value, however, can be difficult to pin down and psychologically complicated. How can leadership teams actively manage value or devise ways to deliver more of it, whether functional (saving time, reducing cost) or emotional (reducing anxiety, providing entertainment)?

...A rigorous model of consumer value allows a company to come up with new combinations of value that its products and services could deliver. The right combinations, our analysis shows, pay off in stronger customer loyalty, greater consumer willingness to try a particular brand, and sustained revenue growth. 

FairPay provides a structure for building relationships around value, by giving consumers limited power to set prices that correspond to the value they receive -- for as long as the seller considers them to be fair about how they do that (but not longer). This is described in my post on customer journeys and the elsewhere on my blog (see links below). The elements of value outlined in this HBR article can be an effective structure for the dialogs on value that FairPay inserts into the customer journey to enable that.

Since there are 30 of these elements, in a hierarchy of four levels (functional, emotional, life changing, and social impact), it would not be practical to force dialog on every element on every cycle -- and only some of them will be relevant to any given business. But the dialog structure can be varied adaptively to introduce relevant elements whenever the customer or the business find them to be relevant. This can enable the dialogs to generate rich value data.

And keep in mind, that these specific elements are just a way to specify and communicate value judgments that are actually very intuitive and nuanced. The beauty of FairPay is that it is driven by the consumer's intuitive sense of value.  The seller can drive the dialog based on analytics such as these, to seek to understand that nuanced and intuitive perception of value through simple questions, while the buyer need only respond, and need not be concerned about the structure that is driving that.

The dynamically adaptive nature of FairPay also enables the level of dialog to be varied over time, to collect this important value data without undue burden on customers. Value dialogs might be relatively frequent and detailed when a relationship starts, but only until a common understanding of value is reached.  Then the dialog level can be cut back, or even dropped completely, as long as both parties are satisfied with putting the adaptation process on autopilot, but then re-engaged in more detail any time either party senses a disconnect on their shared understanding of value (for that particular customer).

The article concludes with a quote from an executive that “I have a lot of people working on product features and service improvements, but I don’t have anyone really thinking about consumer value elements in a holistic manner.” FairPay's embedding of dialogs about value into the customer journey loyalty loop makes thinking about customer value elements in a holistic manner central to routine operations.

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).

My Forthcoming Book on "FairPay: Adaptively Win-Win Customer Relationships"

Enterprises everywhere are recognizing the need to be more customer focused, but struggle to see how.  This new book explains a revolutionary approach to pricing – FairPay -- that can change the game.  FairPay is a new logic for conducting ongoing business relationships that adaptively seek win-win value propositions in which price reflects value.

I am very pleased to report that this book is in production, to be published later this year. It will be part of a series on Service Systems and Innovations in Business and Society, curated by Jim Spohrer and Haluk Demirkan of The International Society of Service Innovation Professionals (ISSIP), and published by Business Expert Press (BEP).

Jim saw the potential of FairPay, and how well it is aligned with the service-related innovations he and his colleagues at IBM and ISSIP are championing. He asked that I write this book, drawing on the material in my blog. I look forward to seeing it published in the coming months.

The full title is FairPay: Adaptively Win-Win Customer Relationships. It pulls together a wealth of material from the blog plus new additions. The book has sections that are very pragmatically focused on how FairPay works in specific industry use-cases (as an alternative or complement to conventional freemium subscriptions, paywalls, and other methods). It also addresses the conceptual foundations in marketing, behavioral economics, game theory, and related areas.  It explains how FairPay can solve critical problems in pricing, value propositions, and customer relationships -- with a focus on the digital content and services businesses now in the throes of digital disruption, but also for other businesses.

I hope readers (both early followers and those new to these strategies) will find this not only a useful introduction to FairPay, but also a thought-provoking perspective on the broader issues of modern consumer commerce and how to make it far more win-win.

Some of the new material in the book will be featured in added blog posts over the coming months.

I will be providing updates about the book on this blog as it approaches publication.

• Current details on the book are now online (also accessible as FairPayBook.com), and updates on availability will be provided there. 
• As an added feature there will be a special online supplement to the book with links to updates, blog posts with added detail, and other resources (also accessible as FPZLink.com)

Background:

Business Expert Press is a leader in concise and applied learning resources, and partners with Harvard Business Publishing

ISSIP is an organization founded by IBM, Cisco, HP and several Universities with a mission to promote Service Innovation for our interconnected world.

Jim Spohrer is IBM Innovation Champion and Director of the IBM University Programs World Wide,

Haluk Demirkan is Professor of Service Science, Information Systems & Supply Chain Management, and the Founder & Executive Director of Center for Information Based Management at the Milgard School of Business, University of Washington (UW) -Tacoma

[Updated 9/10]

Winning Back Lost Customers -- Before They Get Lost

Keeping good customers is increasingly central to maximizing profit and Customer Lifetime Value (CLV), as highlighted in the March HBR Idea Watch "Winning Back Lost Customers." As our economy shifts toward subscription-based services, companies are realizing that customer acquisition is very costly, and saps profits if churn is high. Win-back offers must be personalized more smartly, to present the right value proposition to the right customer.

Here I build on that article to suggest how companies can

1. Automatically create personalized win-back offers that are adaptively win-win.
2. Shift from reactively trying to win back customers who are almost lost -- to proactively enhancing the customer journey to retain them before they get lost at all. 

FairPay is a new revenue architecture for creating win-win offers, both for retention, and in routine business. Retention is a perfect test-bed for experimenting with this new strategy at low risk -- a new way to seek low-hanging fruit -- and then to build on that.

With regard to conventional win-back offers, FairPay can initially be trialed as adding a new, more automated, and more efficiently win-win tool.

But the deeper breakthrough of FairPay will be to put proactive retention directly into the customer journey loyalty loop.

• We we know that an ounce of prevention is worth a pound of cure, but even these smarter retention strategies are just belated attempts to cure a customer's dissatisfaction with the value proposition after it has become a serious problem.
• When proactively integrated into the customer journey loyalty loop, FairPay creates ongoing dialogs about value, so that potentially good customers are routinely engaged to jointly craft personalized value propositions, long before they approach the point of being lost. 
• Just as smart marketers are building loyalty loops into every cycle of the customer journey, they can do the same for value and retention. 
• Think loyalty loop = retention loop.

The HBR article on "Lost Customers" shows how sophisticated marketers pay attention to:

• selecting the right customers to try to retain (using propensity models), and 
• finding the right value propositions to present successful "win-back" offers tailored to those individual customers. 

Key success parameters for a retention strategy are both cost and ROI. Typical options include discounts, service upgrades, and combinations of the two, and results can be enhanced by tailoring the nature of the offer -- and whether to make an offer -- to the reasons a customer seeks to cancel. The sidebar of the HBR article explains how Cox Communications is getting smarter about customizing its retention offers to individual customers of its cable TV and Internet services, and triggering such offers at the right points in their customer journeys. A big step in the right direction -- of customizing the pricing and features of their offers -- but still doing it in a costly manner, with human intervention, on a reactive exception basis.

We look first at doing this better and more automatically, and then at doing it more widely and proactively.

Part 1:  Adaptively customizing retention offers 

First consider how FairPay can enhance conventional win-back offers.

As described on this blog, FairPay is a new win-win pricing strategy that provides an automated way to adaptively customize business-consumer relationships based on value -- with the full cooperation of the customer.

• FairPay gives customers new power to dynamically set prices based on their individual usage and value perceptions ("pay what you think fair") -- after experiencing the product and knowing its actual value to them -- while requiring that they satisfy the seller that they are being fair and honest in order to continue that ("play fairly or lose the privilege"). 
• This draws on a large body of behavioral economics on the human drive for fairness, and turns pricing of subscriptions into a repeated game that motivates customers to set fair prices in order to maintain this win-win relationship. Thus the power of the consumer to set prices is fully balanced by the power of the provider to demand more generosity or halt the game.
• FairPay serves as a new way to do value-based pricing, in which prices are set based on the actual value to the customer -- with a fair share of the value surplus going to the provider. 
• Such value-based pricing methods have been widely proven in B2B contexts -- now FairPay provides a simple way to achieve similar results in B2C businesses.

These new methods are not yet tested in B2C practice, but there is reason to think it is just a matter of both businesses and consumers learning how to apply them effectively. Retention offers provide an excellent place to test a variety of variations on this basic strategy in a controlled environment, and learn how to apply them effectively. FairPay generates an ongoing multivariate pricing experiment with each customer.

Retention is a perfect place to introduce FairPay -- in a high-value, low-risk, easily managed and contained environment.

• FairPay can be offered to limited numbers of customers seeking to cancel, framed as a special trial offer that will be continued only if they price fairly, and only if enough other customers show that they, too, will set prices fairly.
• FairPay retention options can be offered selectively to known customers, based on data that suggests which ones are worth keeping and which ones seem most likely to demonstrate the positive social value orientation that will lead them to set prices fairly -- using strategies along the lines outlined in the HBR article..
• Selection criteria can further isolate testing of FairPay to those customers with a history of relatively light usage -- for which discounted prices would be fair, a strong incentive, and still very profitable.
• FairPay can be tested in controlled populations, and framed as a special experimental offer, to minimize risk -- a privilege that will be continued only if enough customers cooperate, and revocable for any customer who is not reasonable.

The HBR article emphasizes the need to be smart about what offers to make to which customers. FairPay offers an automatically adaptive way to do that, with offers that are flexible and constantly tuned to individual consumer value perceptions.

Customers seeking to cancel are sending the message that the conventional value proposition does not work for them. The way to retain them is to find a profitable value propositions that do work for them -- for their particular situation and point in time. FairPay offers an automatically adaptive process for doing just that.

Why not try more effective pricing for those who are demanding it?

Subscription businesses face not only questions of price, but also the dilemma of whether to apply usage-based pricing (which consumers find unfriendly and subject to nasty surprises), or all-you-can-eat pricing (a one-size-fits-all price that is too high for light users and too low for heavy users). This dilemma is outlined in Beyond the Deadweight Loss of "All You Can Eat" Subscriptions, That post explains how FairPay's adaptive pricing can work better than either option, adding a value focus to blend the best aspects of both plans in a dynamically adaptive way.

• Retention offers provide a perfect place to experiment with FairPay -- so that each viable customer can be offered the value they seek at a price they can accept -- which can lead to more revenue from more customers. 
• The beauty of FairPay retention offers is that they are self-adjusting. Once you learn how to set key business rules for what to offer, to whom, and when, it then takes a minimum of live intervention by costly and hard to manage support staff. Customized FairPay offers can be made automatically, quickly, and at low cost, to every customer worth keeping.

Based on what you learn in such a limited trial, you may find it desirable to expand it, refine it, and extend it more widely -- to apply FairPay to customer acquisition, special premium/loyalty programs, and perhaps even to your core subscription pricing.

Part 2:  Proactive retention -- seeking win-win all the time

Managing retention on an exception basis is counterproductive.

Do you let your spouse feel neglected or abused, and ignore that until they ask for a divorce? If customizing value propositions makes sense when customers ask to cancel, wouldn't it be even more effective before they get that far gone? Why wait until then to begin dialog on the issues? Think about what listening to your customers really means. That may seem impractical, but FairPay provides a process for doing that efficiently and profitably. 

Why are we content with poor value propositions for the customers who don't make the effort to complain? Why do we wait for them to cancel? It may seem nice to get customers on auto-renew -- and hope they will never think about what they are paying and what they are getting -- but is that really the way to grow loyalty?

Maybe we would have more and better customers if we tried to proactively find better value propositions for all of them. That is what FairPay is designed to do. Once you have learned the basics of managing dynamically adaptive FairPay retention offers, why not extent that to all of your regular customers? -- at least all of those who seem to desire your product, and then demonstrate their fairness during an initial learning period. (Those who do not prove to be fair can be returned to the conventional set-price plans.)

The whole point of FairPay is to continuously seek win-win relationships that customers are satisfied with. It gives early warning of dissatisfaction, and provides processes to seek to resolve issues -- as customers become aware of them, and long before they ask to cancel. The idea is to build considerations of value -- and how that drives retention -- directly into the loyalty loop, for every cycle of each customer journey. For more on this, see the post Win-Win Customer Journeys -- With Dialogs on Value.


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).