Invited Journal Article on FairPay - "Pricing in Consumer Digital Markets: A Dynamic Framework"

This new invited paper on FairPay has been accepted to appear in the Australasian Marketing Journal.

Update 7/31: now published, and freely available to download. A pre-print of the full article is now available online.

This complements my previous journal paper -- providing a more complete review of how FairPay builds on participatory pricing methods like pay what you want (and avoids weaknesses in their current forms) -- and expands on how it provides a flexible framework for better pricing that can move the exchange between seller and buyer from the transactional to the relational in a wide range of contexts.

This paper is co-authored with Pennie Frow and Adrian Payne. (The previous paper was co-authored with Marco Bertini, and was published in the Journal of Revenue and Pricing Management in 2018, also available online, and free to all under open access.)

The abstract:

Supplier firms are increasingly seeking new ways to personalize their offers and differentiate their products, especially in contested digital markets.  One approach that shows promise involves encouraging customers to participate in pricing decisions using schemes such as “pay-what-you-want” where the customer has an input into determining the price.  These approaches can benefit both the customer in terms of paying a reasonable price and reducing risk, and the supplier in terms of increasing sales and generating deep customer insights that can assist in relationship development.  However, extant research shows limitations associated with these pricing approaches and, despite some qualified successes, there has not been widespread adoption in businesses. This study extends consideration of existing participative pricing schemes and proposes a new conceptual framework, termed FairPay. This framework overcomes many of the limitations of previous approaches, while addressing important challenges, especially those faced by many digital product suppliers. The framework offers an attractive pricing solution for both customers and suppliers, ensuring an equitable exchange that is based on value-in-use.  We discuss the application of this framework in the context of digital products, where the approach has special promise.

We think FairPay has immediate potential to radically change business practices in a way that puts a powerful new form of dynamic and emergent pricing at the forefront of digital content businesses (as described throughout this blog).  Likely initial applications are for digital offerings to consumers in markets such as journalism, e-books, music, video and other content, as well as games and other apps -- both directly between service providers and consumers, and via aggregator/distributor platforms. But as this paper suggests, "FairPay may be a unifying framework that bridges the gulf between purchases for profit and non-profit donations" (as currently emerging with crowdfunding platforms).

We hope you will read the paper, and find it helpful -- and will let us know what you think.

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Pennie Frow is Professor of Marketing at the University of Sydney. Adrian Payne is Professor of Marketing at the University of New South Wales. My collaboration with them began when I contacted Adrian about his pioneering book on Relationship Marketing, with the idea that FairPay was very aligned with his thinking.  That led to discussions of his more recent work (see Strategic Customer Management by Adrian and Pennie), and an early result of our collaboration was presented at the Naples Forum on Service.

My background is as a practitioner in online media and e-commerce, and the technologies that drive that (bio).

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Resource Guide to Pricing

Drawing on the research in this paper, I have updated my Resource Guide with recent references. The guide is intended to be relevant and accessible to managers and entrepreneurs, as well as to scholars and researchers.

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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.)

BuzzFeed, Google, Testing Recurring 'Pay What You Want' Membership -- Steps in the Right Direction

Digiday reports that BuzzFeed is working with Google to pilot a recurring "pay what you want" membership program. Here is a quick recap and outline of how FairPay points the way to future improvements.

The story so far

Digiday's Lucia Moses explains (emphasis added):

BuzzFeed News is adding messaging to pages that solicits small donations of $5-$100 as seen [to the right]. The initial benefits will be updates on big investigations and new video programming. (There’s no member-only content for now; if the program is successful, BuzzFeed News hopes to add perks that will come on top of its news content, that will remain free.)

BuzzFeed News, like The Guardian, has staunchly adhered to the idea of being part of the free and open web. But... it’s eager to capitalize on people’s growing willingness to pay for quality news.... 

BuzzFeed News said it’s working on its membership program as part of the Google News Initiative...Google helped BuzzFeed with tech and market research; it’s unclear if Google is planning to expand its subscription program to accommodate publishers that have reader donation or membership programs. A Google rep confirmed the company is working with Buzzfeed to help it explore different business approaches and understand how its readers would react to this kind of model. 

Moses refers to her previous report on "a textbook turnaround" with a similar program in the Guardian US (1/26/18) (emphasis added):

Guardian US was primarily ad-driven; philosophically, the Guardian has eschewed the more common paywall model because it believes its journalism should be as widely accessible as possible...

The challenge with one-off contributions is replenishing them. Most of the 300,000 US supporters (230,000) are one-off contributions; the rest are recurring subscribers. The reader support is mostly one-offs because the ability to make recurring contributions was just added a few months ago. The plan is to move people toward recurring contributions, which creates a more predictable revenue stream.

To that end, Guardian US has two people dedicated to reader revenue, which it plans to double to four in the next fiscal year starting in April. They’re identifying topics U.S. readers care about and are more inclined to support with their wallets, and they’re testing everything about the way it solicits contributions, from the color to placement to language of the message, which is typically British in its politeness, from a U.S. audience.

“We could be a little bit more assertive in the way we canvass,” [Guardian US CEO] Webster, a U.K. native , acknowledged.

 Some key points as I read this:

• Little or no news is locked behind a paywall.
• Payments are entirely voluntary. Emphasis is on being a patron or benefactor, not a quid pro quo.
• The contribution amount is not pre-set by the publisher, but varies from reader to reader based on what they think fair and affordable.
• Payments may in future bring perks, but still only a loose degree of quid pro quo (which encourages contributions under communal norms of fairness, altruism, and generosity, rather that exchange norms of bargaining).
• "Prices" are set by the customer, at whatever level they think fair.
• The publisher can nudge the customer to pay generously -- just how to do that nudging most effectively is something to be tested and refined.
• The recurring payment model not only adds predictable revenue, but builds a relationship that increases loyalty and fosters communal norms.
• These voluntary payments in a relationship context provide a rich field for learning, for each reader, what "readers care about and are more inclined to support with their wallets" and "testing everything about the way [the publisher] solicits contributions." 

FairPay points to sensible next steps

The FairPay strategy and architecture that I have been developing with colleagues shows how to extend this early success with more win-win models. 

The key is to leverage the relationship and the information it generates to understand: 

• the value each reader obtains (and perceives), and how that varies over time 
• how to maximize that value over time, 
• how to get the reader to recognize that value, and 
• how to nudge the reader to pay increasingly generously, at a level that fairly maps to that value.

The objective is to tailor the offers -- and the services offered -- to each user to best solicit a fair share of their wallet relative to the the value each reader enjoys -- and to nurture and grow that.

Further steps are to find perks and premiums that further demonstrate value, to remind readers of the specific levels of value they received (based on usage and other data), and to encourage more share of wallet -- to the level that offers the most value to both the business and each customer. 

• So far in the above, all payments are entirely voluntary -- but with some level of nudging. That could be the permanent strategy. 
• But, as a possible further step to increase revenue, some level of services could be offered with a clear expectation of fairness in the voluntary payments from the reader. After some cycles of nudging as to what value is offered and what pricing is considered fair for that reader, future offers of that kind may be withdrawn (for some period) if the publisher concludes the reader just will not be fair about their payments. This is still much more participatory than conventional pricing, in that the reader still decides (on each payment cycle) what is a fair price for them and the value they received. The publisher gets to enforce reader generosity for selected services -- at whatever customized level of gentleness or firmness seems best.

Details of these strategies are in the sources listed below. Especially relevant places to start are these posts:

• Patron-izing Journalism -- Beyond Paywalls, Meters, and Membership
• The Missing Piece of the Membership Puzzle -- Agreeing on Value for Each Member

Your mileage may vary!

In evaluating and testing such strategies, keep in mind that the results will be highly dependent on the "framing" -- specific design of the offers, the skill in communicating them effectively, and the selection of which services and which reader segments to apply them to.  Disappointing results may not accurately reflect the potential of such methods in general, but could just mean the test was not done in the best way possible (or that your business has far to go in getting your customers to feel you deserve their support).

There is a great deal of marketing communications, pricing theory, value proposition design, and behavioral economics to getting this right. The details may seem complex, but the basic principle is simple -- build a win-win relationship of dialog, trust, and transparency, jointly seeking to create and share value with the each customer, in ways suited to that customer.

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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.)

Thaler's Nobel, Surge Pricing, Fairness, and Long-Term Relationships

Some very nice insights on this theme are woven together in the latest Upshot reporting by Neil Irwin. It shows how Richard Thaler's behavioral economics adds deeper dimension to the debates about surge pricing -- and how that ties to underlying issues of fairness and long-term relationships, beyond the usual conflicting simplistic responses ("not fair"/"sound economics").

My congratulations to Thaler on winning the 2017 Nobel Prize in Economics last week for his work in creating the field of behavioral economics. That is a key foundation for my work on FairPay, and I am very appreciative to have gained his encouragement, as noted below.

When we look beyond the surface, we see that fairness in long-term relationships is what really matters for economics to work well, and that leads to the values (fairness) that we all seek. Thaler developed behavioral economics to look deeply at those deeper issues of human value and behavior. FairPay makes that the center of an new logic for consumer commerce that is badly overdue in our new digital age.

Some relevant quotes from Irwin's article:

For artists, no one show exists in a vacuum. And the things that might maximize revenue for any given night might not be the elements that matter in the longer term in developing devoted fans.

...So one view of the Springsteen approach is that it is economically irrational. But another is that it is part of a long-term relationship between a performer and his fans.

...Utilities and regulators, in other words, have to think a little like Mr. Springsteen: It’s not just about maximizing the efficiency of the energy market on any one day, just as the Boss isn’t trying to maximize his revenue from any one concert. Rather, it’s about maintaining a relationship in which people do not feel like they have been exploited.

...People’s perceptions of what is fair and just are not set in stone; they evolve over time. But companies looking to use variable pricing have to be cognizant of how important it is to respect those perceptions.

...What the successful examples of variable pricing have in common is that they treat customers’ desire for fairness not as some irrational rejection of economic logic to be scoffed at, but something fundamental, hard-wired into their view of the world. It is a reality that has to be respected and understood, whether you’re setting the price for a highway toll, a kilowatt of power on a hot day, or a generator after a hurricane.

“If you treat people in a way they think is unfair, then it will come back and bite you,” Mr. Thaler said. And it doesn’t take a Nobel to understand that.

Numerous posts on this blog address similar underlying issues related to consumer perceptions of price discrimination (including surge pricing) -- and how a more enlightened variation that I call "value discrimination" can be very fair and broadly beneficial to consumers.

I was privileged to get Richard Thaler's attention and encouragement when I wrote to him in 2015 about how nudging is a key aspect of the FairPay strategy, referring to my blog post, How Consumers Can Nudge Corporations for Good (which commented on a piece by him in the NY Times). He then connected me to his colleague, Heather Caruso, executive director of the Center for Decision Research at the University of Chicago Booth School. After some encouraging discussion, she indicated that their center would be interested in possibly being a resource for help in conducting experiments when a company is ready to do a trial.

With regard to trials, businesses, entrepreneurs, researchers, or others who might have interest in applying FairPay or related strategies are invited to contact me for pro-bono assistance. (FairPay is an open architecture in the public domain.)

More detail on how behavioral economics supports the strategies that underlie FairPay is in my earlier post, Thinking Fast and Slow about FairPay: A New Psychology for Commerce in a Networked Age, and in Making Customers Want to Pay You -- Research on How FairPay Changes the Game. (I previously had brief interchanges with Daniel Kahneman, the first winner of a Nobel for related work in behavioral economics, and author of Thinking Fast and Slow.)

We are just beginning to see the real world results of the more human side of economics that Kahneman, Tversky, and Thaler shined their light on.

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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.)

So Last Century! - It's Time to End the Tyranny of Set Prices

We think we know what a price is, but new kinds of markets require new kinds of prices. A price has a function, and that function has changed.

We recognize that electronic markets and digital products have created a new age, but we seem to not recognize that these markets and products need a radically new approach to pricing. FairPay is a new concept of what a price is for these new markets.

Expanding on ideas in Harvard Business Review, Marco Bertini and I have co-authored an article, "A Novel Architecture to Monetize Digital Offerings" that has been submitted to a leading journal for publication [now published in the Journal of Revenue and Pricing Management*].

Conventional thinking about prices is blinded by a mind-set that we all grew up with and take for granted -- but that is actually a historical oddity. As we observe in the article:

Throughout most of the history of commerce, price was the outcome of a negotiation between individual sellers and buyers. Different buyers achieved different prices depending on their current situation, needs, and bargaining power. In other words, prices were very personal.

Starting in the 1850s, however, the shift to mass retail shoved this tradition aside. Shoppers no longer bought from individuals, but from organizations interested in standardization and scale. Indeed, the price tag gained popularity in the early 1860s with the arrival of the department store—John Wanamaker, the trailblazing American merchant and religious leader, opined that if everyone is equal before God, then everyone should also be equal before price. The company dictated terms, with prices set to maximize profit or some other objective and offered to the market on a take-it-or-leave-it basis.

Now that commerce is shifting back to personalization, it is interesting that one of its central ingredients, price, lags behind. Businesspeople appreciate that prices should be fitted to people’s personal valuations as they once were, but there is no real agreement on how this comes about.

Our suggestion seeks to undo the tyranny of fixed prices while retaining the efficiency inherent to institutionalized commerce...

Specifics of how and why to do that are explained in the article (preliminary version online at SSRN). Additional background is in other posts on this blog.

To be clear, our answer is not to try to somehow go backward to automate traditional negotiation. Instead we need to go forward with new ways to build relationships based on human values in a world of electronic markets and digital experiences. What we need is a totally new concept of what a price is, how it is arrived at, and why.

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Article abstract:    

The shift of commerce to the digital domain has forced many organizations to rethink their attitude to value creation, at times backtracking to the very question of what “value” actually means. Electronic commerce facilitates and thrives on social interaction, yet the way companies convert digital anything into cash they can bank seems to be stuck in time, obeying rules and practices that may have worked for physical goods but make far less sense today. We believe that earning revenue in the digital age needs a fresh approach. This short article seeks to lay the foundations for such an approach and proposes FairPay as one viable alternative.

*The text here may not reflect final edits in the published article.

[Update:] Short NPR Video: The History of the Price Tag
This is worth watching as an amusing perspective on how the price tag was introduced and took hold. It emphasizes how haggling became impractical as commerce scaled with department stores, but glosses over the human dimension that was lost with this "take it or leave it" solution.

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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). 

Even better, read my highly praised new 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 evaluating and applying FairPay, and am happy to address questions.)

Beyond Freemium -- Free? Paid? Freemium?... Finding Whatever Works

Pricing for digital offerings continues to be a fundamental challenge, and the debates over free, paid and freemium rage on.

"Making 'Freemium' Work" by Vineet Kumar in Harvard Business Review (5/14), nicely sheds light on companies' real world experience with freemium, highlights the challenges of making it work, and suggests how companies can tune it to get good results.

Here, I expand on my online comment on that article that refers to the HBR Blog post I did with Marco Bertini, introducing FairPay to HBR readers. Excerpting most of my comment on Kumar's article:

...a new strategy beyond freemium that addresses the same business needs, and exploits the attraction of "free," in a way that promises to be more powerful and flexible. We motivate this as moving the exchange between seller and buyer from the transactional to the relational, based on three pillars of relationship: empowerment, dialog, and experience/reputation. The six questions raised here are important to this new strategy as well. 

Freemium has offered a good start to dealing with new economics of digital offerings, but this new strategy, called FairPay, takes the driving objective of freemium - exploiting "free" to move toward a profitable relationship over time - and makes that the driver of a variable boundary between free and paid tiers. FairPay moves the strategic question of what to exchange at what price from a pre-set seller decision to an emergent, dynamic process that balances the interests of the seller and different individual buyers. That provides more nuance and flexibility than freemium's gross segmentation into just two (or a very few) set tiers (free or paid). 

We suggest the more individually adaptive techniques of FairPay can be applied to get better market reach and profit, and to build deeper and more profitable long-term relationships. The six questions identified in this article remain important: FairPay provides a systematic method for (1) adapting (and softening) the boundary between free and paid, focusing on (2) customer understanding and (3) conversion rates, (4) evolving over adoption life-cycles, (5) encouraging referral incentives and communications, and (6) guiding ongoing innovation. With both freemium and FairPay, we see an opportunity to move beyond the debate over free vs. fee, to focus on empowering and communicating with customers and finding ways to reward those who opt to pay.

How FairPay does this is more fully explained elsewhere in this blog and related Web site (see sidebar), but here are some comments specific to Kumar's six questions.

1. What should be free?  With freemium, this is a very visible static parameter that is hard to guess right, and hard to change. With FairPay, the boundary is soft and dynamically individualized. The buyer sets it for each transaction, always getting a price he considers fair, but the seller controls future offers, thus providing a balancing force to drive the buyer to price in a way that both sides consider fair, over the course of a series of transactions that build toward a profitable relationship.  The seller need not shoot in the dark to set a rigid boundary that is inevitably too high or too low for many buyers. Instead of upwards of 95% of customers paying nothing, a majority can be driven to pay some workable amount -- and some to pay very well. (But the buyer is always free to pay nothing, at any time he feels that the product is not satisfactory.)
2. Do customers fully understand the premium offer?  FairPay is built around a structured dialog about offers and value received, and lets customers in good standing try both regular and premium offers whenever they want, and then determine the value they see in it. The seller highlights the value, based on their individual usage patterns, and if a buyer does not value it enough to satisfy the seller, that buyer's trial of a premium service can end (but it can be extended long emough and often enough to be a proper test -- at any stage of the relationship). The basic process is structured, but lightweight, informal, dynamic, and intuitive.
3. What is your target conversion rate?  Freemium centers on a single all-or-nothing boundary between free and paid that make it costly to guess wrong, and either miss much of the market or leave money on the table (by undercharging good customers). (See my "Long Tail of Prices" post for more on this.) With FairPay, "free" users are permitted to pay 0% of suggested price, while paying users can pay 10%, 80%, 120%, 200% or whatever -- the conversion process is one of nudging customers up the pricing curve, and getting them to try (and pay for) more valuable features. This multivariate dynamic optimization process is more complex, but even simple heurisics can offer far more nuance and flexibility than the hard boundary of freemium.  (Adding additional premium tiers to freemium can add a bit more nuance there, but still in a static way that is not easily changed.)
4. Are you prepared for the conversion life cycle?  As Kumar observes, early adopters are less price-sensitive than others, and are often people for whom the value proposition is unusually compelling.  Freemium has no way to adapt to such variations over time, except to move the boundary for everyone. The core process of FairPay is driven by ongoing dynamic adaptation to different price-sensitivities and value perceptions, so identifying and dealing with such individual behavior is baked in to the process. 
5. Are users becoming evangelists? Free users can have value as evangelists (as Kumar notes) and also as a target for advertising (a key revenue source for many services), and viral marketing can be very important. FairPay can accommodate whatever value factors the seller and buyer choose to consider: Free users can claim credit for evangelism and receiving and acting on ads, and viral offers can draw on the same process to offer FairPay "trials" that suggest pricing with a trial discount that encourages those new users who do see value to start paying something immediately or very soon (while still letting those who try it but do not acknowledge any value pay nothing).
6. Are you committed to ongoing innovation? Freemium is very focused on customer acquisition, but FairPay is designed to do its adaptive work throughout the life cycle, as usage and understanding of the product matures and changes over time.  Because it is based on an adaptive value discovery engine that always sets prices in accord with current perceived value, it works throughout product and customer life-cycles, and continually drives the seller to make more desirable offers, based on detailed, real-world customer preference data. FairPay offers the potential to not only serve as a pricing engine, but also to serve as an engine for partly automating product innovation, as well. Detailed value perception data can be used to drive offer bundling and product development. So, once you get FairPayworking adaptively to set near optimal individualized prices, why would you drop it for a less adaptive alternative? If things are stable it works near optimally, and if things are changing, it is a nealry ideal tool to identify and adapt to the changes.

Kumar's article provides a nice framework for understanding both freemium and FairPay. Pricing is the heart of commerce, and is never simple. Debates over free versus paid tend to oversimplify and overgeneralize.  One post specific to the free vs. paid debate is "Free AND Paid! -- To Each His Own Price." Other commentary on why and how I think FairPay will provide an architecture for better pricing that subsumes both free and paid are throughout this blog and the FairPay Web site. 

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.

Thinking Fast and Slow about FairPay: A New Psychology for Commerce in a Networked Age

Nobel Prize in Economics winner Daniel Kahneman's new book, "Thinking Fast and Slow," presents a wide range of insights into how we think and make choices.  These insights--mostly established in the past few decades--form the groundwork for the new field of behavioral economics.  Much of this is highly relevant to the radically new FairPay process and how it can shape a new economics to enhance value exchange in our increasingly networked economy. (FairPay is described extensively on this blog, and the related Web site.)

Kahneman's book is all about choices, and shows how greatly they are influenced by framing and anchors.  While our decision processes are wonderfully rich and nuanced, they are highly susceptible to influence. Much of our decision making is based on the fast, intuitive, but error prone processes Kahneman calls System 1 -- with reluctant intervention by the slower, more deliberative and "rational" processes of System 2, which is often lazy, and also subject to systematic errors.

The basic opportunity in FairPay is that it changes from a model in which prices are imposed on buyers (take it or leave it...or shop elsewhere), to one in which the buyer chooses the price, but with incentives to consider whether the seller will judge it to be fair, in that particular context. This may seem to take all power from sellers, and expose them to buyers being unfairly cheap, but there is a counterbalance: The seller has the ultimate power to motivate fair pricing by controlling whether future FairPay offers will be made to that buyer. That gives buyer an incentive to price fairly, to gain the best future offers, and to avoid losing the FairPay privilege. The seller can also frame the offer, and set a suggested price as an anchor.

By applying the principles of behavioral economics as outlined by Kahneman, the seller has many opportunities to nudge buyers to price fairly and even generously. Many of the lessons of the book are very relevant to FairPay:

• Framing is very powerful and applies to both System 1 and system 2. Choices can be altered very dramatically by framing the choice in different ways. Framing of offers is central to making FairPay work effectively. The core objective is to make buyers feel the seller deserves a fair price, and to find incentives for pricing generously.
• Nudge is the title of another recent book on behavior, by Thaler and Sunstein, that makes much of choice architectures that can nudge behavior in very powerful ways.  (Kahneman refers to this, noting his collaborations with Thaler.)  A choice architecture is a systematic process for framing choices to induce desired behaviors. FairPay sellers can use such choice architectures to nudge most buyers to set prices to desirable levels.
• Anchors are an aspect of framing, in which a reference point for a price or other parameter to be chosen. Even where the individual is free to ignore the anchor entirely, it tends to have a surprisingly strong influence on the choice. FairPay exploits the power of suggested prices as psychological anchors to nudge buyer pricing choices.
• Intensity matching is one of the things the intuitive and automatic System 1 does easily. Matching prices to one's happiness with a product is easy. Thus choosing prices that match to perceived value is easy, and the desire to pay fairly for being delighted by a seller can be harnessed just as well, and perhaps better, than the competing desire to find bargains.
• WYSIATI (What You See Is All There Is) -- people (especially their System 1), tend to make choices based on just the factors they see, and even System 2 is lazy and tends not to search for other factors that may be missing. A key aspect of framing and choice architecture is to present those factors that cause buyers to notice what they should value (and to forget or discount any negatives) in order to nudge toward desirable pricing choices. 
• The laziness of System 2 is perhaps most strikingly evident in the use of opt-in versus opt-out choices to set desirable defaults. Kahneman cites organ donation rates of 4% and 12% in two European countries where donation is opt-in, compared to rates of 86% and nearly 100% in two countries where it is opt-out. Thus making acceptance of a suggested price an opt-out choice (such as for ongoing subscriptions) might lead most buyers to be compliant, most of the time (especially once a comfort level is established).
• Decisions are affected by distortions in psychological weighting.
  --Loss aversion is stronger than gain seeking. Losses from an established position tend to be weighted more heavily than equivalent gains.  Once a buyer has the privilege of setting prices under FairPay, they will be averse to losing that privilege (by pricing unfairly low just to get a small gain on one transaction).
  --Fear of disappointment also tends to be overweighted. The pricing-after-trial feature of FairPay eliminates the risk of buyer remorse, and that fear can be a significant barrier to buyers accepting a price corresponding to full value up front. So conventional prices are implicitly discounted in the buyer's mind to allow for the risk that the hoped for value will not be realized. FairPay removes that significant discount factor.
• Perceptions of fairness and entitlement are inherently frame-specific and not underlying. Kahneman gives an example where wages have declined in a down economy--most people view it as unfair for an employer to cut the pay of an existing employee (viewed as having a personal entitlement), but perfectly fair to fill an vacancy at the lower rate by a new employee (viewed as lacking that personal entitlement). By framing fair prices as being context dependent, such as based on usage, value obtained, ability to pay, and other factors, buyers can be nudged to accept prices that are different from those for buyers in different circumstances. Those who pay a higher price need not feel regret if they learn that another buyer paid less, since the fairness of the price depends on the circumstances (different entitlements in different contexts).

Building on how System 1 and System 2 partner in making choices, an objective of FairPay choice architecture is to make it easy for the buyer to accept seller-suggested prices so that both buyer and seller maintain a happy and mutually valuable commercial relationship.

Kahneman refers to cognitive ease as a key factor in how we make choices. When things are going well, with no surprises or threats, System 1 does its automatic control -- but when there is cognitive strain, System 2 reluctantly jumps in. Obviously, FairPay pricing processes should seek to maximize cognitive ease, as they nudge buyers to fair pricing. More guidance on the issues in achieving cognitive ease is shown in Kahneman's figure below:

• Repeated Experience: As buyers become familiar with FairPay, and with a given seller, they will gain comfort and ease.
• Clear Display: Offers and pricing requests should frame the offer and the suggested price as simply and clearly as possible
• Primed Idea: Offers and pricing requests should frame the value proposition, the relevant context, and the suggested price to most effectively prime the buyer to accept it as fair.
• Good Mood: FairPay aligns the motives of the seller and the buyer -- if the seller delights the buyer and positions himself as a positive and deserving partner and provider of value, the buyer will find it easy to reward that (just as most people give good tips to delightful and effective waiters, and pay premiums to companies that delight them--like Apple).
• Feelings of Familiarity, Truth, Goodness, and Effortlessness will accrue and reinforce desired behaviors in continuing FairPay cycles.

All of this suggests that effective choice architectures can be applied to make FairPay very effective for most buyers -- if the seller really seeks to deliver what the buyer values, in return for a fair profit for doing that. Isn't that the kind of economy we all seek?

Speaking of the kind of economy we seek, some of this choice architecture may smack of exploitation of buyers by manipulative businesses, but remember -- this is in the context of a system in which buyers have complete power to set any price they think fair. The choice architecture is just a defensive tool for sellers to nudge buyers toward fairness in choices they have full freedom to make. The nudging of a choice architecture may be "manipulative" to a degree, but in the context of an unprecedented level of buyer freedom. Sellers need to have some compensatory powers (and it seems that abuse is unlikely and easily countered). The ultimate objective is to align buyer and seller behaviors toward achieving a mutually beneficial value exchange.