The Elements of Next-Gen Relationships and Pricing -- A Unifying Framework

[Updated 9/2/19, see notes at end]

FairPay is a new and transformative way to think about how businesses market and price consumer services -- it points to ways to dramatically improve many businesses and satisfy many more customers. It is a framework that combines many important elements, some familiar, some not so familiar.

• Advanced versions combine all or most of those elements, but useful solutions may apply only some of them. 
• Many of these elements are already used in conventional pricing, at least to some degree. 

There is a clear opportunity to do much better. The original focus of FairPay was on specific new business model strategies for sustaining for-profit enterprises (especially for digital products and services) -- but the framework spans non-profit services as well, and can extend to subsume conventional strategies as well.. These core strategies of FairPay have gained recognition in business and scholarly publications.

I often struggle to explain what FairPay is -- as it applies at different levels, and in different business contexts. Without a full perspective of all the elements, this can be hard to pin down, and it can shift from one context to another. In a narrow sense, FairPay is a way of applying advanced methods used in combination. But in its broader sense, FairPay is an architectural framework that spans the full range of value-exchange styles and business contexts, and points to ways to move up the rungs of a ladder of value,

I am reminded of the familiar parable of The Blind Men and the Elephant. Even when I seek to explain the whole elephant of FairPay -- which seems to be a new kind of beast -- it can be challenging. But when I try to explain intermediate forms, and how these forms relate to various conventional approaches to business relationships and pricing, that adds to the challenge.

This post is an attempt to list the elements -- the trunk, the ear, the leg, and the side -- and outline how they fit together to take various forms (whether an elephant, anteater, or tapir). First, a discussion of the elements, then brief examples of important combinations that can move us up the ladder of value.

The Elements

This following table summarizes the elements and how they can be mixed and matched to fit a given context. These elements have a synergy, so that more can often be far more powerful that few. However, some may not be applicable in some contexts -- depending on the nature of business, product/service element, and the customer segment. Each of these elements are discussed below.

Check marks indicate elements that are likely to be desirable in most contexts, question marks are more case-dependent. (But just how each of the elements is used is very case dependent.) The "trust" factor is meant to address the varying levels of mutual trust and expectation of fairness in an individual business-customer relationship -- trust-based strategies can work with many consumers, but may not work for others:

(with minor updates, 10/27/19)

A thought experiment about value -- Reisman's Demon

Before digging in to the elements, let's consider our objective. Imagine a supernatural demon that might power a system of commerce.  This demon has a "god's-eye" view, a perfect ability to observe activity and read the minds of buyers and sellers to determine individualized "value-in-use:"

• The demon knows how each buyer uses the product or service, how much they like it, what value it provides them, and how that relates to their larger objectives and willingness/ability to pay. It understands that the value of a given item or unit of service depends on when and how it is experienced. It is also aware of broader/external value impacts.
• This demon can determine the economic value surplus of the offering -- how much value it generates beyond the cost to produce and deliver it.
• The demon can go even farther, to arbitrate how the economic value surplus can be shared fairly between the producer and the customer. How much of the surplus should go to the customer, as a value gain over the price paid, and how much should go the producer, as a profit over the cost of production and delivery, to sustain their ability to continue those activities.

Even if we lack such a demon, we can internalize it as an ideal, and design relationships and pricing methods that seek to approximate what it knows. This demon would apply all of the elements described below.  Advanced forms of FairPay apply all or most of them. Keep this demon, and its sense of value and fairness in mind as you think about which elements you can apply now, and which you might add in over time.

Foundational Elements

These elements are often used (to some degree) in some forms of conventional pricing -- they support finding value and serve as a a foundation for the less conventional elements described in the next section.

Relationship-centered. Modern commerce is increasingly moving to a relationship focus, whether the loyalty loops of repeat purchases, or more explicitly in the form of subscriptions. This shifts the entire focus of business from one-shot games of transactions and short-term profit, to repeated games of lifetime value. Well-structured repeated games build cooperation, trust, and loyalty. They exploit the economy of scale over time -- keeping customers is usually far more profitable than finding new ones. Subscriptions and other conventional models exploit this, and online services facilitate  relationship-building, but other elements of FairPay can change the structure of the game to make it far more cooperative. This is actually a reversion to traditional norms of commerce, the village markets where buyers had ongoing personal relationships with sellers. All of the other elements relate to this core element.

Individual value-centered. Business is of course a matter of value exchange. Value-based pricing is often best practice in B2B businesses, but is harder to do in B2C. It is a basic principle that both sides are best served when prices map to the value actually received. Few question that this is desirable, but if it is done at all in B2C, it is usually just typical value (for some "persona" segment). It is increasingly recognized that individualized value-based pricing is most effective -- and studies of pay what you want (PWYW) pricing support that for consumer markets. FairPay points to ways to do that much more effectively. (When conventional subscriptions are usage-based, such as for cellular data megabytes, that offers a very basic level of value-based pricing.)

The question of how to measure individual value is complex and multidimensional -- much of it is founded on the fundamental value of fairness in our business relationships. There are questions of value to the customer and to the business, and of broader aspects of value, such as externalities, ESG values, and triple or quadruple bottom lines. There are also questions of fairness in dividing the value surplus (among the direct parties, and along the value chain). [Related to this is "reverse metering" -- considering that value can also flow from the customer to the business, and providing credits accordingly, such as credits for ad attention and data (see 9/2 update comments below).] My demon defines value primarily in terms of the buyer and seller's perceptions, experience, and outcomes, but has awareness of larger aspects of value as well. The FairPay repeated game seeks to do much the same. This largely comes down to fairness -- the idea is that all aspects of value can be internalized by the two parties and used as a basis for pricing whatever aspects of value they agree are fair to consider.

It must be emphasized that it is customer value that is paramount here. Of course equity (my demon) requires that both sides share in the value -- but the motivation that drives customers is value to the customer.

• Businesses increasingly see that Customer Lifetime Value (CLV) is how they make money, but usually fail to realize that they are measuring the value of the customer to the vendor.
• What really motivates the relationship is Vendor Lifetime Value (VLV), the value of the vendor  to the customer. This clearly deserves much more attention!

And, in delivering value to the customer, smart businesses know that this comes back to the values of human relationships. Even economists are beginning to recognize that "Not Only What, but Also How Matters." (That can even extend to call centers.) 

Post-pricing / "Risk-free" pricing. We have gotten into the habit of thinking that prices must be set before consumption, but in our digital world, that is often not necessary. There is evidence (from B2B value based pricing, and from PWYW consumer pricing) that setting prices after the consumption can be more effective. Customers no longer face risk of disappointment or uncertainty about what they are paying for, and so are willing to pay more, especially for experience goods which can only be valued after the experience, or in situations where prices can be contingent on performance or outcomes. The "risk-free" subscription model I have proposed is an important example of an advanced form of post-pricing. (Again, when conventional subscriptions are usage-based, that offers a basic level of post-pricing.)

A simple way to get a limited post-pricing effect is by permitting post-adjusted pricing, in which prices are pre-set, but can then be adjusted after the experience to reflect a revised understanding of value. Money-back guarantees are a simple form of this, but because they are all or nothing, they tend to be underused -- disappointment is often just partial, and so a full refund is seen by both sides as unfair. Enabling a post-priced discount (or bonus) at whatever percentage corresponds the the degree of value non-delivery (or of positive surprise) could make this two-stage method work well on both sides. That is a strategy that could easily be introduced in almost any payment context.

Framing and nudging, plus trust and transparency (generic). These are all important tools in relationship building that are often neglected. Behavioral economics has demonstrated the framing effect: how you frame questions and offers has dramatic effect on how people understand and respond to them (see the classic book, Nudge). Smart marketers (and pollsters) have long understood this, but the science is maturing. It is amazing how many businesses (and non-profits) utterly fail to apply this powerful tool. FairPay focuses on how this can be customized to the individual (or just a persona/segment) to boost potential customers' willingness to buy, and to pay (as expanded on below), but the basic principles apply very broadly. When these techniques of behavioral psychology and economics are unilaterally abused to gain zero-sum advantage, that is toxic to the larger goals of the relationship -- but when done openly and transparently, they can build trust and help establish fairness.

That brings us to the basic values of transparency and trust. Transparency is a prerequisite to trust, and trust is prerequisite to a constructive and lasting relationship. Old-fashioned mass-market customer relationships are often shaped by an intentional lack of transparency, leading to mutual distrust. Hardly a way to grow CLV!

Applying the foundational elements. As indicated in the above table, the above four elements of FairPay are broadly desirable and should generally be used wherever practical. Some highly successful B2B pricing models already apply all four. An example of a new pricing model that is suggested by this FairPay framework is the what I have called "risk-free subscriptions." While I would not call that a full form of FairPay, it is a good example of how other important new ideas can be suggested by the FairPay framework. This risk-free model promises to provide many of the benefits of a full FairPay model, in a more simple and conventional way.

Amplifying Elements

These further elements are not widely used in pricing to consumers because the synergies of using them together have not been understood. But as we will see, they can significantly amplify the power of the fundamental elements, especially when used in combination. This new synergy derives from the basic structure of the FairPay repeated game. Consider this change in the game...

• 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.”

Here are the key amplifiers that make that repeated game converge on cooperation -- on value, dialog, trust, and transparency -- to seek to do what the demon would suggest:

Participation. Participation in pricing is the element that underpins FairPay, and is gaining recognition as widely applicable in many models. We are all accustomed to fixed-pricing that is set by the seller -- but that was actually rare before the mid-1800s, when the "price tag" was invented to enable scaling in newly emerging department stores. Joint participatory pricing (bargaining in which both parties negotiate a price) was the norm in traditional village marketplaces, and still used in auctions. PWYW is considered "participatory pricing," but it still involves one-sided participation: price setting is entirely controlled by the buyer instead of the seller. We can view participation as a continuum, from full seller control (set-price) to full buyer control (PWYW), with various forms of joint participation in between.

• Joint participation enables the complementary value perceptions of both the provider and the customer to be considered, and so provides the most complete understanding of actual value. That brings us closest to the god's-eye view of my value-pricing demon. (Joint participation was the norm in traditional marketplaces, and is still applied in auctions.) 
• Full forms of FairPay create a new participatory balance of power over time, in which the buyer sets the price after the experience. That is done knowing that the seller may chose to end the repeated game and not make future offers, if the price is judged to be consistently unfair (after some number of cycles of purchases and price settings). That is what I call the invisible handshake -- not agreement on a price, but agreement on how to price.
• The breadth of the FairPay framework becomes evident when one considers that the extremes of participation are just variations in the policy of how FairPay is applied -- conventional fixed pricing is the case where seller constraints on the buyer are total, and PWYW is the case where buyer control is absolute (FairPay privileges are never revoked.)
• There is also considerable flexibility in just how pricing participation is shared. For example, a minimum "floor" price can be imposed to require that buyers pay at least that much. Such restrictions might sometimes be desirable when providing services which have high marginal cost (and/or are scarce).

Individualized nudging based on reputation tracking. The heart of the of FairPay game is in how it exploits one-to-one computer-mediated dialog to build a relationship centered on value and trust. It centers on ongoing dialogs about value --  in which information about perceived value, and why a suggested price is or is not fair, is regularly exchanged between the buyer and seller. That enables mutual learning and understanding of value propositions, perceptions, and desires, with opportunities for each party to nudge the other, and to develop a fairness reputation with the other. This builds on the basics of framing and nudging, and can be supercharged by big data and predictive analytics. This reputation tracking and nudging is what makes FairPay powerful as a way for each party to better understand the value exchange and to seek jointly to converge on a common understanding of value over the course of the relationship -- what would the demon have us do?

• The most basic form is simply to communicate value and nudge customers to appreciate the value provided. When pricing is participative, this enables nudging toward more desirable levels of fairness and generosity, but it can always be beneficial (when done well).
• The converse basic form is to solicit ongoing feedback from the customer on their perception of value received. Few companies make it easy to provide feedback. (They seem to fear getting customers to think about value...and to have to listen and maybe respond to what they think.) But doing that well yields fine-grained, real-time value data -- and makes the customer feel valued.
• Advanced forms of FairPay build on this to conduct the full FairPay repeated game -- to give more pricing power to the customer, and to learn exactly what product/service elements each one values, to nudge them to recognize the provider's efforts to deliver that value, to obtain reasons for customer pricing above or below suggested values, to assess the customer's fairness in their pricing, and to track that as a reputation for fairness that warrants trust (or not). [Update: for a detailed use case, see Patron-izing Journalism -- Beyond Paywalls, Meters, and Membership.]
• Voluntary forms of FairPay can limit nudging to positive incentives, such as premiums and perks to motivate more generous pricing.
• FairPay can also apply negative incentives, limiting access to premium offers and perks to those who have demonstrated that they price generously enough to warrant such offers.
• In extreme cases of free riding, the ongoing privilege of future FairPay offers may be limited or revoked. Unfair customers may be relegated to a fixed-price paywall, or even excluded from all service offers. This may or may not be useful depending on context -- and so revocation is discussed as a separate element in the next section.

Enforced Fairness / Revocable FairPay privileges (if unfair) -- Gated FairPay. This just-noted aspect of nudging and reputation tracking deserves special attention. It provides the most powerful tool for enforcing fairness in the FairPay game -- but one that can be counterproductive by reducing trust and cooperation. "You catch more flies with honey than with vinegar." For the most part, the "carrots" of positive incentives will motivate customers far better than the "sticks" of negative incentives.

• FairPay is an architecture, not a single rigid method -- and there are a variety of decision parameters that determine how strictly or liberally fairness policies are enforced. 
• At the extremes are the strictness of seller-set fixed pricing that gives the customer no ability to adjust pricing, and the looseness of PWYW in which the seller has no power to limit unfair, free riding customers. 
• "Gating" of FairPay by selectively limiting who is offered FairPay privileges -- and by revoking future privileges for those who abuse them -- is important for enforcing fairness in for-profit contexts where trust in the customer's fairness has not been established or is questionable. The privilege of a FairPay relationship can only be sustained for those who honor the invisible handshake -- the agreement to be fair about doing what the demon would have them do.
• Once a good fairness reputation is established, a forgiving policy is likely to be best, keeping the stick of revocation out of sight unless signs of growing unfairness suggest a reminder or probationary warning is required. 
• Where wide market reach is desired (much as with freemium) similar liberality may be desirable. 
• And in non-profit contexts, payment may be entirely voluntary, and no revocation or even negative incentives may be appropriate at all. 

Flexible adjustment for Ability to Pay (ATP). This is an opportunity to dramatically improve pricing for both providers and customers that can now be applied far more widely. Student discounts and senior discounts already benefit customers and bring added revenue to businesses. Price discrimination is recognized as bringing economic efficiency, but often in ways that exploit customers. But the above elements of FairPay enable the customer's ability to pay to be factored in to the dialogs about value in ways that are transparent and fair -- what I call value discrimination. The delicate issues here may argue for ATP adjustments in some contexts but not others. Great care must be taken to do this fairly, in responsible and privacy-sensitive ways. But FairPay creates a platform that can get very smart and nuanced about ability to pay.

Using the elements to climb the ladder of value -- a sampling of notable combinations

As we combine more and more of these elements, we generally tend to climb up the ladder of value, toward relationships, value propositions, and prices that center on actual value to the user. This brings us closer to what my value demon would suggest. Organizations that do that well are more likely to thrive, serving more customers, over longer lifetimes, and sharing more value surplus -- thus sustaining revenue and/or profit. The rationale for this is more fully explained in my publications and and blog posts. A wide range of use-case examples are given on this blog (but not always using the  terms used here to identify the relevant elements). Here a few representative examples, along with a table showing which elements are applied in each. (Remember that my value demon would want to apply all of the elements.)

(with minor updates, 10/27/19)

Full, gated FairPay -- the ultimate value-based subscription. Many of my posts, especially the earlier ones, and my journal articles, are focused on full embodiments of FairPay that apply most or all of these elements, including the enforcement of a minimal level of fairness using negative incentives, up to and including revocation of FairPay privileges. I believe that will ultimately be the most effective pricing strategy available for many for-profit contexts. It can be done in basic forms with moderate effort, but will take more effort to build, validate, and refine than the simpler variations that do not use gating to enforce fairness. Even in contexts where this may not apply well, such as for high marginal cost items, it may still be applicable for value-added service components.

Voluntary FairPay -- all "carrot;" no "stick."  This is much simpler to implement and manage than full, gated FairPay -- and can be more appropriate in non-profit settings, and in for-profit settings for products with low marginal cost where wide uptake is desired. Even with full, gated FairPay, the most basic tier of service might allow for voluntary payments with no enforcement of fairness. This works much like freemium, but can generate some revenue from happy customers even for the "free" tier. This form of FairPay is more closely related to PWYW and crowdfunding, but emphasizes regular dialogs about value, including use of framing and "carrots" to nudge for fairness and generosity.

Risk-free subscriptions -- an 80/20 solution that omits participation. This is a very important simplification of FairPay that can serve as an 80/20 solution. It relies primarily on post-pricing -- without using any of the participative elements of more advanced FairPay solutions -- and need not exploit nudging. Thus it is less of a departure from conventional subscription pricing. Unlike the high hurdle of an all you can eat, fixed price paywall, it works as a gentle "pay ramp." Instead of the direct customer participation in pricing for full forms of FairPay, the provider retains full unilateral control of price schedules, but applies a price discount schedule that is value-based -- ramping from zero for no usage in a given period, upward based on value actually received -- with increasing volume discounts, until limited by a price cap to avoid risk of overuse (similar to that for an unlimited plan).

FairMicroPay -- simple, relationship-value-based adjustments to micropayments. With resurgent interest in micropayments, partly fueled by blockchain, simplified forms of FairPay might be applied to make micropayments more flexibly value-based. There are fundamental problems with most forms of micropayments, but relationship-value-based adjustments can be overlaid on micropayment models.  The idea is to add a FairPay layer that identifies the user, and that allows the user to modify a standard base price within limits permitted by a smart contract -- downward as a volume discount, or as a refund/discount for lack of desired value -- or upward as a value-based bonus or sustaining contribution.

Climbing the ladder of value

Once you understand these elements, the framework becomes a tool for climbing the ladder of value toward more value-based pricing models -- toward what my demon would have us do. Wherever you are in current practice, you can begin to better apply these elements to chart a path to improve market reach, share of wallet, loyalty, and customer lifetime value, to better sustain your business.

Not all of these elements are applicable in all contexts -- but with time and maturity in better ways of doing business (and of sustaining non-profit services), more of these elements can be effective in more and more contexts. Keep in mind that these methods are not all or nothing.

• They can apply to offers for some products/services, but not others. That may depend on the nature of the product/service, including such factors as fixed costs that must be covered, or scarcity that must be rationed, which may cause providers to restrict the pricing power of customers.
• What we may now think of as a single product/service can often be re-factored to separate high-marginal-cost elements, where pricing must be controlled, from low-marginal-cost elements, where customers can be given more freedom (such as for value-added services and support services).
• They can be applied to selected customer segments who are expected to be cooperative, fair, and even generous, but not to others who might not buy into the social contract of the invisible handshake.
• They can be introduced to selected test populations as limited time tests to allow key parameters of the offering to be tested and refined before wider and more permanent use.

Some of these elements will drive a shift in mind-set on both sides -- from zero-sum to win-win games, and toward more cooperative norms of behavior -- and some people and organizations will adapt more quickly than others. But over time, the players will learn how to play this game in a way that becomes attractive for more and more products/services, and for broader and broader segments of customers.

"Revenue as a Service" -- the power of platforms

The more advanced elements of this framework -- and increasingly nuanced variation of each of the elements -- will take effort to implement and operate, including software development and operations. That suggests an opportunity for platforms to provide these services, along with expertise in how to apply them, for the many organizations that might otherwise have difficulty doing that for themselves. That is just the kind of problem that "Software as a Service" was designed to solve. This can bring huge economies of scale and network effects to solving the problem of nurturing revenue relationships. Expanding a suite of services across this entire framework presents a significant opportunity for new or existing platform service providers.

A platform solution across many organizations also has other kinds of economies of scale and network effects, beyond simply outsourcing that service. FairPay dialogs about value generate valuable data about exactly what each customer values at a transaction level, as well as reputation data about the fairness of each customer (and how that varies with context). While that data is sensitive, if managed with care, it could potentially be used in win-win ways to help guide service providers to engage with those customers who most value their services. That can lead to more effective co-creation of value for everyone.

That pool of data holds much of what my demon knows.

[Update: See much more on platforms in A Platform for Teaching Men to Fish -- "Revenue-as-a-Service" for Non-Profit Impact -- which applies to for profit use as well.]

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[Update 8/5/19] Table revisions

The above tables and element descriptions have been updated slightly to add clarity and completeness.

The first change is to add transparency and trust as foundational elements (listed in combination with framing and nudging). I was reminded by Steven Forth that, while I had these in mind as part of the relationship-centered element, they were important enough to deserve explicit mention. I combined them with the other important elements that reinforce relationships, framing and nudging, as not dissimilar enough to warrant listing as separate elements.

The second change is just a minor wording change, adding "enforced fairness" as a broader, and perhaps more meaningful, description for selective granting and revocation of FairPay privileges.

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[Update 9/2/19] An added element? -- Broad value factors, with "reverse metering." 

I am considering making this a separate element in my table, but unsure to what extent it fits as part of the "Individual value-centered" element, as noted above, and whether to categorize this largely ignored aspect of value as foundational or amplifying. 

FairPay seeks to focus both the business and the customer on all aspects of value that they agree are relevant. This deserves emphasis, and an important aspect of that is that value goes not just from the business to the customer, but often in significant ways from the customer to the business. This can be called "reverse metering" (much the way that electricity generated by a customer is metered to determine credits from the electric utility). Drawing on an older post about journalism as an example, consider how broad value really is, and how far this goes beyond what we think of as the "product:"

From the provider to the consumer, FairPay focuses on the total value of all kinds, as actually delivered to each particular consumer -- the value-in-use for exactly what is consumed and how (what items, how many, how intensely), not only content, membership perks, etc. -- the value of that experience and potentially even the outcomes that result (enjoyment, appreciation, and the results enabled -- did our advice improve your health or your stock market returns?). This can also include "soft" values, such as:

• service and support
• participation, listening, and responsiveness (comments, access to the journalists) 
• events and merchandise
• the social value of investigative journalism, community services, and good corporate citizenship.

From the consumer to the provider, FairPay considers not just monetary payments (subscription or membership fees, or pay-per-use), but other currencies. Thus it factors in credits (the "reverse meter") for:

• attention to advertising (including the possibility of customized levels of ad loads) and 
• personal data that can be used or sold (again with possible customization)
• the value of user-generated content
• the value of viral promotion and leads
• up-sell/cross-sell revenue potential
• volunteer-provided services to the provider 

------------------------

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.)

"Risk-Free" Subscriptions to The Celestial Jukebox? (A Working Draft)

They promised us an "Infinite Jukebox" -- but we never expected the price to be infinite

The early days of the Internet promised an "infinite," "celestial jukebox," with instant access to all the content in the world. But instead of heaven, we are now facing "subscription hell." Yes, we can now enjoy nearly infinite access -- but the price also seems to be approaching the infinite. What we have here is not a failure of technology but a failure of business model innovation.

The future of subscriptions is to make them risk-free to the consumer.  For digital services, the provider risks little except the opportunity to take money in exchange for no value. That will be less and less tolerated.

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Your thoughts?  This is still in formative stages, and feedback is invited.*  

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One issue is that subscriptions are all about relationships, and that is more true than ever in our digital world. Our current relationships are dysfunctional because businesses make consumers take on pricing risk for no good reason. Consumers see the risks they face, realize that makes little sense for digital services, dislike that, and dislike businesses for demanding that. The compounding issue is that the inherent abundance of replicating digital services makes consumers even less willing to accept pricing risk.

Providers seem to think current models are the only way to do business – if they think about it at all. (Some prefer not to think about it, and love the value proposition of "autopay forever," hoping you forget that they are sucking money out of your wallet every month.) Even those with better intent and more desire to innovate are stuck in the scarcity-based economic mind-set of real goods, and have not really understood the value-creation power of the new economics of abundant digital services. We are still mired in your father's subscription models -- models for mailing pre-defined assemblages of print and squeezing pre-defined sets of TV channels into an analog cable:

• Business know that consumers like simplicity. 
• They also know that consumers hate surprises. 
• So subscriptions are made simple: unlimited, flat-rate, all you can eat (AYCE). 
• But AYCE distorts incentives -- it overcharges light users and undercharges heavy users. It limits risk at the high end, but not at the low end or the middle.

Businesses know there are problems here.

• They have difficulty acquiring customers, and so offer introductory discounts (jam yesterday)
• They have difficulty retaining customers, and so offer retention discounts, but only after you try to cancel (jam tomorrow)
• But there is rarely any discount in normal times (never jam today).

Seeing the problems with AYCE subscriptions, some turn to another unrealized dream of the Internet -- like an old style jukebox, our infinite jukebox should take nickels -- so-called "micropayments."

• But micropayments just change the pattern of risk: how many nickels will I need? 
• This reduces risk at the low end, but not at the mid end -- and dramatically raises risk at the high end.

We have limited forms of micropayments for decades, in the form of pay per item (PPI) or pay per view (PPV). But, run up enough micropayments and those digital microbucks add up to real kilobucks. That is a fatal problem, even if we can make taking the micropayments totally frictionless. (Many grasp at new hope from cryptocurrencies and blockchains, but, much as they may reduce friction, they do not solve the problem of risk.)

The problem remains: consumers hate risk! Both classes of current models force significant and unnecessary pricing risk onto the consumer.

As outlined here, we can easily do much better, for most kinds of subscriptions to digital content or services -- not only for the consumer, but for the publishers (and platforms that serve them).

By getting smarter about harnessing the abundance of digital, we can have our cake and eat it too: we can reduce consumer risk AND we can motivate consumers to sustain those who create the content and services that they desire. (See "extensions to sustain creation" below.)

What is a risk-free subscription?

Here is the basic idea of a "risk-free" (or "no-risk") subscription.  Compare it to a conventional unlimited subscription that costs, say, $5/month. (The "update" section below also considers how this compares to services that are currently free and wish to shift to a paid model, or to enhance a simple voluntary payment model.)

Let's design a risk-free subscription that costs $0 to $7 per month depending on how much you use. Let's design a volume discount that varies -- to work much like micropayments for low usage -- and much like an unlimited subscription at high usage -- with graceful blending in the middle.

• Get "run of the house" access to whatever items you want
• If your usage for the month is zero, your bill is $0
• As your usage for the month grows, your bill grows, but with declining cost per item. Your bill will go from $0 to $7, depending on how many items (and how many of them are premium items).
• To avoid the risk of bill-shock when you used more than you intended, you never have to pay more than $7.

This is a simplistic example, and the price ($7 versus $5) for this added flexibility may actually be reduced over time. If many more people subscribe (because they have lower risk), total revenues will grow and the ARPU (Average Revenue Per User) target can be reduced (to attract still more subs), so the unlimited cap might shift to $5, or even lower.

We can improve on this (as explained further below):

• add nuance to our usage metrics to move us closer to a value-based metric that understands that some clicks are more valuable than others 
• layer on options to more fully support the ongoing investment of publishers and creators.

(This risk-free subscription is a generalization of a model I first suggested in 2015 --“Post-Bundling – Packaging Better TV/Video Value Propositions with 20-20 Hindsight” -- and have since discussed with major TV providers. That provides added detail on the use-case for TV/video bundles.)

[Update] Note that while the discussion in the original post was about risk-free models that ramp up based on items accessed or consumed, the same principles can be applied to work based on time, not items.  Some possible advantages of that are outlined in the update section on time-based models at the end.

Of course such a subscription is not absolutely risk-free, but it is much closer -- and yes, there are some levels of risk to the provider -- both of which are discussed below. But first, a closer look at consumer risk.

Consumer risk in an unlimited subscription

Think about the consumer's issues when they decide whether to subscribe, ...as they continue, and ...if they consider cancelling:

• Will I use enough to justify the monthly price -- now, in the past, and going forward? Am I using the service often enough?
  Am I happy with my interest level in the selections offered?
  Am I satisfied with the quality of the items I consume?
  Do I just skim many items, or quit part way through?
  Do I get the desired value (or enjoyment) from the items?
• Which premium channels should I buy access to?
  How would I know in advance?
  Did I watch enough items on the premium channels I chose and paid extra for?
  Was I happy with the premium channel items that I did consume?
  Did I regret that I could not watch programs on premium channels I did not subscribe to?

• Is this subscription one that deserves to be in the "portfolio" of sources I pay for unlimited access to (given all the content sources of this kind that I want)?
  Did I find this month that I wanted other services I did not subscribe to?
  Can I afford to add still more subscriptions?
  Is this a subscription I should drop, so I can afford something else?

• How can I predict any of this reliably?
  Do I know what will be offered in coming months?
  Do I know what alternatives will draw my attention elsewhere?
  Will I be paying for periods where I am on vacation or too busy?

The problem is that most digital consumer services offer constantly changing collections of experience goods. Especially for content services, we have only limited ability to predict what value will be offered, what items we will actually choose, and what value we will realize. That is highly unpredictable, except in hindsight.

Subscription providers seem to ignore this. They focus on customer acquisition and customer retention (and its converse, churn), but how many of them consider the dynamic value propositions of value/risk to each individual consumer? They optimize for CLV, the Customer Lifetime Value to them, but not for VLV, their Vendor Lifetime Value to the customer. How many businesses really think about how they justify their share of the consumer's wallet?

As more and more content of all kinds goes behind flat-rate subscription paywalls, how many subscription are simply unaffordable to many consumers who might gladly pay a profitable amount for occasional access? How many services offer discounts only for new customers, or those threatening to cancel? (This reflects a natural risk discount -- if the price is set in advance, a consumer's willingness to pay must factor in a discount to adjust for their risk of disappointment.) What about those who would be continuing customers at modest but still profitable levels? A few top publications like the New York Times are making money with subscriptions paywalls -- but only about 3% of their readers subscribe! -- and most news publishers do much worse. What a waste to both consumers and businesses! Surely we can do better!

The game most subscription providers play now, is one that charges at flat rates that work for their best customers, but that leave more moderate customers on the ragged edge of saying no. And the vast majority of those who might pay for moderate amounts of content do not subscribe at all. Some providers are even more cynical and customer-hostile, hoping you will take a trial and forget you are paying $5 a month, and then making you jump through hoops when you realize you no longer want to.

Consumer risk in micropayments (pay per item)

Why do consumers hate micropayments? -- even if they are frictionless? Because consumers hate unpleasant surprises.

• What if I run up a huge bill?
  What if I get hooked on a binge?
  What if my kid goes overboard?
• Will I be sorry I paid per item instead of getting an unlimited subscription?
• What if I select items but find them disappointing?
• What if I like to skim, and so access many items but get little value from each?

These problems are inherent in micropayment models that do not have significant volume discounts or other value-adjustment provisions. Pay per view movies have a profitable niche, but viewing more than a few gets very costly. News services like Blendle have been even less successful -- they offer single articles, but at 25-49 cents each, the bill rises quickly.

The psychological distress of the ticking meter has been well established. Think of telephone minutes, cellular data megabytes, and the old days of online minutes on AOL. Knowing the billing clock is ticking makes it very hard to enjoy using a service. We are always worried: "what shock will I face when I see the bill?"

20/20 hindsight and post-pricing

My work on FairPay highlights the difficulty of setting prices before the experience, why that is an issue of risk, and how "post-pricing" can avoid that problem. The value of experience goods is best known with 20/20 hindsight. Consumers are much happier paying for the value they get after they know what the value actually is. The classic Our Gang "Pay as You Exit" story illustrates the power of that.

Provider risk and profit

Back to my opening statement, "the provider risks little except the opportunity to take money in exchange for no value." Providers will, of course be quick to argue that they do face risk, but to what extent? Since the unit costs of access to existing content and most other digital services is negligible, the risks are not the marginal costs of service, but the usual subscription issues that drive CLV -- CAC (customer acquisition cost) and retention/churn -- and the risk of just not having enough subscribers.

The deeper provider risk issue relates to the predictability of cash-flow -- whether they can expect to fund their content creation and marketing expenditures going forward.

• Compared to micropayment/PPI models which are already totally dependent on usage, the risk-free model should not worsen predictability -- and might improve repeat activity enough to make predictability much better.  Many businesses are hit-based, and deal with it, and all but the smallest publishers can spread that risk.

• Compared to flat-rate subscriptions, the obvious concern is that the steady stream of monthly payments from each customer might become much less steady. However, the law of large numbers (many customers) will tend to smooth that in aggregate. Also, if the risk-free offering is designed well, there is reason to expect that reduced CAC and churn will dramatically increase the number of subscribers, so that overall revenue and net profit will be much higher, even if it is more variable.

Cynical providers be very reluctant to shift from the "get them on autopay and hope they never think about it again" gravy train -- but isn't that really very thin gruel?

Tuning the model

That is the basic idea, and the core of the case for it. It will take good design, testing, and refinement to prove it out and get it to work well. That can start with limited, low-risk tests. There is reason to expect that to validate some promising sectors and customer segments, so it can grow from there.

The rest of this draft explores some ideas on how to build on this strategy, by further reducing consumer risk and adding more value-based metrics of usage -- and by keeping the impact on provider risk manageable. Value-based pricing is increasingly viewed as best-practice in B2B -- we need to be more creative about applying that for B2C.

The discount curve

A key feature of the risk-free subscription is that it depends on usage, but adds a volume discount. Designing the discount curve that gets built into the price schedule will be critical to making it behave in a way that can make consumers comfortable. Consumers want simplicity, so the trick may be not to expect consumers to look closely to understand whatever tiered or continuous schedule of rates is used, but to simply give some examples of what to expect at representative usage levels. As long as customers have a sense that the curve is reasonable, and that they can see their detailed accounting for any month if they want to, that may be enough -- as long as the cap on total rate is not too high, and they don't reach it too quickly. (Of course one or more levels of premium pricing might be reflected in this schedule as well.)

Extension: The money-back guaranty, and the skim discount

One thing Blendle, the news micropayment aggregator, did well was to offer an unconditional refund button on each article viewed. That is a good start, but too all-or-nothing. It may be much better to let users specify a percentage refund they want, so that they can ask for a partial "satisfaction discount" when they are disappointed, without shying away because they feel a full refund would be unfair if they did get some value.

(Note that a quality guaranty can increase willingness to pay, thus offsetting the cost of the guaranty. Now consumers unconsciously build in a risk discount that discounts for the risk that they will regret their purchase. The guaranty can eliminate the need for customers to discount for that risk.)

Related, is the skim discount. Instrumentation increasingly makes it practical to determine the time spent consuming items, and what portions are consumed -- why not discount the unit price if the time spent is clearly short, or the item is clearly not finished? This kind of tracking also makes it possible to confirm that subscribers are being honest about claims of dissatisfaction, and limiting refund privileges for those who go overboard.

Extension: value-based usage metrics

Advertising-based revenue models lead to click-bait, and there are valid concerns that usage-based revenue models can create the same kind of harmful incentives. A simplistic usage metric such as number of items accessed, may well create similarly misaligned incentives for quantity without quality. But extensions like the satisfaction discounts and skim discounts above, will shift this from a simple count, toward a more nuanced value-based metric.

Further extensions can add more sophisticated value metrics (and the bonuses of the next section) to make this model more reflective of the true value of the experience to the consumer. Such metrics may factor in time spent with an item (dwell time), how full a portion of it is consumed (aborts and sampling), is it re-accessed, does it lead to further actions (outcomes), is it shared, etc. Of course most users will not want to dig into this complexity, but a simple "relative value/intensity of use" metric for each item could be reduced to an average and included in their statement. That is likely to be accepted as long as it seems reasonable.

Extensions to sustain creation:
A publisher-sustaining bonus, and a creator-sustaining bonus

The real challenge in sustaining digital services, especially content services, is that we are only beginning to realize that we must have a new social contract. We must pay to sustain the supply of future content, which is costly, not to access current content, which costs almost nothing. A risk-free subscription can make this transparent and discretionary:

• At the end of the period (along with the statement that reports on usage, and what the "risk-free" price came to), invite a voluntary bonus to sustain the publisher. 
• Remind the subscriber what they accessed and what they apparently got the most value from. 
• Invite them to add a bonus payment, to reward the publisher, to better enable them to continue to supply more like that. 
• Also, invite them to make this a recurring bonus (that can be cancelled at any time), so the publisher has more certainty of continuing revenue.

This can work for single publisher subscriptions, and for aggregations. Aggregators can suggest that bonuses be contributed for each publisher the consumer patronizes heavily (as well as a bonus for their own curation services).

A similar bonus can be offered to reward and sustain creators/artists -- the authors, musicians, filmmakers, gamemakers, or podcasters that each customer patronizes most heavily. Report the top candidates each month, and encourage a voluntary sustaining-bonus contribution that goes directly to them -- one-time or continuing. This might substantially increase consumer willingness to pay, and might generate significant benefits down the value chain, to enable digital services to create value far more sustainably.

This would work as a new kind of hybrid model, adding a component much like recurring crowdfunding (as supported by Patreon and similar recurring variations of Kickstarter and Indiegogo) into the mainstream of subscription businesses. Of course these bonuses need not be entirely voluntary -- there could be some required minimum "sustaining fee" -- or some premium-level sweetener could be added that requires a minimum fee.

A low-risk step for publishers in the direction of FairPay

Notice how this risk-free subscription becomes a way to edge toward FairPay while limiting risk to the publisher. The simple no-risk subscription outlined here uses the 20/20 hindsight of post-pricing to largely eliminate the consumer risk in conventional pre-priced subscriptions (and micropayments). It does that in way that keeps the provider in full control of the price schedule. FairPay goes farther to reduce consumer risk, in a more unconventional way, by adding customer participation in setting the price. Powerful as that promises to be, it is understandable that many providers are hesitant to give up that control.

The extension features outlined above gives the customer limited power to effectively adjust the price. They can adjust downward with the guaranty and upward with the bonuses. That moves incrementally toward FairPay, with a basic level of participation in a portion of the pricing.

It may be hard for publishers to make the case that they should be able to "take money in exchange for no value" -- but they do have a legitimate case that if they must invest to provide the value that consumers want in the future. A consumer who values the service has some obligation to sustain that investment.

• Think of the base risk-free subscription as the way to maximize market reach, and ensure a base level of compensation commensurate with usage. (A component of price that is controlled by the provider.)
• Think of the sustaining bonus as the way to nudge consumers to sustain the ongoing creation of services they value. (A component of price that is controlled by the customer, within limits set by the provider.)

Think about where to start with this, test it, learn how to manage it, and move toward a solution that serves more consumers and generates more profit for providers.

And, with this kind of win-win model, we can more sensibly sort out a balance between publisher-specific subscriptions and aggregated services (as Apple has given added prominence to) -- to find a harmonious mix that is good for consumers, publishers, and aggregated distribution services across a full spectrum of dynamically varying usage levels.

Why not give it a try?

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Update: A "pay-ramp" not a "pay-wall!"

Think of the risk-free subscription as a "pay-ramp" -- a gentle incline that presents an almost imperceptible barrier to new and light users that permits ongoing sampling at modest cost as long as desired. As users gain the usage habit, the cost ramps up slowly, and even bingeing is at low risk.

Compare this to the sudden, hard barrier of a "pay wall" -- Even so-called "soft" or "metered" paywalls are really hard, shutting the door once you exceed the quota of free items. Instead of a hard barrier, the risk-free pay-ramp is more like a gentle speed-bump -- it does not stop users, just slows them momentarily.

Compare this also to an introductory subscription discount that has a somewhat lower (but still sharp) barrier, and then a further sharp hurdle (even if largely hidden, but overhanging) when the discount period ends.

Update: Time-based risk-free subscriptions -- with rollovers

Some services offer time-limited access, "pay as you go" models that are a form of micropayment that is not item-based but time-based. These can include "day passes" or variants for some number of minutes, hours, days, or weeks.

I have not been keen on the "ticking meter" aspect of these (the same problem as other micropayment models), but in speaking with a SaaS provider of such services I learned that some services are getting much better results with these than with item-based models. That led to discussion of a time-based risk-free model.

• Current time-based models require the user to choose in advance whether they want an hour, a day, a week, or more. Interestingly, users often favor the shorter options because of fear that they will not use the longer options (even if it offers a hefty discount) -- lose-lose on both sides. 
• So of course I proposed applying a post-pricing variation. Why not provide automatic rollover? Let the user start with the 15-minute or 1-hour option, but if they want longer access, don't go back to zero, roll into the longer, more discounted, option and credit the short-term fee against the longer-term fee so there is no risk.
• This eliminates all but very small price-risk hurdles, and provides full optionality. 
• Just provide a simple notice to the user when the current period has expired, stating that continuing will trigger the rollover.
• Being time-based also has the advantage that it can seamlessly roll right into a full, auto-renewing subscription. On each monthly roll-over, just give the user the option to make it auto-renew.
• The UX need not even explain all of this up front, it can do it in incremental bites as rollover points are reached.

Update: From free to paid (whether compulsory or voluntary)

The discussion above was largely framed as an alternative to paid subscriptions (or pay per item), this risk-free model is attractive in comparison to other conventional models as well.

It is very relevant to services that are now free, but that want sustaining revenue.

• As an alternative to adding a conventional paywall, the no-risk value proposition softens the blow. Users can more easily be converted to paying customers if they know they do not risk paying for value they may not get. The hurdle becomes vanishingly low. Try it and keep usage low, until you see how it prices out. Instead of $5/month every month, it may be $0 or $1 or $2. If the discount curve is not right, usage will be driven down, but not to zero. That buys time to tune the discount curve so that most free users can be converted to paying customers. Make it easy to see the current total (and to get item refunds), so reluctant customers need not fear any billing surprise.

• For mission-oriented providers who want all payments to be voluntary, the sustaining bonus component does the job. Keep the subscription price at zero, but suggest sustaining bonuses to the service provider, and to selected creators of items that are accessed. For example, a public service news offering could know its customers and gently nudge them based on their usage patterns, and any other value data it can apply. Patrons can be encouraged to set up recurring bonus contributions, knowing they can be stopped or adjusted any time they like. They can be nudged to boost their bonus contributions whenever their observed value consumption increases.

• For member perks, this brings a risk-free way to charge for premium membership tiers. Many services (whether for-profit or non-profit) find it challenging to add paid premium tiers because the value propositions are especially lumpy, making fixed contributions especially high-risk to potential patrons. Risk-free charging solves that problem.

Update: How this can enhance and complement advertising revenue

It should be noted that this enhances and complements ad-based revenue models in two ways:

• Paywalls conflict with ad revenue because they dramatically reduce views. Risk-free subscriptions reduce that effect because they reduce the subscription hurdle. They are more like an pay-ramp or pay-bump than a pay-wall. Paywalls reduce reach, and thus page views. So even if direct ARPU decreases, when ads are factored in, ARPU can be expected to increase.
• The win-win nature of risk-free subscriptions can be complemented by a similarly win-win model for advertising. That is to apply a "reverse meter" that gives users credit for the attention and data they contribute when viewing ads. My post, Reverse the Biz Model!, explains how this can re-align incentives to make advertising more valuable for users, advertisers, and publishers/platforms.

Together, these strategies can have a compounding effect in raising revenue.

Update: Risk-free aggregation as the savior of long-tail providers

"Subscription hell" and "subscription fatigue" are especially limiting for long-tail providers. It is hard enough for dominant providers to attract subscribers, but even harder for smaller providers of more niche content. They are more value-challenged in attracting subscribers and more hungry for them. Potential subscribers face a lumpy value proposition (an expectation of fewer items of interest per month than for a dominant supplier such as Disney or HBO or NY Times) that makes flat-rate AYCE a very high-risk. An all you can eat buffet has low appeal at any viable flat-rate price when there is not much you want to eat.

Risk-free models can be especially valuable to them, and an aggregator who supports such models can help them reach beyond the small core of customers who would cross the hurdle of a flat-rate subscription (and not quickly churn away). This builds on my closing paragraph above: "this kind of win-win model...can...find a harmonious mix that is good for consumers, publishers, and aggregated distribution services across a full spectrum of dynamically varying usage levels."

Detailed discussion of how risk-free aggregation can work in the context of TV/video subscriptions (equally applicable to other content types) is in my earlier post, “Post-Bundling – Packaging Better TV/Video Value Propositions with 20-20 Hindsight.”

Update: Paywalls soft and hard versus risk-free payramps

NiemanLab reports that soft paywalls will get weaker with the change in Chrome that will prevent detection of incognito mode. The suggest this "could encourage more publishers to go all in on a hard paywall, in which you can’t read a single article without first registering."

As I commented, "Maybe the solution for publishers is to shift from the zero-sum thinking of warfare against their readers to the win-win thinking of co-creating value with them."

Update 9/30/19: Some corroboration from Zuora

An interchange with Jessica Lessin, triggered by an article in The Information reminded me of some important corroborating data from Zuora, a leader in services to SaaS businesses that analyzes data on over 900 SaaS companies (both B2B and B2C). From their chief data scientist, in "What Goldilocks Can Teach Us...:"

“Giving subscribers too many options is overwhelming. Giving them too few options is unattractive to customers who demand choices and value. But there’s a just right sweet spot based on understanding how your customer values your offering that leads them over time to sign up for more. A case in point lies in how you charge subscribers for usage with a pay-as-you-go component to your billing plan: without usage billing, subscribers may feel that a one-size-fits-all plan is charging them for more product than they use. But if you charge primarily based on usage, subscribers feel like you're looking over their shoulder and charging them for everything they do.”

“Our research shows that churn is lower and companies grow faster when there is a usage component to pricing: these companies experience 6% lower churn and 8% faster annual growth. But faster growth happens when the usage component is less than 50% of the bill: an additional 4% annual growth compared to companies where usage is the main mode of billing.”

(With regard to the last point, that "faster growth happens when the usage component is less than 50% of the bill," it seems unclear to what extent that really applies to B2C markets. But to the extent it does, that would suggest using the risk-free "pay ramp" as I outline it here, but perhaps with a minimum "floor" price per month even when there is no direct "usage." This gets to the issue of more sophisticated value metrics beside usage, and might be framed as covering the value and cost of "continuity" services, such as curation, alerts, newsletters, and even optionality. But such a floor price should not make the perceived risk of overpaying too high.) 


***Hint to entrepreneurs: maybe there is a killer opportunity for a risk-free service that aggregates long tail providers (or serves many of them in a harmonious way as a white-label SaaS service). Being more hungry, they will be more willing to innovate on pricing models than the dominant fat cats.

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*Your feedback is invited. Comment here or email me (FairPay [at] teleshuttle [dot] com).

This post was first published 3/26/19 on my blog at FairPayZone.com. 
Minor revisions and enhancements are included in this version (latest: 6/24/19).

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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.)