A Platform for Teaching Men to Fish -- "Revenue-as-a-Service" for Non-Profit Impact

Fund development of a platform that enables non-profits to sustain themselves

Give a man a fish and you feed him for a day;
Teach a man to fish and you feed him for a lifetime.

The same applies one level up:

Fund teachers of fishing and you feed their teaching for some days;
Fund a platform that supports teaching men to fish and you feed all of them for all of their lifetimes.

This could be a very high leverage opportunity! Making a transformative new tool widely available and affordable.

Foundations and others who fund charitable service organizations face a huge problem:

• Current strategies for funding non-profit services have yet to exploit the power of digital relationships to transform how they work with their customers and donors.
• Digital technology is already enabling transformative tools, especially for businesses on the leading edge of relationship commerce. Businesses are shifting to recurring revenue models, managing customer journeys and loyalty loops, and the most enlightened are engaging in dialog the brings a mutual focus on co-creation of value. The FairPay framework described in this blog and elsewhere supercharges value-centered relationships, and applies to non-profit organizations  (NPOs) as well as for-profit businesses.
• But non-profits lack business sophistication and can rarely afford to put resources into developing, testing, and applying similar methods to their relationships. The FairPay framework can transform revenue management at a full range of levels, but much of this potential remains out of reach for many organizations. 
• Meanwhile foundations and others are looking for ways to support worthy non-profit organizations, and for ways to make those services more cost-effective in their funding and operations.

***Note that much the same applies to news organizations that struggle to sustain socially valued journalism -- even where there is a for-profit element.***

"Revenue as a Service" for Non-Profits -- platforms as a universal leverage point

Viewing this from a systems perspective, this opportunity appears: Fund development of a platform to enable non-profits to sustain themselves by drawing more systematically on support from their community of customers, patrons, and donors. This can provide leverage across a broad swath of service organizations.

• Non-Profit Organizations (NPOs) -- as well as others, such as news providers -- need a systematic, ongoing way to obtain funding to sustain their operations.
• That can now be done in very sophisticated ways -- and that sophistication will be constantly increasing -- drawing on advancing technology. 
• The FairPay framework outlined here suggests a path to transformational improvements in relationship-based revenue models. 
• Doing that will take skills and resources that may not be economically feasible for small or even mid-sized organizations (even if they would pay back handsomely).
• That is just the kind of problem that "Software as a Service" was designed to solve: a platform provider (whether for-profit or non-profit) can develop, operate, and continue to enhance a high quality service that non-profit organizations can outsource to. 
• This can bring economies of scale and network effects to solving the problem of nurturing revenue relationships with large numbers of patrons. (Venture capitalists love platform businesses because of their scalability and high return on investment.)
• The impact of a non-profit platform could be so transformational that such projects should be very attractive to the charitable foundations that support non-profits and/or journalism. (VCs might be concerned that profit potential of such a platform may be limited by the tight budgets of the NPOs that would use it -- all the more reason for foundations to step in.)

Such a platform would provide "Revenue as a Service." Just what is that outsourced service?:

• The platform provides the common base of operational software services (based on marketing and behavioral science, technology, and systems analysis), that can facilitate relationship-based revenue management strategy and execution for each of many organizations. Build it once, use it many times. Spread the cost of research, development, and support across many client organizations.
• Each of those client organizations can retain full control -- setting all the key policies and retaining control of all exception handling. Each decides on all the parameters that define how the system works for them (the platform service may offer suggestions to guide that). Each  gets to have its people handle all human-to-human contact (but can outsource parts of that as well).

There are some existing models for revenue platforms for NPOs. They range from cooperatives like Tessitura, to for-profit services like The News Project, and less structured services for recurring crowdfunding like Patreon. FairPay provides methods for making such services far more powerful, across a far broader range of NPOs. The paths forward are 1) to add advanced FairPay features to existing platforms, or 2) to create new platforms that are clearly focused on FairPay strategies.

"Impact Data as a Service" -- platforms as instrumentation

Funders not only want to get good results, but to get the data to validate whether they are in fact succeeding in that. Common platforms lead to common data and metrics, and common reporting practices.

FairPay drives organizations to increase the quality and frequency of their operational dialog with their community, creating a new level of impact data. Platforms that manage and add new layers of communication with an NPOs's customer/donor community will create new kinds of fine-grained data and metrics -- on just what services are consumed by whom, with what outcomes, how those are valued by those individuals, and how they add value to each community member -- interaction by interaction, over the lifetime of the relationship.

• That creates a new level of rich data on just what services were consumed and the impact they achieved. 
• That enables the organization to be more dynamically adaptive and self-tuning, to maximize their co-creation of value with their community. 
• Funders can use that data to manage their funding and maximize their own impact.

The following sections explain how this is achieved.

The heart of the platform opportunity -- the FairPay framework

FairPay is a radically innovative framework for relationship-centered, “customer-value-first” revenue strategies for the digital era. Its varying forms can be adapted across a wide spectrum of business contexts, both for-profit and non-profit.  (It is an open architecture in the public domain, not a product, and I am working on this as a pro-bono project.)

The original focus of FairPay was on advanced strategies for sustaining for-profit enterprises (especially for digital products and services) -- but the framework spans non-profit services as well, and can be even simpler to apply in non-profit contexts. The core strategies of FairPay have gained recognition in business and scholarly publications. It has strong foundations in behavioral economics, and sheds light on many knotty issues and perverse incentives that are often poorly understood.

What can FairPay do for service organizations? FairPay provides a framework for applying elements that can be mixed and matched to provide a powerful solution to engage customers and donors, and build ongoing relationships with them in a way that motivates them to cooperate in sustaining services that they value. (I use the term "customer" in the broad sense, as including those served as wells as those who donate, regardless of whether they are overlapping or distinct sub-groups. The term "patron," in its broad sense, also conveys that inclusiveness.)

• Modern behavioral economics has shown that people want to be fair and even generous when asked in the right way to support a service they find valuable. 
• Game theory teaches that relationships can operate as repeated games, and that well-designed repeated games that are rewarding motivate cooperation to continue the game. (Subscriptions and memberships are forms of repeated games, sometimes well-designed, sometime not so well-designed.)
• Marketers have learned that they can build profitable recurring revenue businesses based on ongoing relationships (a simple form of repeated game) rather than one-shot transactions, and are beginning to apply the lessons of behavioral economics to enhance that process. They are managing customer journeys and loyalty loops, and engaging in dialog the brings a mutual focus on co-creation of value.
• FairPay adds more advanced elements to the mix, and combines them to re-align the repeated game to maximize cooperation in creating lifetime value. FairPay builds on transparency and trust to build relationships. It applies empowerment of stakeholders (to show trust), dialog about value given and received (to achieve transparency and motivate willingness to pay to sustain that), and reputation (to sustain trust). 
• FairPay works best when the business can position itself as a benevolent and fair partner in value co-creation that is worthy of the "price" it needs to sustain the relationship.
• Non-profit organizations can apply the same methods, and are more naturally seen as benevolent and fair partners in value co-creation.
• Therefore non-profits have more power to motivate fair contributions from their "customers," and therefore they are able to yield more power to their customers than for-profit businesses are. 
• That enables them to make contributions voluntary (as is already common practice, but not yet effectively managed with modern relationship-building tools). Such voluntary forms of the more advanced methods of FairPay are relatively easy to apply. 
• These methods center on regular and ongoing dialogs about value that remind customers of the value co-creation they have benefited from (looking backward to what has been experienced, not just promised for the future), how much they have contributed to sustaining that, and what more can and should be done to add value (in whatever forms are agreed to) in this relationship. That points to what else of value can be done. 

The FairPay framework informs an architecture that can enable NPOs (and journalism organizations) to enhance their revenue-related operations -- to apply the latest business systems, methods, and communications media in a way that optimizes their relationships with their "customers" (again, including donors) to maximize their ongoing sustaining revenue. 

• This process applies a new kind of leverage -- as a self-adapting engine to create real and valuable impact, measure its perceived value, and adjust the process to do even better.
• From this perspective, the FairPay framework clarifies how little most businesses and NPOs are currently doing to maximize that, and how much more they could be doing.

More detail on just how this FairPay framework works follows, but first, what does it take to make it happen?    

The platform that supports teaching men to fish

A basic platform for bringing these tools to fund-raising and revenue operations could be built in stages. This is a natural candidate for applying an open source strategy (or a cooperative) to become self-funding beyond a certain initial pump-priming:

1. Do a basic proof of concept. This could demonstrate the synergy of the combined elements and make the case for further investment. It might take something like 1/2 person-year in total, split between technology and business analysis.
2. Enhance that to a "minimum viable product" level to be a useful service for a large number of organizations.
3. Facilitate cooperation of that user community to continue further development, and to attract experts to aid in developing and testing more advanced methods.
4. Build all of that out into a vibrant, self-sustaining platform ecosystem (much as has been done with other platform or SaaS services like Linux, Mozilla, and Wikipedia).

NPOs (and/or news organizations) could then use this platform to get far more effective and sophisticated in managing their activities as a revenue-generating business, in ways that deepen their social contract with their community.

(As noted above, existing revenue platforms might also be enticed to take the lead in adding FairPay features.)

The FairPay social contract

FairPay works by creating a new social contract for sustaining the creation of desired services.

Consider this change in the game:

• From today’s conventional repetition game: “Here is our requested price/donation, 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/donate what you think fair for you after each period of service — we will remind you of the services you got (or funded for others), and will encourage you to pay/donate accordingly.”

This voluntary form of FairPay relies on dialogs about value to frame the value proposition, and to remind patrons of the value they received. It empowers them to determine the "price," engages in transparent dialog about the value that the price should relate to, and tracks reputation to build trust and to know how to nudge fair levels of support.

• It draws on all available information on when and how services are actually consumed by each patron. Increasing availability of fine-grained usage data will make that increasingly meaningful.
• It may seed its dialog with individually-calculated suggested prices based on the value and cost of those services. (Even if services may be offered to some at no charge, it may be fair to gently nudge others who have greater means to pay for those services for themselves (and others) as they can afford.) 
• It regularly solicits payments to sustain ongoing services in an open and transparent way, framing and managing the dialogs about value to remind patrons of the value they (and others) got, and what and when they have paid in the past to sustain that, why they should now pay again, and what new value to expect. 
• It learns which patrons are fair or even generous in their corresponding payments, so that they can be most effectively nurtured, and resources can be directed to serving those who most appreciate the value offered.  
• It can suggest additional benefits (perks, tiers of services) based on how fair or generous the customer is. 
• In selected uses, it can also withdraw benefits -- for-profit businesses can use that "stick" to enforce fairness, but non-profits might stick to more positive "carrots" (but might still use "sticks" in limited situations).

That is how it drive revenue operations, building on that basic social contract. This is simple in in its core concept, but it is amazing how few organizations engage in real and regular dialogs about value with each customer at this fine-grained level.

• Engaging an NPO's community on what it offers each of them, what each of them values, and what it needs in the way of support from each of them is the way to build strong sustaining support, enabling it to co-create the maximum value. 
• Some managers fear getting customers to think about value and price, and some fear that customers will not be willing to engage in such dialog. But behavioral economics shows that customers are far more responsive to productive dialog about value and price than most businesses realize (my latest journal article cites a number of compelling studies, and the most relevant are listed in my Resource Guide). 
• Managers also tend to forget how much their value propositions vary from one community member to another. (A simple thought experiment can help recenter on the importance of these individual value propositions.) 
• That, in turn, enables a funder to leverage its impact -- the value it co-creates with its NPO portfolio and each member of their communities.

There is of course much more to how this is done, and it will vary greatly from context to context. Background on these variations is in my previous post, The Elements of Next-Gen Relationships and Pricing -- A Unifying Framework. It provides this summary table of the elements, and then comments on each:

 (with minor updates 10/27/19)

The columns to the right show that while most of these elements are applicable to both for-profit and non-profit organizations, the details will vary, and it will further depend on the level of trust and cooperation in the customer segments to be addressed.

As indicated, most non-profits currently use fewer of these elements than for-profit businesses, but greater use could improve their results (including increasing the satisfaction and generosity of their community). This presents a broad opportunity for a platform to make it easy for non-profits of all sizes to gain leverage.

Again, the clearest difference from how FairPay is used by for-profits is that fairness will often be left as voluntary, to be gently nudged with positive "carrots" rather than enforced with negative "sticks" (such as the revocation of privileges). But motivating fairness should be relatively easy for non-profits, since they can readily point to both the individual value and broader social value of their cause. (And non-profits can generally avoid the most complex element of FairPay, the business logic and policy issues of revocation or other negative incentives.)

The foundational elements are already used to some degree in many contexts, to build on the power of ongoing relationships. Now the amplifying elements can be added in and combined, to bring new synergy to revenue operations.

The general implication of the differences across columns is that the more advanced elements of the FairPay framework are most effective when the parties are perceived as holding up their side of the social contract:

• for service providers who are perceived as offering real value and warranting trust and commitment from customers/patrons for being fair, transparent and responsive to their value creation needs and desires.
• for customers who are perceived as fair and honest about communicating their needs and desires, and being fair (even generous) in making contributions to sustain that desired value creation. 

Concrete use-case examples

If this still seems abstract or unclear, please see my other posts with more concrete details of how FairPay applies in specific use-case examples:

• This example of membership based on the Whitney Museum.
• This example of membership based on the Metropolitan Museum.
• This example of reader-funded "patronship" for journalism (and many other discussions of journalism are linked to from the Business Use Cases section of my list of selected items).

Simpler "80/20" solutions with the same platform

Organizations using this proposed Revenue as a Service platform need not use its more advanced features, except as they are ready and wish to. The platform can be configured to deliver just the features each organizations wants. Thus it can provide a service that scales gracefully, from very basic, to very advanced.

One very important simplification of FairPay can serve as a high-leverage 80/20 solution in both voluntary and payment-required contexts. That is the "risk-free" subscription model that relies on post-pricing (after the experience). That can be done without using any of the participative pricing elements of more advanced FairPay solutions (and need not even exploit nudging). That is less of a departure from traditional set-price subscription or membership pricing. But unlike the high hurdle of an all you can eat, fixed price membership paywall, it works as a gentle "pay ramp." (This, too, is explained in my Elements post, and the Whitney and Metropolitan Museum use-case examples listed above.)

Similarly, the platform, itself, can be built in stages, beginning with the more basic elements, then gradually adding the more advanced ones.

Crossing the lines between donors and those served

As explained in my 2016 post on non-profits, FairPay provides new and better way to address the complex issues of pricing and sustainability across the spectrum from donors to those served.  Consider how this works for these two often overlapping constituencies:

·         Recipients -- direct customers/patrons of direct services (the mission). Here, pricing takes on two interrelated dimensions -- what is the fair value of the service, and what is the fair contribution from the recipient (to both the cost of the service to them, and to the added overheads needed to sustain the organization -- and optionally to the cost of service for those who can less afford it).

·         Benefactors -- indirect customers/patrons of indirect services (the altruistic value of supporting services to others, and the value of being a benefactor, including perks and recognition).  Here, the key dimensions are the value of direct services to others enabled by the benefactor’s donations, and the value of the indirect benefits to the benefactor.

The details will vary with the type of customer/patron and the nature of the organization and mission, but the essential task is the same -- to generate sustaining revenue by cooperatively setting prices (for service or donation) that make the value proposition "win-win." (That also includes recognition of non-monetary contributions by those who give in kind.)

The platform as a universal leverage point for achieving impact

The problem that limits the uptake of these methods is the implementation effort, and the need for ongoing testing and refinement (including "devops," the work of enhancing and maintaining the operation). Fund a platform for that, and many more organizations will be able to teach men to fish -- or give them fish -- or whatever other good works they do. The platform is a universal leverage point.

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 fine-grained 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 service (for a single service provider, or across all the service providers that use the platform, subject to appropriate privacy controls). That can lead to more effective co-creation of value for everyone.

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Posts that are specific to non-profits and social welfare:

• A Better Revenue Strategy for Non-Profits in the Digital Era
• Making "Pay As You Wish" More Equitable -- Sustaining the Met Museum (and Others)
• An Invisible Handshake for The Digital Wealth of Nations
• How Market Commerce Can Become More Cooperative, Fair, and Human
• Turning the Invisible Hand to Create Shared Value -- The FairPay Strategy

...and focused on journalism:

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

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[Update 4/14/20:]  An excellent article on how one platform service, Network for Good, is bringing some of the relationship-building methods I describe here, is How NonProfits are Doubling Down on Relationships with Subscription Giving. The article is by Tien Tzuo president of Zuora, who wrote the excellent book, Subscribed, that I reviewed in 2018.

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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). 

And these journal articles, A Novel Architecture to Monetize Digital Offerings and Pricing in Consumer Digital Markets: A Dynamic Framework. 

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.)

Finding Value in The Subscription Economy

At the heart of the Subscription Economy is the idea that customers are happier subscribing to the outcomes they want, when they want them, rather than purchasing a product with the burden of ownership.

...Nicely put by Zuora, the SaaS platform company that drives many of the largest subscription services. They have popularized the term "subscription economy," and recently created a Subscription Economy Stock Index that highlights the striking growth of such businesses. This is not just a Zuora thing -- as the Oracle infographic to the right indicates.

This fundamental shift toward subscriptions is driven by the nature of our digital environment, and the power of Big Data and the Internet of Things. It is becoming easy to manage ongoing subscription relationships and service delivery -- and to get increasingly rich understandings of actual value received. We are only beginning to recognize how deeply this will transform how we exchange value in commercial relationships.

This post explores the key concepts of value as they apply to subscription relationships -- and as they are are embodied in the pricing of subscriptions. This draws on "value-based pricing" strategies that shift from simple (but less optimal) cost-based or competition-based models. (These are increasingly transforming B2B markets, but have so far seemed less readily applied to B2C markets. FairPay, a new approach to value-based consumer relationships, promises to change that game.) This post shows why shifting toward value-based pricing -- even if only in small, incremental steps -- is vitally important to maximizing the value of subscription relationships -- Customer Lifetime Value (CLV).

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

Value is complex, multidimensional, and highly individualized 

Our digital age has not only driven "relationship marketing" to become deeper and more powerful, but has changed the economic realities of value -- shifting focus from "value in exchange" to "value in use." That is what the opening quote from Zuora referred to, "the idea that customers are happier subscribing to the outcomes they want, when they want them..." We generally do not really want products for their own sake, but as services that produce outcomes. Subscriptions are not a product with a set value in exchange, but a structure for a service relationship that produces a dynamically varying value in use.

Current subscription models drive toward this idea of value-in-use, but do not yet fully embrace it. Our concepts of value and value-in-exchange are still rooted in the old logic of products ("goods"). Value-in-use can not be known until after use. Not only does value vary from subscriber to subscriber and from period to period, but there are many factors involved in estimating value.

• Is the value tied to the period of access and/or the amount of access (permitted or used)? 
• Is it per unit of product/service? 
• Is it how well the service met quality or service-level standards (performance)? 
• Is it what the experience achieved, what benefits it led to, or how well liked it was (outcomes, whether objectively measured or in customer perception)? 
• Is it a matter of broader values, like cultural merit or support for social/civic/environmental values (including economic "externalities")? 
• Is it affordable to me (willingness/ability to pay), and does what I pay sustain creation of more content or services that I desire?

An ideal market system would factor all of these aspects of value into pricing. For example, the value of a content service is not just how many songs or videos or stories I have access to, nor how many I do access, nor whether they arrive without halts or delays, nor whether I play all of an item or hate it and stop, nor whether the service pays its creators and employees, and avoids pollution, nor whether it is priced within my means. Ideally it is a reasonable combination of all of these.

The question is: how well can we do at approaching that, in a way that still creates a good customer experience without undue complexity? In this digital era, we are gaining a wide range of Big Data that bear on understanding value -- data that directly or indirectly provide new insight into:

• the usage of products and services with detail on what we use, when, and how completely or intensely
• the performance of what we use and the quality of the experience
• the objective and subjective results of the experience.

Marketers are already using newly available data to target their offers, and to factor better predictions of value into their pricing. But subscription pricing strategies are just beginning to address the gap between average predictions of value and the widely varying actual experiences of individual consumers. 

Climbing the ladder of value -- profiting from more win-win relationships

Consider the range of approaches to price that we commonly see in practice and how they track to value. Keep in mind the fact that value in use, the outcome of a service, is difficult to predict in advance, and varies from customer to customer and time to time -- and so is best assessed after use, when the outcomes are known. There is also the problem that important subjective value perception data arises from within the head of the consumer -- that aspect of value can be hard for the business to know, even after the fact.

Uncertainty in quantifying value realization forces us to address the related question of who takes on pricing risk? This has important implications. How much use will I get from my subscription? Must I lock in a package rate to get a volume discount, and then have to wonder if I will use enough of the package to get the value expected? What if I use it, but am disappointed?

• Pre-setting prices puts the pricing risk on the consumer (causing many to refuse to take the risk at all, resulting in lost revenue), and often leads to disappointed customers (which hurts customer retention, thus reducing future revenue).
• As practitioners of value-based pricing recognize, offloading pricing risk from the customer is a service, and one that can increase sales and loyalty. Think of it as pricing-risk-management as a service.
• For digital services (which typically have near-zero marginal cost for unlimited replications), businesses have little to lose by taking on pricing risk (as long as they manage that risk effectively).

Both parties suffer when services are priced in a way that a) poorly correlates to the value the customer receives, and b) forces consumers to take on unwanted pricing risk. Specific strategies can be understood in terms of how they combine three aspects of pre- (versus post-) pricing risk:

1. Pre-set packaging of an assortment or bundle of items or services in a subscription. Do you have run-of-the-house access to a full range of items or services to choose from, as you decide you want them, or must you choose a specific assortment or bundle in advance? This comes up when you subscribe to TV channels in bundles, or to NY Times news plus crosswords, or support a museum or a musician on Patreon, and choose from multiple packages with different perks at different prices. Do you know in advance what combination you will want and how you will value it?
2. Pre-set usage levels. If you subscribe to a service, does the price depend on how much you use it, building in volume discounts? Other things being equal, a customer who uses many articles, songs, programs, or whatever, per period will presumably get more value than one who uses only a few. Does the price reflect that? Unlimited usage plans do not -- so heavy users get a bargain, and light users subsidize them (and may not find it worthwhile to subscribe at all). Beyond that, usage-related pricing generally tracks better to value when it applies volume discounts, as with mobile data plans, and TV channel bundles. (Such prices can vary a unit at a time, or be fixed within set usage bands.) Volume discounts can factor in both diminishing returns to the customer and economies of scale to the supplier. 
3. Pre-set price schedules. Even when pricing depends on usage, and offers volume discounts, that usage is most commonly priced using a pre-determined price schedule, which presumes some average quality of outcomes. More advanced value-based pricing approaches can allow the price schedule, itself, to depend on actual outcomes. For example, the price of an article or song or video may depend on the value I actually get (/perceive) from it. One simple example is when a sales commission depends on the price obtained for the sale. Outcomes pricing is generally not done in current consumer subscription plans (but is a feature of the new FairPay strategy).

Whatever the particular form of pre-pricing, the business must try to predict pricing levels (/tiers/packages) that work on average, but will inevitably work poorly for the many consumers who diverge from the average in one way or another. To the extent that such pricing decisions can be deferred, greater price discrimination can be achieved in a fair and transparent way. That leads to better economic efficiency, higher profit, and happier customers.

More detail on "Understanding the rungs on the ladder of value" is provided in the sidebar below, but to cut to the chase...

Maximizing CLV and Value Experience

The established wisdom of subscription economy businesses is that it all about Customer Lifetime Value (CLV). The problem is that this is generally viewed from a one-sided perspective -- value to the vendor. But value to the vendor is maximized when the relationship is win-win. It is a matter of fair balance -- maximizing CLV requires equal attention to how the customer values the relationship: Vendor Lifetime Value (VLV).

• It is costly to acquire customers, and therefore it costly to lose them and have to replace them -- recurring revenue models work best when the revenue recurs. 
• Customers are retained when they feel they are getting good value for their money -- for what they really want. That is especially likely when they feel the business is listening to them, understanding what they value, and seeking to deliver that at a fair price. 
• To the extent that we can migrate toward pricing methods that offer better mappings to value-in-use, customers will be happier and more loyal, and move toward maximum CLV (and VLV).

It is easy to get lost in the mechanics of pricing and subscription models (which are complicated and full of compromise) and lose sight of the underlying goal -- to find a right price, for each customer -- a price that each customer will view as fair compensation for the value they seek. We are so used to the compromises and nasty zero-sum games that are the dark side of the past century of mass marketing, that we often descend into a cycle of exploitation on both sides. Businesses treat the consumer's perception of the total value proposition as something to manipulate and exploit, and, as a result, consumers distrust businesses and try to "hack" them. But as businesses become "customer-first" and oriented to "customer experience" (CX), we see that what really matters is cooperating in a joint, effort to co-create value, to maximize "value experience" (VX).

A few decades is a long time in our personal lifetimes, and that makes it is easy to forget that we are still in the infancy of the digital era, with many deep changes yet to come. But we do see that a few decades into the digital era we are still in a time of continuing disruption and turbulence. As Peter Drucker said, "The greatest danger in times of turbulence is not the turbulence, it is to act with yesterday's logic." Moving toward value-based post-pricing will move us toward tomorrow's logic -- to reduce the cost and risk in how poorly prices track to value. It is that new logic that will fully realize the value in the subscription economy.


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Sidebar:  Understanding the rungs on the ladder of value

A more detailed view of how this plays out in subscription pricing plans is outlined in the following list (drawing on an earlier post, Beyond the Deadweight Loss of "All You Can Eat" Subscriptions). Looking at this progression, ordered roughly in accord with the degree of value-based post-pricing, it becomes apparent that we are only at "the beginning of the beginning" of our evolution toward a commerce for the digital era.

• Unit sales of items (pre-priced). This is the pre-subscription base case. Examples are song/album, video, e-book, and article ownership downloads (with or without cloud repositories). This is simple and easy, but tracks to value only on average -- and as predicted, not as realized. It is a bargain for heavy users of specific items, but costly or prohibitive (and a management problem) for light use of many items.
• All You Can Eat (AYCE), unlimited subscriptions (pre-priced). The common model of all the items you want, time-limited to periods of subscription. This too is simple and easy, but has similar kind of unfairness and inefficiency -- still tracking to value only on average (overpricing light users and underpricing heavy users), and considering value only as to the predicted average experience, not the value-as-realized. Many potential subscribers who are unsure of the value or how much they will use (or expect it will not be much) are disinclined to subscribe. Often referred to as paywalls (with all the exclusionary connotations of a "wall,") these also include tiered variants with levels of premium access, including freemium versions that begin with a free tier (but still place a paywall at some pre-set premium level). 
• Membership models (pre-priced). These are a form of subscription with a more cooperative, participative orientation, such as for publications, artists/creators, or museums -- sometimes using crowdfunding platforms like Patreon or Indiegogo. These may seem more voluntary than hard paywalls, and often include tiers or bundles that include different levels of perks, but still have pre-set prices for given levels of service (see pre-bundling, below, and note that these perks, such as T-shirts and tote-bags, are often gimmicks of questionable value).
• Partially usage-related subscriptions (pre-priced for the most part). These improve on unlimited models by adding usage-related tiers, such as for varying levels of mobile data service, how many TV channels are viewable in a bundle, or how many DVDs or e-books you can have out at one time. In most cases not only are the price schedules pre-set by the seller, but the customer must pre-select which specific tier or bundle they want. These can track better to value, in terms of usage, but only based on pre-defined units of usage -- without considering the experiential value of that usage.
• Fully usage-based subscriptions (pre-priced schedule applied to actual, metered usage). Currently, these are most widely accepted in B2B, such as jet engine "power-by-the-hour" and fleet "tires-by-the-mile." These have also been used for B2C, such as the old "per-minute" charges for mobile phone and dial-up Internet services. Consumers often dislike these plans because of the unpredictability of both usage and value, and the relentlessness of the "ticking meter." However, in some B2C uses the tracking of usage units to value can be quite satisfactory. Tire miles and engine hours are manageable and serve as a good estimator of the broader business outcomes.
• Pre-bundled subscriptions (pre-priced menu). These can be forms of any of the above in which the customer is given a set menu of options (pre-set, tiered packages) to select from at pre-specified prices. The use of tiers and packages with appropriate volume discounts leads to a better fit to value (for the tier or package), but in a very static way -- it forces the customer to select a tier or package before knowing if they really want it and will find value in it, and sets the value based on predicted averages, not actual value in use.
• Post-bundled subscriptions [new] (post-priced in part based on actual usage -- but still based on pre-set volume discount schedules). This is an enhancement of conventional subscriptions that I have proposed, such as for TV services, that offers discount prices at levels comparable to current TV bundles, but with the composition of the bundle set after the fact, so that customers can watch whatever channels they want, while still benefiting from a bundled-rate discount. This can track significantly better to value as it varies from customer to customer and month to month. It does not directly address outcomes (did you like that program?), but refund options can be provided (for each program view) to add a degree of outcomes tracking (duds are free).
• Performance/Outcomes-based pricing (post-priced based in part on actual usage, with a price schedule that is based on performance or outcomes). This goes beyond usage alone, to factor in the quality or result of that usage. Performance-based pricing is common in digital advertising (clicks, leads, transactions) and other B2B markets. Outcomes-based pricing takes that farther up the value ladder, and is increasingly applied in healthcare (where the price schedules are typically set in advance, based on prior results in test populations). Of course it would be more desirable to base the schedule (at least in part) on actual individual customer outcomes, where that is feasible (pay if cured). 
• Soft values as pricing factors (pre-priced or post-priced). This adds consideration of broader values in the overall experience, like cultural merit or support for social/civic/environmental values. Conventionally, this is rarely an explicit factor in pricing, but some aspects are increasingly implicit in prices, in the form of a tacit understanding that consumers are OK with paying a premium for goods and services that support broader human values and/or are produced and delivered in socially responsible ways.
• FairPay subscriptions (/memberships) (post-priced, with price schedules set after usage). This is the new value-based strategy that shifts to an adaptively cooperative process for "dialogs about value" that get finalized after usage to create the best practical approximation of price to value in use. (FairPay also applies elements of participatory pricing to optimally factor in the customer's perception of value-as-experienced.) FairPay is designed to co-exist, at whatever level desired, with the other methods above, and to be able to subsume them in a flexible architecture for collaborating on value and price (co-pricing). More about FairPay and how it can adaptively seek the best of all of these approaches is addressed elsewhere in this blog. It is not yet clear how widely applicable FairPay will be, but it points to many aspects of deeply value-based strategy that will almost certainly be important in one form or another.

[Update: related comments: The Relationship Economy -- It's All About Valuing Customer Experiences]

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(Other posts in this blog have explored many aspects of the subscription economy, and how FairPay offers a path to a next generation of more profitable subscription relationships. Recent posts explained how and why the FairPay strategy adapts the "value-based pricing" approach that is increasingly transforming B2B markets, but has so far seemed less readily applicable to B2C markets --and how FairPay's new approach to consumer relationships can change that game.)

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.

A Better Revenue Strategy for Non-Profits in the Digital Era

FairPay is a revolutionary new logic for revenue relationships in our increasingly digital world -- it was designed to make for-profit digital business more effective, but also promises to dramatically enhance revenue generation for non-profits. 

The Internet has given new power to consumers. FairPay accepts that power and works with it to shift relationships from a short-term, zero-sum focus -- one that no longer works effectively for anyone -- to an ongoing win-win focus that seeks to maximize the co-creation of value over a relationship. It creates a new focus on the fairness of pricing and value propositions on an individual basis -- an "invisible handshake." This FairPay handshake is particularly relevant to non-profit services. What better sector to benefit from the fairness and cooperation that FairPay elicits? 

A museum example

I joined the Whitney Museum not long ago, and was offered a complex menu of membership levels and optional features:

• There was the usual set of levels based on number of people and features to be included, with a set price for each.  This made it easy for me to pick a level, but offered only a crude basis for the museum to seek more share of wallet.
• There was also a "Curate Your Own Membership" program that let me choose from five series of premium features -- with any one included, and added ones offered for $40 each.  The five series were billed as Social, Learning, Insider, Family, and Philanthropy, with a short phrase explaining the apparently non-overlapping set of features in each. That was a nice touch, adding some of the spirit of FairPay, in that it was meant to enable me to better customize my value proposition. The problem was that they made me an offer I couldn't understand. Not having been to any of their events, and not knowing the exact topics, how could I know which I would want? I doubted I wanted enough to buy extras, so just picked one that sounded OK. Great willingness to customize the value proposition, but not very effective at it.

The core problems: unpredictable value, and need to set prices in advance, in ways that cannot be expected to match well to value.

Before looking at other examples, let's dig a bit deeper on the issues here. The problem is there is no real dialog about value, so no real optimization of the value proposition. I have been to the museum several times since joining, and have had no real interaction with the organization. They must know my attendance record, and that I have gone to none of their special events, but I have no hint of that. If they want a bigger share of my wallet, they are not targeting me well at all.

With FairPay, the membership price could be set based on usage, with 20-20 hindsight (maybe every three or six months) -- after I use whatever services I please, and get a usage report that reminds me what I used (exhibit visits, extras from any of the five event series) along with an itemized suggested price from the museum, tailored to what I used and what is known about me (maybe visits were 30 minutes or five hours; some at peak times or not, some to sold-out events, student/artist/senior, etc.). 

The museum could instead offer "post-bundling," a way to create ad-hoc packages of services on demand, at prices that build in personalized volume discounts. That could encourage me to try more services, and to pay more, to the extent that I found them valuable. Even with just a simple form of this kind of "post-pricing," the extras from all five series at the Whitney might be offered to me at per-event prices, but with volume discounts based on number of events attended in a given pricing cycle. That way I need not guess in advance what I might like, and would take no risk of being wrong, (There could even be "roll-over" provisions to smooth over the arbitrary period boundaries, just like "roll-over minutes" on cellular services).

A win-win customer journey with a loyalty loop centered on value

Such post-pricing is an important foundation of FairPay, which adds other key features to generate rich customer journeys that center on win-win value. Modern marketing has come to realize that the key to success is not in individual transactions, but in maximizing return business. Transactions roll into customer journeys, and creating "loyalty loops" in those journeys brings the return business that maximizes Lifetime Customer Value (LCV). FairPay drives those loyalty loops to center on value, to fuel deeper and more effective relationships.

FairPay does this by combining post-pricing with a new supercharged variant of Pay What You Want (PWYW) pricing. Non-profits often apply PWYW principles to donations, but in the digital age, even profit businesses are finding PWYW can sometimes be surprisingly effective. FairPay adds a new balance of powers to make this more reliably effective. The new balancing factor is that the consumer pays what they think fair, knowing that the organization will track that, and make or withhold future offers depending on how fair the price seems to them, based on full consideration of the particular situation. 

Continuing our museum example, with full use of FairPay, the price schedule would just be suggestive (the PWYW aspect). The museum could highlight the value I actually got, based on actual usage data and report that with its suggested price. If I were a regular who came to value the programs, that would be evident to both me and the museum from the usage data, so we could converge on a fair price for what I used. If I went often, the price should be higher. If I ended up just going occasionally, we could settle on lower prices, but still keep me as a supportive patron with a sense of belonging and patronship, at whatever level seemed appropriate. That would still make me more likely to visit than a single-shot set-price pay-as-you-go alternative, and thus more likely to pay something, and more likely to consider a more generous level of payment/donation. Of course at first my price setting might be unduly high or low, but the museum could nudge me toward a good understanding of value and fairness by adjusting the level of perks in its offers (or terminating the privilege of FairPay membership, requiring me to adhere to a conventional price schedule).

(A very similar example of how this can work is described in my post on FairPay pricing for premium tiers for the NY Times -- journalism has much similarity to non-profit cultural enterprises.  Another post takes a broader look at the issues for journalism that are also very relevant to non-profits.)

[Update 1/24/18: A further example explores how FairPay can make the Metropolitan Museum's Pay As You Wish pricing policy more fair for both patrons and the museum.]

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).

The big picture -- How "customers" make non-profits sustainably win-win

Consider the spectrum of non-profits, from more service oriented to more charity oriented:

·         Co-operatives that operate much like a business, but with all profits shared by the members.

·         Professional organizations that may offer publications, conferences, certifications, and other benefits

·         Cultural organizations such as museums that may offer exhibits, facilities, and events.

·         Secular or religious organizations that may cover a wide spectrum of direct services like food, housing, schools, hospitals, and museums, and have a wide mix of direct customer recipients and indirect customer benefactors.

"Customers" are central across this spectrum, but with variations in expectations of how pricing applies:

·         In traditional for-profit business exchange, customers are generally expected to pay enough to sustain the enterprise. (But even here, there are social values, such as in the business of journalism, and more generally in various "social" and "environmental" bottom lines, and in "benefit corporations.")

·         In non-profits that deliver services for fees, direct customers are expected to pay for services, but often with the help of subsidies from benefactors (indirect customers) who give donations to make those services more affordable.

·         In pure charities, direct customers may not be expected to pay at all, and benefactors are needed to donate enough to sustain that.

FairPay provides new and better way to address the complex issues of pricing and sustainability across this spectrum.  Consider how this works for the two different (but often overlapping) kinds of customers:

·         Recipients -- direct customers of direct services (the mission). Here, pricing takes on two interrelated dimensions -- what is the fair value of the service, and what is the fair contribution from the recipient (to both the cost of the service, and to the added overheads needed to sustain the organization).

·         Benefactors -- indirect customers of indirect services (the altruistic value of supporting services to others, and the value of being a benefactor, including perks and recognition).  Here, the key dimensions are the value of services to others enabled by the benefactor’s donations, and the value of indirect benefits to the benefactor.

The details will vary with the type of customer and the nature of the organization and mission, but the essential task is the same -- to generate sustaining revenue by setting prices that make the value proposition be "win-win."

Of course these factors are difficult to quantify in any precise and objective way, but the beauty of FairPay is that it puts value into personal terms, with all of the nuance of human evaluation. Value setting need not be precise, as long as it is done through flexible and open dialog.

·         Organizations can frame the value they think they provide in terms of whatever metrics are available (and the metrics are becoming increasingly meaningful)

·         Customers (direct or indirect) can respond by factoring in whatever aspects of value they think important, including their perceptions of what is reported to them, plus any positive or negative factors they think important, including ability and willingness to pay. Multiple choice options (with some interpretation of free-text comments) can enable this to be automatically scored and factored into assessments of whether customer-set prices are fair.

·         The organization can offer "carrots" to encourage generosity, and gently withhold privileges or perks when "sticks" are needed.

FairPay provides a dynamic, emergent process for both sides to learn how to make the relationship maximally win-win. That can bring the organization more customers (recipients and benefactors) and get more share of wallet (the amount that the customers can justify and afford to give).

FairPay was developed because the invisible hand of Adam Smith no longer works well in the digital world. FairPay turns instead toward this new invisible handshake -- an agreement to work together in good faith to build a relationship that is win-win.

If non-profits cannot justify support of their mission on the basis of fairness, what basis do they have? If fairness is the basis, what better process for justifying support than FairPay?

Making it happen

FairPay processes are not difficult to build and put into trials, but still require a degree of effort that might challenge the technical resources of smaller non-profits. This represents a major opportunity for a shared platform that can be used by many non-profit organizations. For example, Tessitura Network is a consortium of over 500 arts and cultural organizations that provides a common e-commerce and CRM infrastructure. A shared FairPay platform (and shared tracking of fairness) could benefit many of its members.

I am working on FairPay as a pro-bono project, and would be happy to assist non-profits in exploring how it might work for them. (I can be reached at fairpay [at] teleshuttle [dot] com.)

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[Related post, 1/24/18: Making "Pay As You Wish" More Equitable -- Sustaining the Met Museum (and Others)]

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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.)

The Naples Forum on Service -- Co-Creation of Value, and FairPay as Co-Pricing

The presentation deck is online:
Co-Pricing: Co-Creating Customer Value Through Dynamic Value Propositions

I presented the concepts of FairPay -- in collaboration with two prominent professors of marketing -- to international leaders in an emerging branch of marketing theory at the Naples Forum on Service on June 11th. It was very encouraging to see how the work I have done from a pragmatic, non-academic perspective resonates with those at the leading edge of theory.

This 5th Naples Forum on Service is dedicated to the areas of Service Science, Service-Dominant Logic (in contrast to traditional Goods-Dominant Logic), and Network Theory, which all relate to emerging recognition that business is really about the "co-creation of value" by consumers, service providers, and other "actors," and that the production and sale of goods (which provide "value-in-use") is just one aspect of this larger concept of service. This has become a focus not only in academia, but in forward-thinking companies like IBM.

FairPay and Co-Pricing

My collaboration with Adrian Payne and Pennie Frow 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 on business as co-creation (see Strategic Customer Management by Adrian and Pennie), and how that involves many co-creation activities, including co-pricing.  The theoretical ideas of the co-pricing aspect have not yet been well developed, partly because examples of co-pricing (like value or outcomes-based pricing, and pay what you want) have been limited in applicability relative to other, more studied, aspects of co-creation. 

We think FairPay has immediate potential to radically change business practices in a way that puts a powerful new form of co-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. 

The slides from our presentation are now available on online, and the abstract is now published in the book of abstracts (page 51).

Research Directions

My experience at The Forum reinforced my personal view that FairPay (or a variation on its theme) will not only change a wide swath of business, but will also change the theory of marketing and economics more broadly. My work on FairPay highlights how current practices in pricing fail to correlate well to value-in-use -- and it is value-in-use that is at the core of our markets (whether we recognize it or not). Whether in practice, or just as a thought experiment, thinking more about practical ways to make prices better correlate to value-in-use (and to view that over relationships, not just transactions) will enable us to change how our economy works, and very much for the better for all.

Collaborators?

Adrian, Pennie, and I have started on a more formal paper -- and we seek other collaborators who can help us do field trials of FairPay.  This could be an unusual opportunity to do research that not only advances theory, but potentially gains wide recognition from managers and the general public -- by solving urgent problems in finding good business models for the rapidly evolving digital space. (If you have interest in assisting, or suggestions of those who might, please contact me: fairpay [at] teleshuttle [dot] com.)