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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

FairPay and the invisible handshake

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Price Discrimination for the Good!

"Higher prices in an affluent area help bring healthier meals to a poor neighborhood" reads the teaser for an interesting NYTimes article, which goes on to report on a 2:1 difference in prices between two Everytable restaurants only two miles apart in LA:

The big price difference represents an unusual experiment to address the persistent issue of limited food choices in poorer neighborhoods around the country. The higher prices at the downtown store are effectively meant to offset smaller profits at the other location, making the lower-priced restaurant more economically viable.

The article includes comments from advisory firm partner Michael Kaufman:

To make it work, he said people would need to understand why prices are higher in one neighborhood than in another. ...“I think the key to it will be how they tell their story” 

FairPay applies similar logic -- in a more dynamically adaptive, emergent process -- to set prices based on an individual "invisible handshake" that applies a balance of powers to learn what value customers receive, and factor in their ability to pay to determine the fair share they should contribute the the profits that sustain a business. This was explained in my earlier post Price Discrimination Can Be Good!, which was triggered by the equally interesting, if less noble, example of Uber surge pricing.

One key point is that price discrimination is not inherently evil, as it is often viewed. It depends on how and why it is done:

• When price discrimination is done unilaterally by sellers, to extract maximum profit with no buy-in from customers it can be bad -- especially if done secretly in a way that is exploitative.
• When it is done with transparency and customer buy-in, based equitably on differentials in ability to pay and value received, it can be laudable, and customers can feel good about it.  

What matters is the openness and fairness of the process. As Kaufman said, "the key to it will be how they tell their story.”

This relates to the broader issue of the growing call for a more socially conscious capitalism, a "fairness economy." We want the efficiency of free markets, but with an awareness of social values and bottom lines that factor in people and planet. Many are seeking ways to to achieve that. FairPay points to a new and more powerful solution.

FairPay's invisible handshake is not just a feel-good image, but an operational process based on a specific balance of powers that shapes the "story" -- a process of dialog that gives pricing power to customers, but only as long as they use it in a way the seller agrees is fair. FairPay can be applied in a wide range of contexts, from those that today lack much social context (like TV), through those that have stronger social context (like journalism and indie music), to those with dominating social context (like non-profits and charities).

Engaging customers, telling the story, and building long-term relationships based on this invisible handshake promises to increase Lifetime Customer Value, to offer more profit, greater market share -- and more total value to society.

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).

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.)

Price = Value

Price = Value. The essential logic of FairPay is that Price = Value ...in context, and over time.  Or at least it should, and an efficient economics will seek to approximate that.

Isn't that only fair? -- the only win-win way to do business? Why should we -- both producers and consumers -- settle for prices that are anything less than the best reasonable approximation of the actual value we receive?

FairPay is a new logic for conducting ongoing relationships that adaptively seek win-win value propositions in which price = value.

• The core idea is that prices should equate to value. Not the producer's preconception of value for an average consumer, but what value a particular consumer actually perceives as realized  in the experience of using the product or service, in the fullness of their individual context.
• Such a concept of price = value is win-win for both the producer and the consumer. They agree to do business if they expect a value surplus over cost, and both benefit if they divide that value surplus fairly -- fair value to the consumer, while providing a fair profit to sustain and motivate the producer. It allows a producer to provide value to a maximum number of consumers who seek it, in a way that can maximize revenue and profit as well -- especially for products and services (such as digital content) for which consumers may challenge any pre-set price as arbitrary and unfairly out of line with their actual perceived value.
• Adaptively seeking such win-win value propositions is required because the valuation considerations are complex. It is hard to do this accurately for any one transaction (which is why value-based pricing is now done only in high value B2B contexts). But an adaptive, intuitively reasonable approximation can be cooperatively converged upon over a series of transactions -- and can continuously adjust as things change over time.
• Ongoing relationships provide an environment that justifies and enables the process of adaptively seeking those win-win value propositions. If the marginal costs of the product/service are low, producers can afford to take limited risks at the start of a relationship (just as they do with free trials or freemium), in hopes of building a productive and loyal relationship that is profitable over the lifetime of the relationship.
• FairPay is a new logic in that this idea -- that price must be co-created, as a dynamic and personalized approximation of value as exchanged -- creates a very different conceptual framework for how our markets work. It shifts us from a mentality of take-it-or-leave-it prices pre-set by producers, which are often unfair, to a cooperative process of creating value in a way that explicitly seeks to be fairly win-win.

From this perspective, FairPay is a form of co-pricing for services, in which buyer and seller agree on a process to adaptively seek a win-win value exchange -- not focused just on single transactions, but over the life of their relationship. That ongoing relationship perspective opens up a whole new dimension in customer relationships that can deeply alter how we do business -- transforming the nature of the customer journey, as well as the workings of our broader business ecosystems.

This formulation encapsulates the core conceptual perspective that I have absorbed over the past year, drawing on current marketing and service science theory (see my recent posts about ISSIP and the Naples Forum on Service).


Those with a purely practical focus might skip the rest of this post and turn to more pragmatic information on FairPay. The core dynamic of the FairPay choice architecture is described in the sidebar and the practical implications and applications to various businesses are discussed throughout this blog. Check out the Overview, and More Details. 

Conceptual Perspectives on this New Logic for Business

The greatest danger in times of turbulence is not the turbulence, it is to act with yesterday's logic.   --Peter Drucker

That quote is one of the inspirations behind an emerging reformulation of marketing -- the idea of a "Service-Dominant Logic" (S-D-L), in contrast to the "Goods-Dominant Logic" that developed over the past centuries -- "yesterday's logic." Now we are in a service economy, and are beginning to see that the value of goods is really in how they enable a service -- for example, the value of a car has little to do with the physical product in itself -- its value is in how it provides the service of transportation, in a particular use and context. Is it reliable, comfortable, safe, economical, fun? ...in what mixture, to meet what needs? (Long ago a wealthy friend of mine owned an expensive new Jaguar, but was afraid to drive it far from home for fear it would break down -- high price, costly to create, but low value.) The value of services is understood to be "co-created" by the provider and the consumer in a particular use-context. This has many important implications that have been the subject of an extensive body of work. Proponents of this thinking (including the related field of service science) have been among the most receptive to the ideas of FairPay, such as at my Naples Forum and ISSIP presentations.

I pick up on this further now, by suggesting that what FairPay adds might be thought of as a Value-Dominant Logic (V-D-L) -- as opposed to yesterday's Price-Dominant Logic (P-D-L). FairPay offers a process for seeking fair value, in which price becomes emergent from buyer's and seller's interactions over time. Thus price remains the metric of net value-in-exchange, on which our economy is centered, but now price tracks to value-in-context instead of being pre-set in ways that track poorly to value. The processes of FairPay -- as embodied in cycles of customer journeys -- set price to approximate value. This not only can transform business, but makes a better economics, because prices that track to value make the economy more efficient and productive.

This builds on an earlier post that describes a thought experiment based on imagining an economic demon that reads the minds of buyers and seller to determine the actual value-in-context for each transaction, figures out the value surplus (over cost), and negotiates an equitable sharing of that value surplus between the producer and consumer. Prices set by such a demon would be win-win for both sides. The FairPay process of repeating dialogs about value over a series of transactions serves as a way to approximate what that demon knows, at least on average, over time.

Another post describes how this can be viewed as an invisible handshake -- an agreement between the producer and consumer to work together through the FairPay process to try to come to a common understanding of individual value propositions over time. While this emergent approximation may not be very accurate for any one transaction (especially when the relationship is new), the process seeks to converge on a level of fairness over time, as the parties get to understand one another.

This is win-win for producers and consumers because it allows producers to sell to all consumers who find value in the producer's service, at prices that are dynamically personalized to approximate ideal price discrimination.  That leads to a near-maximum number of profitable and loyal relationships, to maximize total revenue and total value creation. It also enables a near-maximum number of risk-free trials by consumers who think they might find value. All of this brings more value to more people.

Price ≠ Value

We are so used to our current practices of seller-pre-set prices that discriminate poorly (yesterday's logic), that we tend to not realize how that distorts our economy and makes it inefficient. Why do all users of a service -- such as digital newspaper or digital music or video subscription service -- pay the same price? Some use such services heavily, others lightly. Some obtain high value from the services, others just minimal levels of value. Yet they all pay the same price. Not only is that unfair, but it distorts our markets, as a deadweight loss. Many pay less than they should -- and many forgo using such services at all because they the price is too high, even though a lower price would create value and profit.

At a theoretical level, one of the open challenges of service research is that its focus on value-in-context works well at a microeconomic level, but does not translate well into macroeconomics, because value-in-context is hard to measure at a macro level. I suggest the reason is that macroeconomics is centered on price, and in current practice Price ≠ Value. How can our macroeconomics be effective when Price ≠ Value? Revenue is the total of a firm's prices, but total revenue tracks poorly to total value. Similarly for GDP. If we can get prices to track better to value, then our whole economics will be centered on that, and will work better.

Broad considerations of value

Another implication of this Value-Dominant Logic is that value should be very broadly defined to include all aspects that matter to the producer and consumer. Many of the current challenges in getting businesses to better address social values stem from the limited scope of prices, since they are not set to reflect such broader values. We speak of Corporate Social Responsibility (CSR) and Creating Shared Value (CSV) and triple or quadruple bottom lines because our current bottom lines are missing many important components of value. Here again, FairPay provides a rich broadening -- Price = Value, including whatever social aspects of value matter to the consumer. If the consumer values broader social benefits, they can reflect that directly in the price they pay, which then adds directly into the bottom line..

Making it happen

It seems clear that we should be seeking prices that map better to value. We should be exploring how to do that. FairPay suggests an architecture for a process that does that. If the particular process I suggest is found to not work as well as hoped, perhaps understanding why, in detail, will lead us to variant processes and/or process architectures that will work better. One way or another, going down this path should lead us to more value for all of us.

Making Customers Want to Pay You -- Research on How FairPay Changes the Game

Wouldn't it be nice if buyers volunteered to pay businesses a fair price for what they are offered? Seems like a silly idea! But recent business experiences and research suggest we may just be stuck in the mind-set of the last century.

"Modern" mass-market commerce is a race to the bottom that assumes and appeals to the worst in people. Sellers set prices as high as they think they can to maximize total profit -- so buyers' only option is to take it, or bargain-hunt. What we have here is what behavioral economists call an exchange relationship norm. Exchange norms are zero-sum, quid-pro-quo. As described in other posts, FairPay seeks to find a better way.

Insight into how and why a very different model can work emerges from a growing body of research and real business success with Pay What You Want (PWYW) pricing (which has proven to be not quite as as foolish as it might first seem.)  FairPay builds well beyond this -- it promises to be significantly more effective than conventional PWYW -- and sustainably profitable for large-scale business -- by applying feedback and tracking in ongoing buyer-seller relationships, not just one-time sales. (Some background on PWYW.)

How to understand the power of FairPay was made a bit clearer to me in a very interesting research paper by Santana and Morwitz, "We’re In This Together: How Sellers, Social Values, and Relationship Norms Influence Consumer Payments in Pay-What-You-Want Contexts." That paper suggests an interesting two dimensional behavior model, which I interpret as follows.

The two dimensions of behavior are:

• Social Value Orientation (SVO), essentially pro-social versus pro-self, as individual traits. 
• Economic/Exchange Relationship Norms versus Communal Relationship Norms, as situational variables in a relationship. 

These are more fully explained in some excerpts from the paper below, but the bottom line is to clarify the motivation for the two dimensional strategy that FairPay seeks to apply to getting buyers to willingly pay a fair price:

1. Segment customers based on their Social Value Orientation traits -- are they receptive to and driven by social values, or not? Tactics for managing the FairPay process will be a bit different for high, medium, and low SVO trait segments.
2. Nudge all customers toward Communal Relationship Norms, in ways tuned to each segment -- to seek to bring out their Social Value Orientation to the fullest extent possible.  

Based on this, the FairPay process diagram can be understood to work for each segment, but with rather different control parameters applied to each. In all cases the objective is to foster a situation that favors Communal Relationship Norms, and that draws out whatever level of Social Value Orientation can be elicited.

• The sweet spot is targeting high Social Value Orientation (pro-social) customers, and moving them toward Communal Relationship Norms. They are the ones who will respond best to the pricing privilege that the seller grants to the buyer in FairPay -- to price in a way that considers fairness to the seller -- and who will be least inclined to abuse that privilege.  Managing that for these buyers will be mostly carrot, and not much stick. 
• The secondary focus is on moving medium-to-low Social Value Orientation (more pro-self) customers toward Communal Relationship Norms. They will need more nudging to emphasize the carrot (why the seller is deserving of communal norms), while keeping the stick in sight (why it is in their best interest to price fairly). Those who do not respond with at least minimum levels of fairness (uncooperatively pro-self) can be treated as a third segment -- to be excluded from FairPay (at least until they seem ready to behave more sociably), and be left to buy on the conventional set-price terms that routinely work for pure Exchange Relationships.

Businesses can seek to maximize profits with a mix of FairPay and conventional set-pricing by doing the following:

• Position themselves as deserving of Communal Relationship Norms. This can cover the whole spectrum of corporate citizenship, customer relations, quality, style, artistry, craftsmanship, service, and support. (A number of posts expand on this.) 
• Sustain that positioning throughout their customer relationships. This is deeply embedded in the FairPay processes.
• Seek to market to high SVO (pro-social) customers as the preferred market segment. This is the segment that will be most willing to pay you generously for your product or service (if you position yourself as deserving, and ask in the right way).
• Manage the segmentation throughout the business processes to appeal in the right way to the right people. FairPay provides an architecture that supports this. In contrast, freemium has been very popular because of its crude segmentation between those who pay and those who don't, but has been found to be limited in managing to optimize and up-sell that.

A further insight from this study is to reinforce that the nudging of buyers in the adaptive control process of FairPay is best done with a gentle hand. Communal Relationship Norms are a delicate thing. There is an inherent quid-pro-quo in FairPay -- in the future, those who do not pay well will get fewer and less generous offers than those who do pay well. But this should be managed with enough flexibility and forgiveness of minor lapses to not poison the effort to nudge toward Communal Relationship Norms.

This research helps to clarify the behavioral principles that underlie FairPay, and reinforce expectations that it can work very effectively over a wide range of customers and product types. It provides a perspective to better understand my other posts on the motivations, mechanics, and benefits of FairPay.

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Some detail on these behaviors from the paper:

• Social Value Orientation, as individual traits (p. 9-10): 

"People who are motivated to maximize their own gain irrespective of others’ gain are labeled as individualistic. Those who are motivated to maximize the relative difference between their own gain and that of others are said to be competitive. Those who seek to maximize joint gains for self and others are labeled as cooperative, and those who are motivated to maximize gains for others are said to be altruistic....SVO research tends to focus on cooperative, individualistic, and competitive orientations or the more general distinction between pro-social (i.e., cooperative and altruistic) and pro-self (i.e., individualistic and competitive) orientations...We argue that pro-socials will be more likely to take the seller’s welfare into consideration than pro-selves. However, we expect this payment behavior to vary according to the salience of relationship norms between the buyer and the seller when the pricing decision is made..."

• Economic/exchange relationship norms versus communal relationship norms, as situational variables in a relationship (p.10-12):

"Consumers can form relationships with brands that mimic social relationships with other people...As such, these brand relationships are guided by norms in the same way as individual relationships...Perhaps the most common distinction among relationship norms is the exchange / communal norm distinction...Exchange norms are typically based on economic factors, while communal norms are based more on social factors. In general, exchange relationships are guided by norms of quid-pro-quo, where partners provide benefits either in response to benefits given or with the expectation of getting similar benefits returned in the near future. Conversely, communal relationships are governed more by norms of conferring benefits to the partner...Keeping track of inputs and outputs, comparable benefits, and repayment behavior are all hallmarks of exchange relationships; while helping others, keeping track of others’ needs, and responding to others’ emotional needs are all hallmarks of communal relationships. Business partners and acquaintances are typically guided by exchange norms, whereas friends and family are typically guided by communal norms."

"...These findings demonstrate that relationship norms affect consumer behavior, and although commercial relationships are typically governed by exchange norms, that buyer-seller communal norms are possible. We extend these findings to the PWYW context by suggesting that relationship norms can affect how much individuals pay in such settings. Specifically, when an exchange norm is salient versus a communal norm, consumers will be less likely to consider social factors in generating their purchase price, resulting in lower payments and a lower likelihood of overpayment."

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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