How Indies Can Disrupt the Disruptor - A Disruptive Revenue Model for Music and Games

Having recently heard a fundraising pitch by indie music distributor Nogeno, and looked at competitors like Bandcamp, I was again struck by the potential of FairPay pricing to change the game -- for the music business and/or the game business.

Both music and games are dominated by the Apple iTunes Store, which disrupted the old distribution models.  But there are many chinks in iTunes' armor -- one is that significant numbers of independent bands (and game developers)--and their fans--chafe at the economic constraints of the iTunes Store, and seek better ways to manage the value-exchange with their fans.

• Many indie artists and programmers have found Pay-What-You-Want (PWYW) pricing to be a surprisingly effective way to price, whether in temporary promotions a-la Radiohead, or as ongoing model.
• Indie distributors such as Bandcamp and Nogeno offer creators a range of payment models, including conventional fixed price and PWYW (with or without a minimum floor price).
• Bandcamp reports on their home page that "On name-your-price [PWYW] albums, fans pay an average of 50% more than whatever you set as your minimum."  They offer additional guidance (and more) on using PWYW...and on drawing on the buyer appeal of the larger share they give to the artist.

While PWYW is clearly effective at the margins, there are obvious concerns about its practicality for broad use.

As explained elsewhere in this blog (see sidebar) FairPay adds a structured feedback process to enable a long view of pricing over an ongoing relationship, not just single sales, to make its "Fair Pay What You Want" model work far better and more broadly.  FairPay is offered selectively, as a privilege to those who demonstrate that they pay fairly.  An example of how this applies in the music business was in one of my early posts.

With regard to the indie opportunity there are two points to emphasize:

1. FairPay is especially relevant to indie distributors, because their music (or games) are mostly Long Tail items (less mass-market), where PWYW and FairPay can be especially effective in increasing revenue, and where sellers are willing to take more risk to get wide exposure.  The artists are struggling for recognition (and compensation), and fans feel stronger connection to these struggling artists, and want to compensate them for their creations.
2. FaiPay enables the aggregator/seller to establish an entirely new infomediary role, as keeper of the FairPay Reputation Database that tracks how each of their individual buyers behaves in terms of pricing fairness. That database is much like a credit rating database--offering important data usable by any potential seller. This reputation data is what is used to determine whether a buyer pays fairly and should be entitled to make purchases on a FairPay basis (depending on the risk level implied by their reputation from previous purchases).  The more complete the Reputation Database, the more effectively FairPay prcing works to maximize revenue and minimize risk.

This second point offers distribution aggregators like Bandcamp and Nogeno to create a strategic asset that will differentiate them from competitors and raise a barrier to competition.  Once FairPay gets critical mass, this database will have extensive pricing reputation data on many customers--something that will take time and money for a competitor to duplicate.

The combination of both points offers a path to disrupting the dominance of the iTunes Store (and other mass-market aggregators).

1. The Long Tail focus of the indie market will be especially supportive of the FairPay model, because of the greater willingness of sellers to take a risk on their buyers.
2. The buyers will behave well because they will know they are supporting the creators of the product (artists and/or programmers), not the Apple 30% vig, or the suits in the studios.
3. The initial success that builds will grow a FairPay Reputation Database that will increase the effectiveness of FairPay pricing and enable it to be used with decreasing risk for increasing numbers of products and buyers.
4. That can greatly increase the appeal of the indie distributor, and widen its appeal to increasingly take share from iTunes and other mainstream aggregators.

Of course iTunes can offer FairPay as well, and build its own database.  The indies would still have the advantage of a higher share going to the artist, and thus a better value proposition than the big guys.  

Thus the indies might not take over the world, but--in any case--they could disrupt the current models in a way that makes a better value proposition to consumers and creators, and increases the net opportunity for indies.

Guiding FairPay Pricing for Control and Predictability

One of the common concerns sellers have about buyer-set FairPay pricing is that they will lose control and predictability in their pricing and revenue.  I suggest this is actually much less of a problem than it might seem, in spite of the buyer freedom to "pay what you think fair."  There are a number of aspects to this issue, but one especially powerful strategy deserves greater attention.

In many situations, one of the best ways to manage FairPay pricing may be to rely heavily on a suggested pricing structure, and to frame the setting of FairPay prices by the buyer in terms of a differential from the suggested price.  Here is an example of how that can work for the seller.  (For a basic introduction to the concepts of FairPay pricing, see the sidebar at right.)

1. When making the offer, provide the suggested price schedule, so the buyer has a clear idea what you will  be expecting.  The buyer can still be completely free to price as he feels fair, but will know the seller's reference point.   
2. After usage, provide the buyer with the suggested price based on that schedule. The schedule might be a single price, or might provide whatever level of structure you think the buyer might grasp.  The suggested structure might explicitly take into account such factors as usage/volume levels (counts/times, etc.), categories of product/service used (basic or premium, etc.), buyer demographics (business/consumer/student/retired, etc.), indicators of value obtained, adjustments for any problems, etc.  (This schedule could be customized to the buyer, but showing how it varies can help frame the buyer's understanding.)
3. Provide a price-setting form that presents the suggested price and its rationale, and asks the user to set a price as the suggested price plus or minus a differential (whether a percentage or a dollar differential).
4. Include in the form a set of multiple choice (and optional free text) inputs to enable the buyer to explain the reasons why he thinks the differential is fair.  Depending on what is already in the suggested price rationale, these reasons might relate to additional aspects, such as usage/volume, product value perception, buyer circumstances, problems, etc.
5. Determine a fairness rating for the price (the differential), as explained by the buyer -- unfair, marginally fair, fair, very fair, generous, etc.
6. Provide feedback from the seller back to the buyer on the seller's view, in terms of this fairness rating. (This can be clear and explicit, but can also be left fuzzy, and just implicit in how the offers are made.) 

This provides a shared frame of reference that can guide the buyer to price more or less closely to the suggested amount, and provides a basis for communication and judgement as to the fairness of any differential.

This structuring works within the broader FairPay pricing feedback process, in which sellers communicate back to buyer regarding fairness, and determine whether to make more and better product/service offers, or to warn and restrict the buyer, or to disqualify them from further FairPay offers.  That broader process provides the primary method of control:  

• The seller controls an offer management process that stages their offers in an ongoing relationship  (such as a subscription).
• That staging enables the seller to limit the value at risk (at any given stage) to buyers who have not established a reputation for paying fairly, and to extend that as the relationship warrants.  Offers can be managed to limit the value of the unfair exceptions, and to minimize their number.  

With this combination of offer framing, suggested prices, and feedback-driven incentives to price fairly, sellers should generally obtain FairPay prices that average very near to their suggested prices.

(Of course the idea here is to guide the buyer, but not to be deaf to buyer feedback. FairPay is a dialog about value, and it takes two to have a real dialog.  If there is a pattern of buyers pricing below suggested values in any context, that is an indication that buyers are not satisfied with the value received in that context. Such a situation should be understood as a disagreement as to value that the seller needs to address, whether by changing the perceptions of the value, the realities of the value, or the price suggested in exchange for that value.)

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(Also, as suggested elsewhere, this may work best where a conventional set-price offering remains the default for those who do not price "fairly."  I suggest setting the suggested FairPay prices somewhat below the set non-FairPay prices to give the effect of a relationship discount to those in the FairPay zone, and thus add to their incentive to maintain that FairPay privilege.)

My Intellectual Ventures Inventor Profile

*** This post has been moved to my other blog, Reisman on User-Centered Media ***

FairPay Process Dynamics -- a Big Picture Diagram

[Further Diagrams and Process Explanation are in a previous post.]

In the continuing quest to explain the radical ideas of the FairPay pricing process, here is a simpler and higher level view, one that gets to the heart of the process dialectic:

• FP offers are gated by the seller, and restricted in value and duration, to limit seller risk
• The buyer accepts an offer, buys, and uses a product/service
• The buyer is then entirely free to set a "fair" price ("Fair Pay What You Want")
• The seller tracks the price set by the buyer
• The seller decides if the price is acceptably "fair"
• -- If so, the seller makes further FP offers
• -- If not, the FP process ends, and the buyer is only offered conventional fixed-price sales.

Unlike the asymmetric buyer-side power of conventional Pay What You Want offers, and the unfairness that generally results, the seller has a complementary power to balance that.  The buyer knows up-front that FairPay offers are a privilege, and if he does not set the price reasonably, that privilege will end.

The core balance of forces is seen in the dialectic of the two arrows:

• Price it Backward reflects the buyer's power and privilege of setting the price after he knows what the product was actually worth to him (unlike the conventional case where he risks buyer's remorse)
• Extend it Forward reflects the seller's power to gate the FP offers, and to limit them as a privilege granted only to those who set prices fairly.

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

Thus FairPay realizes the economic ideal of individually differentiated prices that correspond to the utility and price sensitivity of each buyer in a way that avoids the feeling of unfair "discrimination." Price discrimination is a problem of roles and perception -- there is nothing inherently wrong about price discrimination (it is beneficial to the general welfare) -- if the buyer sets the price, the "discrimination" is inherently acceptable.

This participative nature is what gives FairPay real power to enable a company to build a deep relationship with its customers, to achieve high loyalty and sustainable competitive advantage.

With this basic perspective, please see more details of how the process works, and how it integrates with conventional pricing, in my recent blog post with additional diagrams, such as this one:

  

  More Diagrams and Process Explanation...

Reinventing Subscription Platforms With FairPay -- for Apple, Google, and others...

In the emerging battle of subscription platforms between the Apple iTunes App Store, Google One Pass, and others, the radically new FairPay pricing process offers a better way to play the game, one that benefits the platform provider, the seller, and the buyer in new ways.

As widely reported, Apple has the dominant position, and is using that power to pressure sellers, and claims to be making things good for buyers.  Google is seeking to be more seller-friendly, and to allow more freedom, which might ultimately be better for buyers as well. The larger issues relating to this battle promise to help shape how digital content is sold, and how a major portion of our economy evolves.

• Subscriptions are a critical battleground for competing platforms and business models, one that could set the ground-rules for monetizing digital content and services at the broadest level.  
• Subscriptions get at the heart of ongoing customer relationships, and provide an aggregation structure that works for a broad swath of content and services.
• Subscriptions relate closely to the major pricing alternatives of free and freemium.

FairPay is particularly relevant to subscription businesses, especially those based on cross-vendor subscription platforms (such as those offered by Apple and Google and others).

FairPay is based on some very simple principles, with the idea that what is needed in a revenue model, is not to choose the right price, but to create an adaptive pricing process.

1. Let the buyer set any price he considers fair after the sale (Pay What You Think Fair, post-sale).
2. Let the seller (or a collective of sellers) track that price and use that information to determine whether to make further offers to that buyer in the future.

Instead of a fixed price, this process generates a cooperative and adaptive series of pricing actions, each based on feedback on how fairly the buyer sets his prices. Using this buyer reputation enables sellers to go beyond freemium to offer adaptive hybrids of free and paid service.  FairPay can be used as a complement and enhancement to conventional fixed-price subscription pay walls: Those who pay fairly, rise above the pay wall -- those who do not, must face it. (A diagram of core steps in this process is in a previous post.)

In the context of a subscription, this process unfolds on a (more or less) month-to-month basis:

• As an alternative to the fixed pay wall, a new user can be offered a trial month of unlimited use of a basic class of service, on the basis that at the end of the month they will set a price for what they used, on a Pay What You Think Fair basis.
• The buyer will be told up-front that renewals for additional months will depend on whether the price they set is deemed fair by the seller.
• As the process continues after initial use, buyers will be asked to set their price, and could be given usage reports to remind them of what they used, and how that compares in quantity and value to typical subscribers. 
• The seller can frame the offers and the pricing requests with background on standard set prices, suggested prices, and typical FairPay prices actually set by other buyers, all with respect to the types and volumes of usage by the consumer (such as basic and premium tiers).
• Buyers can be encouraged to give reasons  for why the chose to price as they did, including low or high usage, low or high quality, low or high value realized, economic circumstances (student, unemployed, retired, business use), etc. (all or mostly multiple choice, for automated scoring).
• As long as the buyer sets prices that seem reasonable considering all these factors, the seller offers FairPay renewals, and the buyer enjoys the freedom of the FairPay Zone.  
• For those that fail to pay acceptably, it is back to the pay wall (at least for a time, possibly to be given another chance in the future).
• As this continues, each buyer establishes a FairPay Reputation that characterizes how well and fairly they pay, and whether they do so consistently or erratically.
• Based on this FairPay Reputation, the seller can upgrade or downgrade their subscription offers to include more or less premium tiers of content or service, and added perks.
• At the same time the buyer learns both the value of the service, and the expectations for fair pricing.
• As buyers establish good FairPay Reputations, the seller can extend more FairPay "credit" to include longer periods between pricing, and more value that can be enjoyed before it must be priced.

FairPay takes conventional approaches to subscription pricing and stands them on their head.

• The buyer, not the seller, sets prices (for himself, as a market segment of one). 
• The seller gates the offers to specific buyers, and thus manages the value at risk, at any given time, to each buyer.
• Pay What You Think Fair largely eliminates risks of buyer remorse.
• Price it Backward (after usage) further reduces risks of buyer remorse.
• Buyer price-setting accommodates a wide range of price sensitivities to ensure that anyone who gets reasonable value from a product/service can afford to buy it.
• Sellers need not cut off potential buyers (who may not appreciate the potential value), only buyers who have proven to not value the product (as realized) at an acceptable level. 
• The impossible task of setting a price that is "right" for all is replaced by the manageable task of understanding specific buyers and their sensitivities through a structured dialog.

Given its roots in Pay What You Want, it may take some thinking to appreciate how FairPay can not only result in acceptable prices, but actual profit maximization, and do this with needed simplicity.  Some deeper insight into this is provided in my previous post, Cutting the Gordian Knot of Price Setting: FairPay, Pay Walls, Hurdles, and Simplicity.

FairPay has even more power in the context of a cross-vendor subscription platform:

• FairPay Reputations for individual buyers can be tracked and applied across sellers.
• Sellers can maintain control of offer terms and gating, but manage this better based on a shared FairPay Reputation database.
• Sellers encountering a new buyer (to them) can see if the buyer has already developed a good or bad FairPay Reputation in relationships with other sellers, and frame their offers accordingly.
• Buyers know that their FairPay Reputation is a valuable asset, that enables them to get more and better offers, and that compromising that Reputation can have real consequences, by limiting future offers from other sellers
• The FairPay Reputation database becomes a valuable asset to the platform provider, attracting sellers, and creating a significant barrier to competitors. This can work much like a credit rating database.
• Consumer privacy can be protected by opt-in provisions, and by limiting what data individual sellers can see from other sellers (including the option of none at all other than a simple rating or go/no-go indicator).  

Of course, FairPay can be implemented by a single seller, for use just with their own subscriptions (as long as the platform does not prohibit that, as Apple seems to, but Google does not).  But the power of a common platform and a shared FairPay Reputation database greatly expand on that.

At both the marketplace platform and seller levels, FairPay creates a whole new way to achieve and manage a nearly optimal exchange of value.  FairPay thrives on:

• Ongoing buyer-seller relationships, as opposed to isolated one-purchase stands.
• Aggregation of items in subscription or other bulk purchase contexts.
• Rich dialog on product/service value (as it is realized by the buyer, and with respect to the costs incurred by the seller).
• Building a knowledge base on buyer FairPay Reputations (with full consideration to buyer needs, values, and circumstances).

FairPay processes and platform services can begin with relatively simple structures and criteria, to accommodate initial usage.  As platforms, sellers, and buyers gain experience and familiarity with how the process works, they can evolve toward increasing layers of nuance and sophistication in:

• How offers are managed and framed to users. 
• How prices are set, explained, and tracked.
• How FairPay Reputations are determined.
• Doing all of this with full consideration of all relevant factors and circumstances.

Additional background on the general concepts of FairPay, its grounding in behavioral economics, and its application in various business contexts is provided at the FairPay Web site, and in the many other postings on this blog.

FairPay Pricing -- Some Process Diagrams

[See a simpler, big picture view in more recent 11/15/16 diagram post]

Here are some diagrams (work in progress) that seek to clarify how the FairPay Pricing process works. This first chart shows the core process:

• Beginning at the lower left, a potential buyer is first presented with a FairPay Offer from a potential seller, subject to basic qualification criteria.  The initial offer is for basic services, as the buyer and seller get to know one another.
• The buyer can accept the FairPay offer, with the understanding that it is on the basis of Pay What You Think Fair (= Fair Pay What You Want), with the price to be determined after initial use.  (The seller might provide suggested or reference prices, but those serve only as non-binding guidance.)
• The buyer tries the product/service, and learns its actual value to him at that time.
• The buyer is then reminded to set his FairPay price for that transaction -- to "Price it Backward" -- and invited to give any explanation that might be relevant (preferably in multiple choice form). The seller might include a report on usage and suggest an individualized value-based price, to help frame an anchor price.
• The seller tracks that price and any explanation, and relates it to any prior history for that buyer to determine a FairPay Reputation for the seller.
• Based on that price and the FairPay Reputation, the seller decides whether to make further offers (now or in the future).  This can be done at various levels of granularity -- for example, in a simple two product tier case:

• If the price is considered Low-Fair, basic offers are continued. 
• If the price is considered High-Fair, offers are continued, and even better premium offers might be extended (including higher value products/services, more time to try before pricing, etc.).  Use of a premium tier gives added incentive for the buyer to pay the maximum he thinks fair.
• If the price is considered Un-Fair, the FairPay privileges are revoked, and the buyer goes back to the conventional pay wall (at least for a time).  That gives the buyer an incentive to be at least minimally fair. (Note that such downgrades can be handled gently, such as with a probationary period in which the customer is warned that more favorable pricing is needed to maintain the FairPay privilege.)

This process is generally best applied in combination with conventional fixed pricing (as with a pay wall).  That gives a clear alternative, and clear consequences for not paying at a level the seller can consider to be fair.  It establishes a clear reference price to use as a starting point for FairPay pricing considerations (it need not be taken as a minimum, since there may often be good reasons to pay less).  The conventional pricing remains a real alternative for any buyers for whom the FairPay process is ill-suited or unappealing.  Such a combined process is shown below.

As described elsewhere, this simple approach can take on many forms, and provide great amounts of flexibility and adaptability. (And of course good marketing communications skills should be applied to framing the operation of this choice architecture in the most customer-friendly light.)

The diagrams below seek to look at the bigger picture.  First we start with a simple conventional "soft" pay wall, with limited free product, and a fixed pay wall for usage beyond that (such as for a newpaper subscription).  As shown, there might be multiple tiers of services, with a higher fixed price for the higher tier:

Then we add a FairPay Zone above that:

Here we hide the details of the FairPay processes, and simply show it as a fuzzy FairPay Zone, with prices running along a spectrum.  The idea is that there is no longer a fixed pay wall with fixed prices, but a flexible spectrum of prices vs. products/services, that adapts to whatever the buyer thinks to be fair...as long as the seller accepts that as fair.

Presumably, once a buyer is invited into the FairPay Zone, he will want to retain the privileges that go with that, and will seek to keep the seller satisfied, so that privilege is not revoked.  (And when this is not the case, the extent of abuse can be limited.)  This balance of forces increasingly converges over time to enable the seller to obtain the maximum price that each participating buyer thinks fair, and thus to maximize revenue over the entire addressable market.

Cutting the Gordian Knot of Price Setting: FairPay, Pay Walls, Hurdles, and Simplicity

Pricing is the central conundrum of the digital media business. Consumers hate to pay, or even think about paying, so content providers need to make it simple -- but simple does not work well. This post explains how the new FairPay process solves the problem. (Let's consider a content subscription Web site such as a newspaper or magazine, or a music or video service, but this applies broadly.)

The Dilemma

Conventional pay walls face the dilemma that they put a hurdle in front of sales. Price too high and many potential buyers will simply turn away; price too low, and much potential revenue is left on the table. This is illustrated in The Long Tail of Price Sensitivity (see earlier post), using the figure shown here.

Ranking buyers in order of price sensitivity, some would be willing to pay more than the set price, and many would only pay less. The green box represents the realized revenue. All who buy pay the fixed price, leaving the red excess on the table, and those who turn away would be willing to contribute the amber revenue. Pick your poison -- you either price too low or too high for many buyers. There is no win-win, only bad or worse.

Keep it simple, and you are left with that dilemma. Add refinements such as tiers of premium content or tiers by usage volume or other segmentation by market, and you add complication, and still have a step function that runs well below the sensitivity curve.

Real simplicity?

FairPay may seem more complicated, but I suggest that complication can be largely hidden from the customer. Yes, customers are forced to think about pricing more than once, but is that such a problem? Don't you think about pricing every time you eat in a restaurant and leave a tip?

With a simple pay wall, customers must think about prices when they first hit the pay wall. The hope is they will pass through it, go onto an auto-renew subscription, and never think about it again (while the money just rolls in). That will be the case for some, but others will balk. Either way, the Procrustean pay wall will cut off a huge portion of the potential revenue (whether the red head or the amber foot). One size just does not fit all. This simplicity is very costly to the seller -- and a turn-off to many buyers.

As for those who do forget about their subscription price, and just renew forever, is that really such a windfall? Those who do not think about their continuing payments are those who are not very price sensitive to begin with -- and so they are just the ones who might be persuaded to pay more than the fixed rate under Fairpay.  Maybe they are the heavy users, who know they are getting more than fair value.  So maybe a fixed-rate pay wall is their windfall, not yours...

Is FairPay really more complicated or more of a hurdle? FairPay is "Fair Pay What You Want", and at heart, pay what you want is almost as buyer friendly as free. FairPay costs only what the buyer thinks fair -- what is so complex about that? It is not rocket science, but gut intuition, guided by some conventions. The threshold for seller acceptance can be soft enough to remove all but a minimum of anxiety (as with tipping) -- and once buyers establish a reputation, price setting actions can be infrequent and easy, and left on autopilot except as change is warranted.  (Sure free is even more buyer friendly, but we are all adults here.)

Simple, fair ...and profitable

As to the apparent simplicity of auto-renewing subscriptions, FairPay can hide a huge amount of complexity, because it is buyer-driven and intuitive. The buyer can set a price that naturally reflects his needs, his usage, his valuation of the product and of the relationship, and his ability to pay -- all with unlimited nuance and adaptation to current circumstance, and with hardly a thought. Fully evaluating all that richness on the seller side (as to fairness) will take sophisticated decision rules, but the seller can begin with a simple, forgiving, fairness model to get close to true sensitivity, and later refine it to get even closer. This is just another aspect of customer relationship management, one that gets to the heart of the value exchange.  Isn't it just this kind of customer relationship management that modern businesses should be seeking to cultivate?

The buyer finds a new kind of freedom, almost as much as free or pay what you want. He no longer needs to wonder how much he will use and how much he will value it. That can be determined later, after he knows exactly what he got. If he under-prices, the seller may be forgiving up to a point, and the worst that happens is he is back at the pay wall. There is no fear of buyer remorse to stop him from using a product he thinks he might value.  ...And the buyer and seller learn how to work together to find the maximum desirable and fair value exchange.

How Do You Explain Something That's Never Existed Before?

This is one of my favorite images, and largely speaks for itself.  So you can stop here (all else is commentary).

Some general commentary on where this came from and the challenges it alludes to are on my other blog.

More specific to FairPay, I came back to this image while struggling to explain the FairPay pricing process and why it matters.

Do you start with the problem of pricing for digital media?  ... with the problems of free and freemium pricing models?  ...with Pay What You Want?  ...with the problems of pricing before you know what you bought and the benefits of "Price it Backward?"  ...with the idea that pricing should be a process of dialog, not a single number?  ...with the idea of tracking prices through Internet feedback?  ...with The Long Tail of Price Sensitivity?

All of these are important (and many have been subject of posts on this blog), but none of them seems to get the whole idea across.

Of course cave men never had to make an elevator pitch (or did they?).

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This is from the October 1981 announcement of the Xerox Star workstation, the productized version of the Alto, the very first computer with a WIMP (Window, Icon, Menu, Pointing device) Graphical User Interface.  (To anyone who has the full advertisement this was clipped from, I would love to have a better, more complete copy.)
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[Image to text:]
"How do you explain something that's never existed before? ... He had a similar problem"
(Caveman to cavemen explaining the wheel.)

Hyperlocal News symposium by MIT Enterprise Forum of NYC -- 2/24

Hyperlocal News: A New of World of Journalism, Sustainable Business Models, and the $30B Local Ad Market promises to be a very interesting NYC panel session.  As board organizer of the event for MITEF-NYC, I am pleased to have a very strong and diverse mix of panelists, and look forward to some stimulating dialog.  Aside from major players like the NY Times and Patch, we have a smaller startup, the Alternative Press, and Outside.in, a technology/infrastructure provider.

A very nice preview article on the event, and on the MIT Enterprise Forum, was published today by The Alternative Press.

I have been involved in various online news services since the late '80s.

As readers of this blog know, one of my recent projects is a radically new pricing process for digital media called FairPay.  This has strong potential for news services, including hyperlocal ones.  More on that is on the sidebar.

Of course I will be at the event, and will be happy to discuss FairPay with anyone there.

Price it Backward! -- Pay What You Want Forever

FairPay turns many conventional ideas about pricing on their head, to the extent that many people don't fully appreciate some of its key features on first look. (FairPay is the radical new pricing process introduced in the sidebar of this blog, and the companion Web site).

FairPay processes moves forward in ongoing cycles of transactions, but for each transaction cycle, the pricing decision looks backward. FairPay price-setting is retrospective.

• Conventional prices are set before the buyer uses the product or service.
• With FairPay, the buyer sets the price after using the product or service.
• Setting the price before use exposes the buyer to risk of "buyer remorse" -- The buyer can only guess whether the value received will be as expected.
• So, setting prices forward (as is conventional) requires the buyer to take a leap of faith. As a result, the buyer must build a discount into what he is willing to pay, to compensate for the risk of a value surprise. Depending on the nature of the product, this risk (and the attendant discount) might be significant. That is especially true for "experience goods" like music, movies, etc., and that can significantly reduce their potential market -- buyers often will not take the risk. It also is significant when dealing with unfamiliar (untrusted) sellers for any kind of good.
• Even with many basic forms of Pay What You Want, pricing is forward (even if set by the user). So up-front price-setting depresses PWYW results, since it leads buyers to set prices lower than they might do after the value was confirmed.

By setting prices backward, after the product or service has been used, the buyer has no risk of that kind of remorse. They know what they got and what value it delivered, so they can set their price based on that full value. Think about it: after you saw a great movie or played a great album several times, wouldn't you consider paying significantly more than the standard price for a typical movie or album? Or with a poor movie or album, aren't you sorry you paid what you did, and wishing you could get a reduction or refund?

FairPay is forever. FairPay is not just a temporary negotiation stage that leads to a fixed price after one or a few cycles. Of course it could be cut short, but generally that seems undesirable.

• Value considerations change over time.
• The beauty of FairPay is its ongoing adaptation, so why cut that short?
• The buyer's usage or needs may change, so their pricing should be allowed to change accordingly.
• The seller's product or service may vary in quality and value, with periods of reduced value or evolution toward higher value, so, again, pricing should vary accordingly.

Why not let the adaptive process inherent in FairPay do its work to adjust for that? In its pure form it works in repeating cycles of an ongoing relationship, and that continues indefinitely -- as long as both sides view it as fair. Of course this is not an absolute -- FairPay is a just a process framework that can be adapted and used in hybrid forms as the situation warrants, but in general, it seems that there is little reason not to continue it.

So FairPay really is Pay What You Want -- except that it looks over your shoulder to encourage you to Pay What You Think Fair (even if you might have been tempted to be unfair). You still pay whatever you want, you just are given strong motivation to be fair about it.

FairPay is not a price negotiation (at least in pure forms). It is also easy to misunderstand the basic idea of these cycles. FairPay has similarities to a negotiation process, in that it creates a two way dialog about price, but (at least in its pure form) it never leads to a set price that goes forward. For each cycle, the price set is always a retrospective price, set by the buyer after using the product/service during that transaction cycle. Each cycle is open to a new PWYW evaluation by the buyer.

There can be indirect negotiation. Sometimes it might be desirable to add a layer of indirect price negotiation, not about the price alone, but about what price might lead to what further offers in the continuing relationship:

• With FairPay, what the seller has to the power to negotiate over is not the price, but the offers that will follow. What I suggest (for the forms of FairPay outlined here) is not that the price is negotiated forward, but that there might be a negotiated dialog on the current backward price set by the buyer, and how that might relate to forward offers from the seller:
• The seller might react to a seller's tentative (retrospective) price and advise that if the buyer prices at that level, the seller will next extend offer, X1, but if the buyer sets a higher price (for the transaction that is ending), the seller will extend a more attractive offer, X2 (perhaps including premium items, or some other perk),for the following cycle.
• Similarly, if the tentative retrospective price is considered unfair by the seller, the seller might advise that no further offers will be extended based on that price, but that if the buyer changes the price to Y, then further offers will be made.
• The idea is to give the buyer the freedom to set the value as he sees fit, but to enable the seller to provide guidance on how he will view that, as it relates to further offers in this continuing relationship.
• The buyer has full control of the price -- what the seller controls is whether the relationship will be allowed to continue on that basis.

But remember, the price remains retrospective. The buyer is still free to pay whatever he wants during the next cycle. What is negotiated is not the price for the next cycle, but the price for the previous cycle that will motivate the seller to offer a next cycle.

Pay What You Want -- Still Crazy After All These Years?

Pay What You Want (PWYW) pricing has gotten some attention in the past few years, but most people still view it as naively idealistic, only suited to very special situations. However, a growing body of research and actual usage is suggesting that it has much more potential value than most businesses realize, in a wide range of situations very different from that of Radiohead or a museum.

The Freakonomics Blog has paid some attention to this, and the greatest publicity for PWYW since Radiohead has come from the special PWYW preview offer for the Freakonomics movie.

PWYW is of particular interest to me because the FairPay pricing process described on this blog is a radical enhancement of PWYW that adds tracking and consequences to encourage buyers to pay fairly over an extended series of transactions. This encourages what might more accurately be called Pay What You Think Fair, to produce much better revenue and profitability. As described elsewhere on this blog and the companion Web site, this model offers many of the advantages of Freemium models, but in a more powerful, individualized, and dynamically adaptable form.
...But the point of this post is that plain vanilla PWYW, alone, is highly underrated.

To help make that point, and to encourage research into PWYW, FairPay, and other innovative pricing models, I have posted a Resource Guide to Pricing - Annotated links and references as a survey of this emerging body of exciting research.

I suggest that a whole new era in pricing models is just beginning, spurred by the capabilities of the Internet. A nice summary of some of these directions is in the book "Smart Pricing" by Raju and Zhang of the Wharton School, which has illuminating chapters on PWYW and many other innovative models. Two other notable books on pricing are also listed.

More specific to PWYW are some eight research papers published in the last two years, all of which find it to be quite effective in a range of situations, explaining a number of reasons why people actually chose to pay, and to pay reasonably well, even when they do not have to. One (the Gneezy paper) also looks at PWYW combined with a share of proceeds to charity, which was found to be particularly effective (and subject of an article on the Discover Magazine blog). Another (the Regner paper) focuses on a very interesting online indie music distributor with a PWYW model (combining a try-before-you-buy feature and a high revenue share with artists, both seen as enhancing payment levels).

While many of these papers are theoretical and written for academics, I suggest that business people would do well to give them a look (skipping over the heavy parts, and with just reasonable caution that many of these models and experiments are simplified).

I welcome feedback on this resource guide, and suggestions for additions -- it is a work in progress.

Also sought are researchers interested in doing studies of Fairpay.

Note to searchers: PWYW is also known as Pay As You Want (PAYW), Pay What You Wish, Pay What You Like (PWYL), Pay As You Wish, Pay As You Like (PAYL).

(Revised 10/6/10)
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[8/29/11 update:  The Wikipedia article on PWYW also has useful information, including links to articles on some notable real uses of PWYW.]

Business Model Generation with a new spin: FairPay Revenue Models

The radically new FairPay pricing process is particularly relevant to the continuing dialog suggested by "Business Model Generation," the recent book by Osterwalder and Pigneur. The book is aptly self-described as "a handbook for visionaries, game changers, and challengers striving to defy outmoded business models and design tomorrow’s enterprises." That is also the focus of the book's companion Web hub for ongoing discussion and development.

Very much in that spirit, FairPay is a radically new kind of pricing process that combines the flexibility and participation offered to buyers by "Pay What You Want" (PWYW), but with the hook of consequences that make it fair to sellers. It works where there is a subscription or other ongoing relationship of continuing sales, by tracking how fairly each individual buyer pays over a series of transactons. FairPay is particularly well suited to the Internet and digital media, for which "outmoded business models" are loudly crashing and burning, and for which it is all too clear that new designs are urgently needed. Fairpay is described at the FairPay Web site and on this blog. This post seeks to frame the FairPay concept in the context of The Business Model Canvas that underpins that book.

In fact, the adaptive and dynamic nature of FairPay is itself a process for generating the details of business models (because it can take on the characteristics of many different models), and thus can help bake this idea of business model generation into core business processes. Given this deep and broad impact, I suggest that FairPay offers a new business model "Pattern."

In terms of the Canvas and its Building Blocks, FairPay is clearly most central to the Revenue Streams block. Key features of FairPay are:

• FairPay lets you (the buyer) Pay What You Think Fair, and do so after trying the item -- and is thus very fair and appealing to buyers.
• Sellers track feedback on each buyer’s pricing to establish a FairPay pricing reputation for that buyer, and use that reputation to decide whether to make further offers, and thus manage their risk of being treated unfairly.
• This dynamic makes FairPay fair to sellers because it lets them manage their risk of unfair prices -- and the cycle of offer=>price=>feedback=>offer creates consequences for buyers that motivates them to pay fairly.

FairPay solves the conundrum of pricing, by treating pricing as a process, not an endpoint. The overall result is more sales, at more fair prices, yielding much happier buyers and sellers, and a more effective economy at large.

Thus, in regard to the Revenue Streams block, FairPay is an entirely new kind of Dynamic Pricing model with a uniquely adaptive cycle of buyer and seller controls (the buyer sets the price; the seller makes or withholds the offers). This gives it the flexibility to selectively take on attributes similar to all of the kinds of fixed pricing models listed (list price, feature dependent, customer segment dependent, volume dependent, and many others), and for most or all of the revenue types listed (asset sale, usage fee, subscription fee, licensing, and many others). These variations are emergent from the dialog of

• how the seller frames the offer--and the criteria by which he will judge price fairness, and
• how the buyer sets the price--and explains his rationale for why he considers that to be fair.

Thus FairPay offers an open-ended framework that can be adapted to almost any kind of pricing metrics and behavior desired.

This then carries through to other Building Blocks of the Business Model Canvas, with some highlights as follows:

• Customer Segments: The dynamically adaptive nature of FairPay enables pricing to be individually tuned to "customer segments of one" in advanced uses, or in simpler versions that are framed to mass markets, niche markets, arbitrarily segmented or diversified markets, and to adapt to multi-sided platforms (such as individually varying mixes of paid vs. ad-supported).
• Customer Relationships: This dynamic segmentation is intimately tied to well-managed, ongoing relationships driven by this cycle of offers, offer framing, pricing, and price-related feedback. FairPay encourages and builds on the movement toward "relationship marketing" and the Cluetrain principles of "markets as conversations."
• Channels: The emphasis on pricing processes as relationships feeds back into nearly all aspects of channels, with strong impact on a the touch points of awareness, evaluation, purchase, delivery, and after-sales.
• Value Propositions: The central issue of fairness links directly to the value proposition. The heart of a well-executed FairPay pricing process is the ability of the seller to highlight the important aspects of the value proposition being offered, and of the buyer to price in accord with how the buyer perceives that value proposition, in terms of any and all dimensions of value (the "aggregation, or bundle, of benefits") that either party considers relevant.
• Cost Structure: The FairPay revenue streams naturally link to the cost structure, and do so in a way that is more dynamic and adaptively-driven than conventional revenue processes. Buyer fairness would be defined by both value and cost considerations, and the dialog cycles can be framed to ensure that costs are fairly reflected in considering value promised and delivered. FairPay can be expected to be particularly well suited to Value Driven businesses, and those where Variable Costs are low (and those with Economies of Scale and Scope).
• Key Activities, Key Resources, and Key Partners: The FairPay processes feed back to signal what products should be produced and offered, in what form. This is much the case with any pricing process (as how economics matches supply with demand), but the uniquely dynamic and adaptive nature of FairPay processes can enable new levels of adaptation back into the production side. In extreme cases of mass-customization, FairPay feedback can be applied directly, to dynamically shape just what product and/or service is offered to individual buyers, and to the aggregate of buyers and potential buyers.

So, as suggested, FairPay processes offer not only a new and better way to do pricing in many contexts, but one that inherently links to all other business processes in a way that makes doing business a far more flexible and generative process.

The way to generate a business model in the Internet age is for the business to be one that dynamically and adaptively generates its own right model, a model that optimizes value creation for both seller and buyer, for each relationship as it evolves.

An Open Letter to Radiohead and Seth Godin -- How to Make Much More Money

For those who have not noticed, Radiohead might be releasing another album soon, and Seth Godin is ditching his publisher and going direct. Both are in the vanguard of content disintermediation. This is an open letter to Radiohead and Seth...]

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I have a suggestion on how you (and others like you) can make much more money than you realize.

You both obviously know that by ditching the middleman and going straight to your public, you get a much larger piece of what you sell. And you both clearly know how to reach your public without the help of a middleman, and that you and your public are partners in a collaboration.

But what you probably don't know is how a radical new pricing process, a sort of Pay-What-You-Want (PWYW) on steroids, can significantly increase your total revenues -- and profits. Radiohead knows that PWYW can be a very effective way to reach your market, getting far more people to buy, and many of them to pay reasonably well. But both of you know that many pay nothing at all. ...PWYW is is participative, but flawed.

FairPay (Fair PWYW) is a radically new pricing process that builds on the flexibility and participation that PWYW offers to buyers, but motivates them to pay fairly. It works where there is an ongoing relationship of continuing sales, and tracks how fairly buyers pay. If they pay fairly, the seller continues to extend more FairPay offers to them. If they do not pay fairly, they lose the privilege of continuing to buy on a FairPay basis, and must pay a conventional set price for future purchases. Unlike PWYW, FairPay is a two-way dialog that creates consequences for not paying fairly.

Because of this cycle, this FairPay process may not work so well for single sales, like one album or one book, but can be very powerful for an ongoing series of sales. For example:

• Individual songs from a collection of albums, offered in series, one at a time, or in small bundles...
• Individual items from a catalog of book chapters, articles, podcasts, or videos...

The process begins with one of a few low-value items, to test how the buyer sets prices. If the prices are reasonable, a few more items are offered. As the buyer builds a reputation for pricing fairly, more FairPay credit is extended (but never so much that there is too much risk that the buyer is done and will pay nothing for a valuable bundle). So perhaps it might better be called Pay-What-You-Think-Fair, because that is the result.

I suggest FairPay can produce far more sales than any set-price offer, and far more revenue and profit than any simple PWYW offer.

• For Seth, this may be easy to apply now to the extensive library of materials you already offer, and have full rights to control.
• For Radiohead, this might work when you have at least a second album you have full rights to offer songs from.

This FairPay process can be even more effective if you can aggregate a larger collection of content that will sustain an even richer and more extended relationship with your buyers. This might be done by teaming up with other content creators who appeal to the same buyers, perhaps in a cooperative selling service. With such a deep (and preferably growing) catalog, buyers will have even more incentive to develop and maintain a reputation for paying fairly, and will generate more

offer-pricing-reputation

cycles for the feedback process to fully develop. The task of developing the FairPay e-commerce platform will be spread across more sellers, and the buyers' FairPay reputations will be shared by all of the sellers.

This could be a back-end service, so that you can keep your direct relationship with buyers, and you can sell to everyone interested in buying at a price they think fair -- and you control the offer decision process, to limit your exposure to the few buyers who pay what you do not think fair.

Much more detail is given elsewhere on this blog, and the FairPay Web site -- the FAQ is particularly recommended.

To Radiohead and Seth, I suggest you think about this. If you want to try it, I would be happy to assist.

To other content creators (including video, games, apps, software, etc.), I suggest the same. Think of this as the next step in C2C (Creator to Consumer) commerce.

To entrepreneurs and developers looking for a killer business opportunity, I suggest this is it. Again, I would be happy to help.

And to Amazon and Apple, of course you could do this too, as described in an earlier post. A FairPay Zone within your store could offer products from creators and/or publishers who agree to offer FairPay pricing, and you could facilitate the offer-pricing-reputation(-offer...) cycle.

Doing Well by Doing Good with FairPay -- Shared Social Responsibility and Pricing

Adding charitable giving to the pricing process can significantly increase total revenue and profit. This was the finding of a paper in the July 16 issue of Science that was reported recently on the Discover magazine blog. The finding was for charity combined with Pay What You Want pricing (PWYW), but the lesson seems equally applicable to charity combined with FairPay. FairPay builds on PWYW by adding feedback on buyer pricing that lets sellers decide whether to make further FairPay offers, as explained in the sidebar to the right.

As reported, PWYW+charity yielded significantly higher total profit than PWYW without charity, and also more than either a simple set-price, or set-price+charity.

Individually, the PWYW buyers paid less than the set-price buyers, but far more of them made a purchase. In this case the product was a photo of the participant taken during an amusement park ride. Purchase rates were very low with standard pricing (at $12.95) and only slightly higher when 50% of that price went to charity.

As summarized in the Discover blog, "...But when customers could pay what they wanted in the knowledge that half of that would go to charity, sales and profits went through the roof. Around 4.5% of the customers asked for a photo (up 9 times from the standard price plan), and on average, each one paid $5.33 for the privilege. Even after taking away the charitable donations, that still left Gneezy with a decent profit."

"This is a substantial result, especially since it came from a real setting. The theme park that Gneezy used stands to make another $600,000 a year in profits if it takes up her sales strategy. And just to be sure, Gneezy confirmed that sales at a nearby souvenir shop didn’t fall on the days when she ran her study. These extra profits weren’t coming at a cost to retailers elsewhere in the park."

These results suggest that combining FairPay with charity could have even better results, possibly even with much lower levels of charity, and thus higher profit. The charity component encourages people to buy and to pay a fair price, and the FairPay feedback process provides even more incentive to pay a fair price. I suggest that FairPay without charity will also prove very effective, and be more widely applicable, but the combination certainly seems worth trying.

Gneezy describes this use of charity as "shared social responsibility," a variation on "corporate social responsibility," which gets to issues of how corporations seek to build a more collaborative relationship with customers. I suggest that the FairPay pricing process is a complementary way to build more collaborative relationships, and to do so more directly and efficiently. Whether the combination is more or less effective than FairPay alone, remains to be seen, and probably depends on the details of the situation.

The charity contribution percentage could be fixed as it was in this experiment, or it might be at a user-specified rate. One real-world example of a PWYW offer with a buyer-specified rate of charity is from Camel Audio (until the end of August 2010). The suggested price is $59 (which seems to be the usual list price), and the suggested charity contribution is 50%. My test indicates this Web offer restricts payments to being between $1 and $100, but that it allows charity rates up to 100%.

The results of the Gneezy paper also show how much of the addressible market can be lost under conventional pricing. Sixteen times more people bought photos when given the ability to pay what they wanted (but they paid poorly), so that is not so attractive. But nine times more people bought with PWYW+charity -- and they paid at a rate that tripled profits!

Trying new pricing models takes time, effort, and some risk, but it would seem that the payoffs might be very large indeed. Businesses struggling with revenue models might be risking much more by not taking the plunge.

FairPay -- Why Would Anyone Pay If They Don't Have To?

The answer is simple: Buyers who do not pay will not get further offers.

This is the first question many people ask on hearing of FairPay -- given its core of Pay What You Want (PWYW) pricing. It is an important question, and a central feature of FairPay is the FairPay reputation feedback process that addresses that. With FairPay, there are consequences for not paying -- much as there are for getting a poor credit rating.

FairPay will generally be most useful in cases where there is an ongoing relationship between the buyer and one or more sellers. This might be for ongoing purchases of multiple items or services, or for ongoing subscription access, taking the form of a series of limited FairPay offers from the seller in response to a series of FairPay pricing actions by the buyer.

Sellers can be expected to limit the initial FairPay offers that they extend to new customers who lack established FairPay reputations. They might offer only items and quantities that might typically be free (much as with freemium pricing), so that their risk is small. Only after the buyer establishes a history of paying fairly will the seller continue to make FairPay offers for larger quantities or premium items. The benefits to the buyer of not paying will be limited and short-lived. The benefits of paying will continue and grow.

Sellers can be expected to make these consequences clear when they first extend an offer to sell on a FairPay basis. The product/service is not offered as "free," nor as simple PWYW, but as Fair PWYW, or perhaps better put as Pay What You Think Fair -- essentially on trial, on approval, and on evaluation. Sellers would make it clear that zero is "acceptable" (with regard to reputation and future consequences) only when that is arguably fair. Such cases of reasonable fairness in setting a zero price might include cases in which the buyer gives a reason why there is little or no realized value to the buyer (much as is often required for returns), or where only very low quantities are sampled (which might be conventionally understood as a buyer-directed form of free sampling).

This process may be clearest and work best for early uses of FairPay that are complementary to "freemium" offerings -- which combine limited access to free products/services with a "pay wall" that requires set price payments for more usage and/or premium items. As an alternative to the pay wall and its set prices, buyers may be invited to enter a "FairPay Zone" and permitted to stay there as long as they pay fairly, as depicted in this diagram:

See more FAQs, and further information on the FairPay Web site.