First Commercial Use of FairPay Revenue Strategy -- Ennovent: Innovations for Sustainability

I am very pleased to report that ennovent has become the first commercial venture to undertake use of the FairPay pricing system, a radically new approach to pricing digital offerings (see sidebar).

Ennovent began the public soft launch of its Global Network today, September 14.  Peter Scheuch, ennovent's managing director, contacted me in June saying "...we think that the FairPay model could be a great revenue model for us." He found the concept "very exciting."

[Update:  additional comments on ennovent's use of FairPay are in the October 11 press release.]

Ennovent is a very interesting startup, carving out a new role as an online global venture network that "...connects entrepreneurs, investors and experts..." (quoting from ennovent):

• "Ennovent is a for-profit enterprise established to promote entrepreneurs, who advance disruptive innovations for sustainability at the base of the economic pyramid"
• "We promote disruptive innovations, crowdsourced globally through our network, scaled locally in India by a multi-disciplinary team and partners and financed through our fund."

The appeal of FairPay to ennovent is that they face a pricing dilemma -- it is very hard for them to price their services.

• They will support a wide variety of crowdsourcing requests for funding, support services, and full-time, temporary, or volunteer staffing. Given the very broad range of value that might result from satisfying such requests, and the similarly variable range of results, they had little clue as to how to decide on a fair price for each request. Request value could vary in terms as how well the request was satisfied and the number and quality of responses, as well as the requestor's ability to pay.  No matter what price was set, it would  be too low in many cases, or too high in many others.
• As a for-profit service with strong ethical values, there seemed to be no good solution to setting fair prices -- until they learned of FairPay.

Peter saw how FairPay could relieve him of the impossible burden of setting the "right" price for such widely varying services, and instead apply an adaptive process to allow users to determine what price seemed fair to them, and to give ennovent the ability to judge and influence that through a user dialog. FairPay provided a structure for such dialog that could be responsive to extreme differences in value obtained, results, costs incurred by ennovent, and the user's ability to pay.

I began to work with ennovent to help apply FairPay in a trial use.  We developed a plan for a phased implementation that would ease in as the service matured.  This exploits the reality that ennovent must first grow a network of members (entrepreneurs, investors, and experts/solution providers), which meant that the use--and the value--of the request process would  build slowly.  That evolution suggested a strategy for early stage use of FairPay in a way that allows maximum information-gathering, and that limits investment and risk.

Ennovent is starting with the "Free Trial/Survey Mode" of FairPay that I described in an earlier post. In addition to easing implementation, this will give them a rich base of market survey data for setting suggested prices in FairPay, and for setting the conventional set prices that will serve as an optional alternative to FairPay.

I hope you will check out the ennovent site.  Apart from its pioneering use of FairPay, it promises to be very interesting service, and to provide great social value. At this early stage there is not yet much visible of FairPay, but that is expected to grow over the next few months.

And of course I would be happy to work with others who might be interested in a similar collaboration.

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Link to Ennovent's press release: "Ennovent Launches the Global Network")

[Update:  additional comments on ennovent's use of FairPay are in the October 11 press release.]

Re-inventing Value Exchange For Digital Offerings -- A Radically New Approach to Business Relationships

Imagine a market Nirvana for digital offerings. Think beyond the traditional value exchange processes and protocols and re-envision how buyers and sellers might interact in a world with a networked marketplace.

I suggest FairPay offers the path to that market Nirvana, and that it is now very practical. Here is an overview (based on the recent rework of the FairPay home page).

First let us look at what the consumer wants, and FairPay delivers:

Consumers  -- Pay only what seems fair to you: Pay what you want for products or services -- after you try them Make every purchase on a trial basis--so you can always be sure to get fair value for your money Agree to set your price fairly--in your judgment--and explain why you think it is fair Do that as long as you can convince the seller that you are being fair

Of course free is even more ideal (for the buyer alone), but we know there is no free lunch -- someone pays. The question is how to make the market work for the consumer, and still motivate sellers to sell and creators to create. "Fair Pay What You Want" (as just described in the box) clearly comes rather close to a practical ideal for a large mass of consumers.


The bigger challenge is how to make our new "ideal" market system work for businesses? -- to ensure that they get a fair price, to enable them to stay in business and continue to deliver value. Here is how FairPay does that, as well:

Businesses  -- Get the most revenue from the most customers by continuously learning what each one values: Engage in real dialog with each of your customers on the value they get from your products or services Make a trial offer to every potential customer who sees potential value and is fair-minded Let your customers self-select into segments (based on usage, value perception, willingness and ability to pay, ...) Limit your risk from those trial offers by tracking the results for each buyer, and limiting future offers if you judge that buyer to not pay fairly Continue to make every offer a trial... ...as long as each buyer continues paying fairly--in your judgment

Ordinary "Pay What You Want" pricing  has been shown to work well for special offers.  ...With FairPay (short for "Fair Pay What You Want"), every offer is a special offer.  

• FairPay changes the game from single transactions to an ongoing relationship of continuing transactions. 
• That enables a whole new balancing dynamic that drives to a better market equilibrium, over a wide range of relationships and value perceptions.

FairPay works through a very simple balancing dynamic: 1. Selectively offer to let the buyer set any price the buyer considers fair -- after the sale (Fair Pay What You Want, post-sale). 2. Track that price and determine whether the seller agrees that is fair, and use that information to let the seller decide whether to make further offers of that kind to that buyer in the future.

I suggest this gets us as close as possible to market Nirvana. The buyer always pays a price he considers fair, and seller gets to sell to every buyer who set prices fairly (in the seller's judgment).  The seller is also able to limit his risk, in way that trades a managed level of small loses for a large expansion of his market to the entire population who value his offering. Some will pay better than others, but for all who pay fairly, the seller gains revenue. And for those who the seller judges to not pay fairly, FairPay offers are restricted, and conventional set-price selling remains the fallback.

Thus FairPay exploits the power of the networked marketplace to offer as a participative pricing process that combines the user freedom of pay-what-you-want pricing, with a new level of feedback, accountability, and seller control of future offers to make it fair to both buyers and sellers.

For more on how that works, see the FairPay site (How Does FairPay Work?), and many of the posts on this blog.

FairPay “Free Trial”/“Survey” Mode – Easing into the Waters -- And Understanding Your Customers

[***Update 8/11/17 -- Voluntary Payment Mode:

Most of the focus of FairPay is on a balanced use, as a repeated game in which the buyer has full power to set the price after each cycle of experience, but the seller maintains equal power over the pricing relationship by continuing the game to offer ongoing experiences only if they judge pricing to be sufficiently fair (referred to below as Full FP (Revenue-Gated) Mode). The criteria for fairness can be as strict or lenient as the seller wishes.

However, there are important use cases where a more purely voluntary payment regime is desired permanently, such as for public service journalism and many non-profit services. For example many membership-oriented journalism services are happy to make membership payments purely voluntary, and still provide access to their journalism to those who choose not to pay. A simplified variation on FairPay supports such a Voluntary Payment Mode -- described below as Real-Payment Survey Mode. This uses much the same process as full FairPay, but simplifies the seller controls to apply soft nudging to personalized suggested contribution levels, still based on individual value factors, but using only carrots, and not the stick of withdrawing FairPay privileges.]  

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I have recently been working with a startup company that is working toward introducing FairPay pricing for their new service (details on that to follow).  That collaboration has led me to some interesting ideas on how you can best phase FairPay in, to get some basic functions at low cost -- and to learn a great deal about your market, so you can better manage your investment and your risk -- and improve your business overall.

Whether for an entirely new business, or for a new pricing approach in an established business:

• key questions about FairPay are how hard is it to integrate with your pricing systems, and to what extent might it put revenue at risk?
• key benefits of FairPay are as a learning process, centered on dialog with your customers, about what they want from you, and how they value it.

Here is a way sellers can begin to get the benefits, without incurring much of the cost, and none of the risk.

(Note, this post deals with strategies for introducing FairPay in a gradually phased manner, and assumes a basic understanding of FairPay concepts -- see the sidebar, and other posts and the FairPay Web site for the basics.)

The idea is to use FP in a startup mode to provide ongoing on a “free trial” basis, while a new service is in a “provisional use” mode, and then, after that, to phase in use of the full FP feedback and control processes.

• This approach is especially suited to new lines of business where the value proposition may be uncertain or temporarily limited (such as beta tests, pilots, etc.).  Limitations may be due to lack of system function or lack of critical mass network effects, such as those affecting content richness, community participation, etc.  
• This provisional use of a subset of FP processes can be beneficial, even before full use of FP is pursued.  This opportunity may be common to many startup businesses, or to new services within existing businesses. It can also be applied in existing businesses by taking services that had been in a standard service tier, and shifting them to a premium tier on a trial basis.

The objective is to position FP pricing to provide benefits (and not impediments) even in early stages, and to set the stage for a transition to full function as the service matures:

·         Initially, FP Free Trial Mode should stay largely out of the way, behaving generally as a conventional “free trial,” with the addition of some key features:

o   The initial objective is to serve as a learning platform, apart from any revenue generation, to obtain customer “survey” data related to the potential value of the service.  This role can integrate with other customer feedback to focus on the perceived value exchange, to better understand the benefits and problems in using the service by the consumer -- both reflecting the current state of the service (and its content and community), and looking forward to what can be expected when it matures. 

o   From this perspective, FP Free Trial Mode can be thought of also as a FP Survey Mode, in which data on willingness to pay is collected, but is not used to limit continuing use, even if users do not pay.  Depending on the situation--or in successive phases--users might be asked:

1.      to simply say what they “would” be willing to pay without actually making any payment (No-Payment Survey Mode),. 

2.      to actually pay what they think fair (Real-Payment Survey Mode), with the understanding that all payments are entirely voluntary (pure PWYW, in arrears, or "pay as you exit") and there are no adverse consequences (no reputational harm) for non-payment. [***As per the above update, this can also be applied permanently, as Voluntary Payment Mode.]

o   A secondary objective is to set the stage for Full FP (Revenue-Gated) Mode use, by facilitating learning by both customers and the service provider on how FP is best applied to the particular services.  This would educate customers on basic concepts of the FP process, and help the service provider learn where to apply FP, how to frame offers, how to suggest prices and assess fairness, and the like, in the context of their particular services and customer base.

o   To aid in customer understanding, it might be clearly stated that FP is currently in Free Trial Mode for some or all services, and that a future transition to Full FP Mode was planned.

These modes can be enabled before a full FP system infrastructure is built, since they require none of the real time feedback analysis, buyer fairness reputation rating, and reputation-based offer gating of a full FP service.  Thus this level of FairPay requires modest development investment.

·         As the service matures, the Full FP (Revenue-Gated) Mode can be completely implemented and gradually turned on--with any desired phasing as to customer segments and service categories.  Full FP (Gated Revenue) Mode would enforce FP “fairness-gating”-- limiting access by buyers that develop a reputation for failing to pay fairly.  This can overlap with continuing use of FP Trial Mode for other customers and/or other service categories.

o   The shift to FP Gated Revenue Mode might be related to achieving a level of maturity as to service robustness, critical mass scale (in content and/or community), initial education of customers on FP concepts--and to scale-driven needs for revenue. 

o   This shift can be phased in (sector-by-sector, if desired), using an appropriate change management process.  Customer communications and dialog can be applied to prepare customers for this change (to include customer reputation rating and gating of offers), to identify any issues or concerns and ensure that they are recognized and addressed.   It would be made clear to users that gating was being activated, why the time for that was right, and what changes to expect.

The result of this staging approach is that FairPay can begin quickly to create a lightweight dialog with customers about value, and to generate valuable data long before it is integrated into actual payment processes.  In this way it imposes minimal burden on customers, and also allows the development work of building the full FairPay infrastructure to be phased.

Indie Games Generate $ Millions with Pay What You Want

For those that think there is no real money in Pay What You Want (PWYW) pricing, the growing success of the Humble Indie Bundle suggests otherwise. Their first four promotions have raised over $6.1MM,** with the last one just ending at $2.2MM [now much more**].  It has been reported that the venture behind these offers has raised $4.7MM in VC funding [now more**]. Their model includes payments to the game developers, the distributor, and charities including EFF.*

EFF has posted a nice summary, observing that "While the record labels, movie studios, and video game producers have not figured out a way to compete with free, others have...as the Humble Bundle has shown us, it is possible, with creators and distributors finding new and exciting ways to compete with free. ... when done right – developers, content providers, and even those who provide the business model can successfully compete with free." Additional details are in a Wikipedia entry.

All of this adds to my suggestion that FairPay (which augments PWYW with feedback processes that incentivise buyers to be fair to sellers, as described on the sidebar) can take this from a promotional tool to a mainstream business model for ongoing use.  Indie games and music are a great place to start, since that Long Tail content is where basic PWYW selling is already gaining traction.***

My previous post, How Indies Can Disrupt the Disruptor - A Disruptive Revenue Model for Music and Games, addresses this in more detail -- suggesting how indie distributors can take on iTunes to change the game, starting with the Long Tail, and moving toward the mainstream.

(*The charitable element is also a notable factor in the Humble Indie Bundle, at two levels. One is true charity, in the form of EFF and others. The other is a charity-like feature, in that the structure of the Humble Bundle revenue is for lightweight (and buyer controllable) contributions to the distributor, such that the significant share to the game creator ("developer"), analogous to the artist, musician, etc., provides a social-benefit motivation to pay -- rewarding the creator, and enabling further creation.  See other charity-related posts.)

Updates:-------------

**[9/21/14:  Wikipedia on Humble Indie Bundle reports this as a total of $30MM, in addition to $20 million to charity, as of 8/23/13.  CrunchBase reports funding of $9.2 million. Check there for further updates.] 

***[1/17/12:  For general insight into real uses and experiments see "Pay What You Want -- Still Crazy After All These Years?," and Wikipedia on PWYW.]

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.]