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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

PIPA and SOPA -- FairPay and the Death of Piracy

[Update 9/13/16 -- PIPA and SOPA are long dead, but this issue of piracy and related issues of ad-blocking remain at the center of the content industry.  The larger points here are as relevant as ever.]

Sabers are rattling this week with the consideration of seemingly draconian measures to stop Internet piracy of copyrighted materials.  The FairPay model for monetizing content puts this issue into interesting perspective. It suggests the way to end piracy is not to reduce the supply, but to reduce the demand.

Basic objectives:

First, let's get back to basics. What is the real objective here?  Copyright and ownership of intellectual property are not ends in themselves, but means to a larger end.  This larger end, is clear in the Constitution: "To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries."

• Thus copyright is clearly only a means "To promote the Progress of Science and useful Arts." 
• It would be foolish to apply measures to protect copyright that impede "the Progress of Science and useful Arts" more than they promote it.

The problem with PIPA and SOPA is that they seem to overstep the objective, and to enhance a means at potentially high cost to the desired end.

• The real issue is that the Internet has facilitated piracy to the point that it threatens the ability of creators of writings and other arts to earn reasonable compensation for their work, and thus threatens the progress we seek for society.  If creators lack fair compensation, fewer will create, and society will lose.
• We (society) support IP ownership to the extent that it is good for society, not the other way around. 

So the challenge is to find better ways to ensure the fair compensation of creators for the good of society. The Internet is a tidal change, and we must learn to channel the tide, and harness it, not try to stop it.

Fairness and Piracy:

Robert Levine's "Free Ride" provides a nice summary of many of the issues of piracy, and makes it clear that some level of piracy is inevitable, with a level that depends on a number of factors, including:

1. The ease and effectiveness of piracy relative to any issues of quality and risk.
2. The ease and effectiveness of legitimate sources.
3. The cost of legitimate access (relative to piracy)
4. Social and ethical factors relating to the legitimacy of the IP owner, and the fairness of stealing from them (stealing service, not bits).

It is well known that the Internet has shifted at least #1 and #4 toward piracy.

I suggest the real solution is not laws and other efforts to shift #1 (although some modest improvement may be gained), but to shift #2-4, and especially #4.  The value of shifting #2 and #3 are well known, and summarized by Levine.  What is less clear is how important #4, fairness, is.

Robin Hood, FairPay, and the death of piracy

As described elsewhere on this blog, FairPay is a new model for transactions related to copyrighted content that lets buyers pay what they think fair, within limits.

• When buyers can buy legitimately for a price they accept as fair, the cost becomes a non-issue.  Those who have limited means or get little value can still buy for a price that considers those factors fairly.
• When buyers can buy legitimately for a price they accept as fair, the fairness of piracy becomes clearly insupportable for all but the most sociopathic. It is hard to argue that "information wants to be free" (as in free beer), when it is free enough.

Piracy is a tax imposed by the people on sellers of IP, a Robin Hood tax. When the price of content seems onerous, people feel they should not have to pay for it, and piracy appears justified. It is seen as noble for the poor to steal from the oppressive rich.

Killing the demand for piracy, not the supply

As with any illegitimate product, it is generally easier and more effective to reduce demand, not to choke off supply.  That is best done not by legislation, but by making the legitimate alternative more attractive.

There are a number of interrelated levers to move in that direction:

• FairPay pricing is a significant step in the right direction, one that also supports the following steps. It makes prices more suited to individual buyers needs, values, and ability to pay. Copyright owners are given the right to extract "monopoly rents," but must balance that with the quid pro quo of society's desire to benefit from their creations.
• Making sellers more legitimate in the eyes of consumers is also a major factor. To the extent the IP owners are seen as evil and rigid, faceless corporations that exploit their consumers (and their creators), it is easy to justify stealing from them. Showing that they listen to consumers and can be flexible in pricing will greatly increase perceived legitimacy and deservedness.
• Getting sellers to be more clearly respectful of creators can also have a big effect. Many studios (such as music labels) are perceived as sharing little of their profit with their artists. While they do have real costs of nurturing, marketing, and managing, clearly the Internet is shifting that toward what Seth Godin calls "skinnier" models. IP aggregators must either get skinny, or demonstrate why they deserve the share they get, and be transparent about how much they share with the creators.

FairPay is not essential to all of these levers, but it can contribute significantly to all of them.

When buyers set prices, no man will be a pirate. That may not be true in every case, but it is true enough.

Price Discrimination Can Be Good!

An interesting NYTimes report by Nick Bilton talks about the Uber online service for ordering a car service, and how the workings of supply and demand can seriously disrupt customer relationships. The issue was a "surge pricing" feature that raised the cost of a ride to a New Years party, which cost $27 to get there, to make the ride home cost $135. Bilton nicely summarizes the issues in dynamic pricing.

I posted a comment on that article suggesting that FairPay provides a solution to this problem -- a solution based on using the Internet to facilitate a relationship view of price negotiation, instead of a single transaction view. This post elaborates a bit on my comments, and highlights one of the major advantages of FairPay that make it more attractive and more economically efficient than conventional methods.

The real problem of dynamic pricing (described in the article) is one that can now be fixed in a “post-modern” economy. The problem with dynamic pricing is that it is set unilaterally by the seller, and imposed on the buyer  on a take it or leave it basis. This is also called price discrimination (and in some cases, price discrimination is actually illegal). But as Bilton says, such discrimination is economically optimal. That is why it is widely used in the hotel, airline, and car rental businesses. There buyers do live with it -- but still with considerable resentment. I suggest the way to make it acceptable to buyers is to involve them in the pricing decision.

That is one of the key features of FairPay.  FairPay sets prices based on a dialog with the customer, and uses Internet tracking of such prices to manage fairness over a long-term customer relationship.  The long term relationship view is as suggested by Liran Einav (a Stanford economist) in the article). With FairPay, customers have significant participation in pricing, and can be asked by sellers to include a dynamic premium (such as for peak time surges) -- but they can decide just how extreme that premium should be. Sellers get to determine if the buyer is generally being fair about that, and continue to allow FairPay pricing in the future to those who are reasonably fair. True, few buyers might accept a price of $135, but many might accept $50-75 and some even more. The seller can also be more restrictive during peak times, offering surge period FairPay pricing only to those who who have a history of agreeing to a reasonable level of surge premium, while let less flexible users might be permitted to use FairPay pricing only during times of normal demand. Thus "discrimination" can be good, when done within reason, at agreed-upon levels, based on mutually understood reasons.

Another factor in customer acceptance is predictability, as in the cited quote of Dirk Bergemann (economist from Yale). I suggest this is really a problem with unpleasant surprises, and with price changes that seem unfair.  The perceived unfairness of dynamic prices and discrimination, such as with the New Year's surge, or for snow shovels or flashlights after a storm, is the "unfair" external imposition of higher prices. Here again, when the customer gets to set the level of dynamic premium, that changes it to a fair process.

Of course dynamic discrimination should also apply in the other direction, to provide discounts at slow times, as well! That is an equal part of fairness, and FairPay can provide that too. When there is lots of supply and little demand, the customer should be given the freedom to set a lower price (within reason). FairPay brings that kind of sensibility back into pricing. The time-honored practice of individual negotiation allowed such issues to be factored in as appropriate and agreeable. We lost that in 20th century mass-marketing, but the Internet now lets us regain that in a new and better way. That is described more fully elsewhere in this blog, and the Web site.

I suggest FairPay could be a very effective solution for Uber, and for many others like them.

[UPDATE 8/1/16:] See additional comments in this newer post:  Price Discrimination for the Good!

The War over the "Free Ride" (Robert Levine's Book), and the FairPay Win-Win Solution

Robert Levine's "Free Ride" is an important study, but a partisan one, as you can judge from its subtitle: "How Digital Parasites are Destroying the Culture Business, and How the Culture Business Can Fight Back."  It explains that competing interests are at war, old business models for creator's and seller's rights have been disrupted, and new business models are needed.  However, it is unable to offer much satisfying guidance to a solution.

This is a very valuable book (with more balance than one might expect), and a very good history and economics lesson. Levine provides a good grounding for "how to fight the last war"--a war of creative rights versus technology (and the double edged sword of new freedoms it offers). It does provide some of the balance we need to accept that both sides are legitimate (to a degree). Levine warns that "over the nest decade, we will chose between two competing visions for the online world...more like cable television ...[or] more like the Internet. ...It is really about commence or chaos. ...A completely closed system would indeed defeat the purpose of the Internet...But so would an absolutely open one...  We'd have a twenty-first century communications infrastructure supporting a seventeenth-century economy, where artists need patrons and only physical items have value." A very good statement of the problem...

He offers only one potential solution:  a compromise, and one that is old, awkward, and unappealing in many ways. What we really need is something new, a twenty-first century synthesis, one that offers a win-win solution, not just variations on the old zero-sum battles.   I suggest FairPay offers the kind of forward-looking synthesis we need, as I will explain in a moment.

For an excellent review of "Free Ride" by an expert in the space, check out "Robert Levine Tells the Rest of the Story" on Bill Rosenblatt's blog.  As Bill says:

If Jaron Lanier’s You Are Not a Gadget from last year is the philosophical tract on which a new movement in favor of content creators’ rights has been founded, then Free Ride provides the  factual foundation on which such a movement should be based. ...

Yet Levine is hardly an apologist for the media industry.  For example, he agrees that the term of copyright and statutory damages for infringement under U.S. law are way too long and large, and he finds the media industry just as guilty as anyone else of funding “research studies” that produce blatantly biased results.  In fact, Levine’s journalistic instincts often get the better of him as he feels compelled to balance every factual assertion that bolsters his point with a counterfactual that softens it; the book ends up being far more balanced than its polemic subtitle suggests.

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My interest here is in looking forward to a better solution. As Levine explains in depth, we have been facing a problem that has had no well-balanced solution in sight.  He presents a strong case for the rights of creators, and the practical necessity of incentivizing costly creations.  He recognizes that piracy is hard to stop, and that part of the cure is to make it easy for consumers to buy what they want in the form they want, and he gives an excellent history of failed attempts to find better business models. "The real issue is how to establish a functioning market for content online."  "A decade after Napster, labels of all sizes are still struggling to reinvent their businesses." Quoting Jeff Zucker, on "Business models to support the digital revolution...we are still very much in the beginning."

It seems that no one has yet found the right synthesis.  Levine does take a a bit of a stab at it, presenting a case for blanket licensing (or collective licensing), much like the model used for licensing music rights on radio via ASCAP and BMI, as the only viable way to address the current dilemma.  I, too, have for many years seen it as the only systematic compromise in sight. But there are serious problems with it, as nicely summarized by Rosenblatt:  "...the many shortcomings of copyright and content licensing under such systems in Europe (and elsewhere): inequitable royalty distribution, irrational levy schemes, opaque accounting, inefficiencies, resistance to new business models, cross-border chaos, and more."

From the perspective of FairPay, the fundamental problem with blanket licensing is that it is not grounded in the dynamics of market forces, but is clumsily pre-set by bureaucratic mandates that cannot adapt to varying real-world contexts.

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In contrast, FairPay applies the power of the networked digital marketplace to bring twenty-first century solutions to the very problems it creates.  FairPay offers not a compromise within the old paradigm, but a radically new kind of synthesis -- one that changes the fundamental nature of sales transaction and the play of  market forces -- to find a dynamic, adaptive, and nuanced solution to the problem of balancing creator and consumer rights. FairPay changes the rules to create more win-win marketplace, that expands the digital economy, and the opportunities for both creators and their consumers.

FairPay provides an institutional framework for deep two-way connections between consumers and creators/businesses--in the form of individual dialogs about the value of offerings, as actually realized by each user in their specific contexts. This can be done with a structured balance of powers in which the consumer sets an individualized price they think fair, and the creator/business continues to permit such transactions as long as they agree that consumer is "fair" about the price, using the power of networked markets to make that assessment. That can improve margins and market efficiency for creators/sellers, and can empower relationships based on fair value exchange (a buyer-agreed-to form of price discrimination). Think of a privilege that is earned and maintained -- a zone of pricing freedom, a "FairPay Zone." The details of how FairPay does this are in the sidebar, the related Web site, and the many posts here.

FairPay is not the answer for all offerings in all markets, but I think it can pervade many segments--and that its more collaborative model for marketplace relationships will fundamentally change a large segment of our economy. I suggest, that just as mass marketing changed the fundamental nature of commerce a century ago-- and disconnected sellers from buyers--relationship dialogs of the kind used in FairPay can remedy that and create a new and higher level of engagement.  That dialog and engagement create and guide a new force for funding "The Culture Business" that Levine is rightly concerned about -- a new paradigm for the invisible hand.

Tom Friedman's "Help Wanted" -- FairPay as a step toward freedom

I commented at NYTimes.com on Tom Friedman's 12/18 column that suggested the emergence of a new level of democracy in many domains, in which consumers are gaining more equal power with organizations of all kinds.  We are only at the beginning stages of this (as Friedman quotes Dov Seidman): "when people are creating a lot of ‘freedom from’ things — freedom from oppression or whatever system is in their way — but have not yet scaled the values and built the institutional frameworks that enable ‘freedom to’ — freedom to build a career, a business or a meaningful life.” Friedman observes that we need leadership to find the "to."

FairPay is an attempt to suggest one "freedom to" that can change the world of commerce for the better -- the freedom to set prices, constrained only by a responsibility to be fair about it.  FairPay also provides an institutional framework -- an architecture for dialogs with customers that enable the freedom to do just that.  The FariPay framework works by linking that consumer freedom to set prices to complementary methods that give sellers the freedom to manage the pricing risk related to that new buyer freedom.

My comment on NYTimes.com, Friedman column, 12/18/11, 11:12pm:

This is very apparent in the world of digital commerce, and I have suggestions on how "freedom from" will lead to "freedom to." The crisis in pricing digital offerings and the revolt that "content wants to be free" is just a start.

We moved a century ago from negotiated prices to seller-imposed prices and widespread price “discrimination” by sellers that enabled efficient mass marketing, but distanced the seller from the consumer. Now digital products and networks have changed the game, and we have movements to free, "freemium," and even "pay what you want" and "name your own price." Digital businesses have found it challenging to adjust to this, and no current models really do the job.

I suggest the next stage of institutional framework for a "freedom to" will bring deep two-way connections of consumers and businesses--in the form of individual dialogs about the value of offerings, as actually realized by each user in their specific contexts. This can be done with a structured balance of powers in which the consumer sets an individualized price they think fair, and the business continues to permit such transactions as long as they agree that consumer is "fair" about the price. That can improve margins and efficiency, and empower relationships based on fair value exchange (a buyer-agreed-to form of price discrimination). Think of a privilege that is earned and maintained -- a zone of pricing freedom, a "FairPay Zone." (This is described in my blog by that name.)

FairPay: "Better Strategies for Monetizing Digital Offerings" MIT Enterprise Forum 12/1/11

It was very gratifying to present FairPay to an audience of about 100 at last night's MIT Enterprise Forum of NYC panel session on "Better Strategies for Monetizing Digital Offerings: Thinking Out of the Box while Looking across Industry Silos."  (more commentary below...)

Video and slides of FairPay presentation:

 

(If any problem viewing the slides, click the "slideshare" button above)(Links to full session below)

After a nice overview by our moderator Dr. Howard Morgan (Co-Founder and Partner, First Round Capital) we got into the perspectives of a diverse array of panelists.  

• Paul Smurl (Vice President, NYTimes.com) shared insights into the closely watched Digital Subscription paywall strategy at the Times, which has gone even better than they expected to meet the challenge of generating reader revenue without loss of ad traffic--and given a boost to print as well.  
• Betsy Morgan (President, TheBlaze.com, formerly of HuffPost and CBS Digital) noted how they were  monetizing Glen Beck's TV offerings with direct OTT (Over The Top) subscription services, that are already generating $10 per month from 230,000 subscribers.  That may seem small compared to the Fox audience, but when you consider the share to Beck, that gets very interesting.
• Shawn Price (President, Zuora.com) provided insights on what Zuora calls "The Subscription Economy," based on work with over 500 companies.  He noted the power of a flexible platform like Zuora's to adapt in real time with some 100 different control parameters, and how it makes it manageable for content and service providers to apply very advanced and nimble e-commerce strategies.
• I provided a more radical perspective on how we might rethink the whole structure of how we monetize digital offerings, including basic issues of transaction and pricing architecture, to create a new kind of deep real-time dialog with customers about value.  Key themes were
  --the need to take a holistic view of relationships, not just transactions,
  --the power of a simple shift to "Pay as You Exit," an opportunity that has generally been ignored, and
  --the opportunity to apply a new level of detailed market research that is fully integrated with every transaction.

All of the speakers noted how important it was was know your customers and track them in real time, and how some aggregators/distributors (notably Apple) impede that critical task in a way that can ultimately be very limiting to sellers of digital offerings.

I was very pleased with the response to my presentation of FairPay, and to my latest attempts to make it easier to understand.  The challenge is that while FairPay is quite simple in its basic concept, it changes many of our core assumptions about doing business at many levels, and has very deep ramifications in ways that take some thought to fully understand and appreciate.  The discussions and questions on how and where FairPay works indicated that many people found food for thought.

The posted slides may show some of this, and I expect the video should be available soon (to be linked below).  I also plan to adapt this presentation to add better explanations to the Web site and this blog.

My thanks to the other speakers, and to the audience for a very stimulating session.

...And for anyone who wants a really detailed preview of what I suggest are groundbreaking ideas on where the future of digital media business will go (or just needs help getting to sleep), the USPTO published my FairPay patent application yesterday.

=================================

Video (full event, by speaker)
MITEF-NYC event page, with video and slides
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FairPay Presentation

FairPay for The Subscription Economy -- My Dinner with Zuora and Friends

Zuora is a hot new company, an offshoot of Salesforce.com, that is focused on what they call "The Subscription Economy." This is very much in tune with the ideas about FairPay that I am developing, and I recently had a very nice chat with their regional account executive. He invited me to a very informal dinner he had been planning for some local customers and prospects, with the idea that they would find it interesting to hear about FairPay, and that that would be a good conversation-starter for some information exchange on subscription services in general.

The dinner proved very enjoyable, and generated much good discussion.  It reinforced the idea that FairPay might help solve many difficult problems related to pricing of content and services, and that it offers a very promising re-architecting of how subscriptions can work. As always, I enjoyed interacting with bright people facing the real challenges of digital commerce, and helping them to see things from new angles.  We discussed many of the themes covered in this blog and on the FairPay Web site, and the positive feedback was gratifying.

"The Subscription Economy" is directly supportive of my suggestion that the solution to many current problems is to shift from a transaction-level view, to an overall relationship view.  With digital offerings, it is not important that every transaction be priced right, but rather that the entire relationship be managed to grow in mutual value, and to move toward more effective pricing over the life of the relationship.  It is a matter of managing a subscription relationship.  What FairPay adds is a radically new concept of just how subscription relationships can work, and be managed, more effectively.  FairPay emphasizes that such relationships should continually adapt to current needs and future expectations, based on a dialog by both parties, and provides a new paradigm for doing that in a more win-win manner.

Zuora offers a nice white paper on "The Subscription Economy" on its Web site.  As it says, the old model is linear, one-time transactions that go from lead to cash. Subscription Commerce refocuses the objective to not just seek cash from the transaction, but to seek renewal.  That leads to ongoing revenue streams that can be grown, in terms of frequency, add-ons, usage, and upgrades.  That, in turn, leads to much greater revenue opportunity, and involves changes (and ongoing adaptation) in product and pricing strategy, customer subscription management, billing and payments, and analytics. Zuora offers SaaS services to facilitate those changes.  FairPay is based on the same ideas, with some further variations, and it can fit very nicely on top of a rich subscription platform like Zuora.  (Of course FairPay should fit well with any reasonably flexible subscription platform.)

I look forward to further discussions with Zuora and its customers.  As noted before, I will be on a panel with Shawn Price, President of Zuora, presented by the MIT Enterprise Forum of NYC the evening of 12/1, on "Better Strategies for Monetizing Digital Offerings."  If you have read this far, you should attend!

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[More recent posts also discuss Zuora and my involvement speaking on FairPay at their events.]

Consultant John Blossom: "Pay as You Exit: FairPay Explores New Content Pricing Discovery Regimes"

"FairPay's concept is fairly simple, but intriguingly powerful."  That comes from a very nice overview of FairPay and its potential value by John Blossom, President of Shore Communications, an award-winniing strategy and marketing consultant to content providers, on his ContentBlogger blog.

John begins with the amusing story of an early step toward FairPay in the classic "Our Gang" (aka "Little Rascals") film comedy episode titled "Pay As You Exit."

"It seems strange in a way to think that such an idea might actually help to save today's premium content sellers from their often rigid pricing regimes that seem to hold back their growth potential..." He goes on to explain how this derives from what I have called "The Long Tail of Price Sensitivity"  He adds:

John highlights the value of FairPay as a "pricing discovery" regime. "The key to all of this is the profile data, of course, which is where Reisman may have his finger on a very valuable idea. FairPay is in essence real-time market research tool, enabling media providers to get more sophisticated insights into real willingness to pay for specific content under specific circumstances."

His conclusion: "While it's very early days for the FairPay model, it could turn out to be a tool that content producers could use to experiment with pricing in new and exciting ways that could lead to higher margins and deeper market penetration for their content - two concepts that could lead to more happy endings on their bottom lines."

Of course these snippets do not do justice to John's well reasoned exposition (and his recounting of the Our Gang episode) -- Please read John's full post.

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[UPDATE:  Video of the Our Gang "Pay As You Exit" short (11 minutes) is now on YouTube. The key offering scene is at about 1:30-2:20 and the results at about 10:00-10:10, but all of it is amusing. (The specific videos are often removed, but posting can usually be found by searching for "our gang" "pay as you exit." or "little rascals" "pay as you exit")]

MIT Enterprise Forum of NYC 12/1/11 Symposium will Include FairPay

"Better Strategies for Monetizing Digital Offerings: 
Thinking Out of the Box while Looking across Industry Silos."

[Update: see event report with video and slides.]

That is the theme of the session that I am helping to organize, and will be a panelist at.  The full slate is:

Moderator:
- Dr. Howard Morgan, Co-Founder and Partner, First Round Capital

Speakers:
- Betsy Morgan, President, TheBlaze.com
- Shawn Price, President, Zuora.com
- Richard Reisman, President, Teleshuttle Corporation
- Paul Smurl, Vice President, NYTimes.com

I suggest this will be an outstanding session--we expect to generate a very interesting dialog on strategy and innovation, both incremental improvements, and more radical directions.  (And we may still add one more panelist to represent the music or video industry.)

Register at MITEF-NYC.

The concept is:

Monetizing digital offerings is a continuing challenge. Advertising can generally generate only some of the revenue required, so customer payments appear to remain essential for most businesses. Freemium was a good starting point, and now soft pay walls are being tested. Shifting music and film from purchase to subscription is emerging as a sea change.

What else is new? What can be applied across verticals? Do we need to rethink the value proposition and customer relationship? How successful are strategies to apply social influence and "pay what you want"?

This session will look broadly at how content businesses such as publishing, music, and video are transforming themselves to achieve economic viability:

Among the issues we will discuss:
- What strategies are they adopting?
- What can these verticals learn from one-another?
- How far out of the box can solutions go?

I will present a brief overview of FairPay, and will be available to address questions during the Q&A, and afterwards.

We hope to see you at this exciting event.

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.

____
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.]  

---

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.