PART I
The Big PictureâA New Logic
CHAPTER 1
IntroductionâDigital Disruption and Yesterdayâs Logic
The greatest danger in times of turbulence is not the turbulence, it is to act with yesterdayâs logic.
âPeter Drucker
FairPay is a new logic for conducting ongoing business relationships that adaptively seek winâwin value propositions in which price reflects value.
FairPay is a logic for seeking to learn and apply what my pricing demon knows (see Prolog). It is an architecture for business processes that are adaptively configured to seek winâwin with customers cooperatively, in a new kind of equity-based dynamic pricing.
The idea for FairPay arose in response to the new challenges (and opportunities) of selling digital services in networked markets, and may be most applicable thereâat least initially. But there is reason to think that it will work well for some physical product/service businesses, and in time might be useful far more broadly. Much of this book focuses on digital services, but the wider potential is outlined as well.
We all recognize that we are at the infancy of a digital era, with the mantra that âthe Internet changes everything.â Our society, business, markets, media, services, and even our most basic human communications and relationships are mediated by digital communications networks and computer processing. We have recognized the need for new logic in many aspects of business in this strange new world, but the most central aspect of our markets, the setting of price, has barely changed at all. Our core approach to how customers and service providers relate to one another needs a radically new logic that addresses the new realities of digital services in networked markets.
We are facing huge turbulence in these markets, most visible in content industries that have been disrupted by digital, so that the very nature of how we think of value has come loose. Major industries such as music and newspapers are being devastated, with others such as TV/ video/movies beginning to see disruption. Long-established businesses are in turmoil, and even nimble upstarts have challenges in making their value propositions attractive beyond narrow markets. It is hard to get consumers to be willing to pay, and the traditional alternative of advertising support is increasingly threatened. Companies face threats of piracy and bypass (via Google and Facebook). Advertising is under siege by technical challenges (including the shift to mobile) and growing consumer rebellion in the form of ad-blocking.
Our consumer value propositions are just not working well. Too many consumers are just not willing to pay the prices that companies think they should. Many companies fed into that by offering digital content services free, and now find it problematic to charge.
There are a number of fundamental reasons why traditional methods do not work for pricing digital experiences in networked markets:
Replication is nearly freeâThe invisible hand flails aimlessly, having no scarcity of supply to ration against demandâpricing becomes an arbitrary shot at what âthe marketâ will bear. Meanwhile many consumers think that âinformation wants to be freeâ and question why they should pay at all.
Value is experiential, personal, and context-dependentâConventional pre-setting of prices by producers fails to relate to wide variations in value received. There is not one market, but a multitude of markets of one, each of which fluctuates over time.
Relationships are the new marketingâConventional efforts at ârelationship marketingâ have been bolted on to traditional transaction-oriented business practices and only scratch the surface of true relationships that seek to maximize customer lifetime value (CLV). Companies are beginning to recognize the importance of âcustomer journeysâ and âloyalty loopsâ but are just beginning to understand how to integrate them into business practices.
Recognizing the importance of these factors, freemium subscription models have emerged as the current best practice in many industries. Freemium (free + premium) is a step toward relationship-building in which a limited level of free service is used as a loss-leader to attract as many potential users as possible, with the hope of then converting them to a premium level that they can be convinced to pay for once they have experienced at least some of the value. But freemium is just one limited step in the right direction. It fails to exploit networked relationships to seek pricing that customers can see as fair.
Digital businesses face two fundamental problems:
The driving problem is how to make the business sustainably profitable in this digital era.
That problem centers on difficult questions of priceâfree or paid? and how set?
A New Logic
FairPay is a simple but fundamental rethinking of how businesses and consumers conduct exchanges with one another in a digital marketplace.
It proposes a new architecture for approximating an optimal priceâone that is personal and dynamically context-dependentâby building a deep relationship that is based on dialogs about value.
It embodies modern concepts of business as the co-creation of value by businesses and customers working cooperatively.
It provides a new and empowering process for co-pricing, a form of participative pricing.
FairPay makes dialogs about value a central feature of a new kind of emergent learning relationship that becomes an integral focus of each customer journeyâto shape what people are offered, what they buy, and at what price. It moves from the mass-market tyranny of set-pricing, to personalized, dynamic pricingâin a way that uniquely develops trust, fairness, loyalty, and profitâto maximize CLV for as many customers as can be served profitablyâand can factor in social values as well.
FairPay re-envisions elements of freemium; paywalls; subscriptions; membership or loyalty programs; dynamic pricing; value-/performance-/outcomes-based pricing; and pay what you want (PWYW), to provide a strong and sustainable customer relationship and revenue stream.
FairPay solves the nasty problems of pricing digital products and other experience goodsâby seeking to approach optimal price discrimination, based on in-depth learning about each customerâand does this in a relationship-centered, participatory way that assures customer buy-in.
It is this relationship focus at the core of FairPay that creates a new dimension to B2C customer relationshipsâone that previously has only been approximated in high-end industrial B2B value-/performance-/outcomes-based pricing.
FairPay builds on the lessons of PWYW participative pricing, in consumer marketsâbut adds this new dimension of feedback and control over ongoing relationships to make that more sustainably profitable.
The core process enabling FairPay works over relationships, by applying a deceptively simple balance of powers:
Selectively empower the buyer to unilaterally set whatever value-based price the buyer considers fairâafter the sale, when the real value is experienced and known.
Track that buyer value-based price and determine whether the seller agrees that is fair, and use that information to empower the seller to decide whether to make further offers on those terms to that buyer in the future. (Unfair buyers are eventually downgraded to lesser offers or fixed-price.)
Continue this balancing in future transactions, to build a relationship based on fair value exchange that adapts and evolves over time, frames the value that was delivered, and a suggested price for thatâand nudges the buyer to be generous by offering more value in the future for more generosity now.
This repeating cycle gives buyers a strong incentive to price fairly, to build a beneficial relationshipâand enables sellers to limit their future exposure to those who do notâusing decision rules that can readily be tuned to specific situations, segments, and objectives (see Figure 1.1).
At first glance, this core process may appear to have limited effectiveness and applicability, but on closer scrutiny it can be viewed as representing a profound shiftâshifting the entire focus on customer relationships from price to value. As such it has the potential to transform how companies manage customer relationships, integrating a new dimensionâof time and relationshipâthat has previously only been tacked on to transaction-oriented exchanges. This book explains how and why this is workable.
Many have seen potential in participatory pricing, but seller control and predictability has been a big concernâhow can the powers of buyer and seller be fairly balanced to lead to sustainably winâwin pricing? FairPay makes participatory co-pricing practical, controllable, and profitable for mainstream consumer business use. It does this by turning it into a repeated gameâusing structured dialogs (choice architectures) plus Internet-enabled tracking, to limit price-setting privileges to only those who price fairly over an ongoing relationship, and to guide customers to price fairly. These dialogs generate a whole new level of customer feedback on their experiencesâand their real willingness to pay for themâas that evolves over the relationship.
Figure 1.1 FairPay participative process
Source: www.fairpayzone.com/2011/03/fairpay-pricing-some-process-diagrams.html
I first outlined FairPay in 2010 on my blog at FairPayZone.com. This book draws heavily on the materials in that blog (see FPZLink). A brief introduction coauthored with Marco Bertini was published in the Harvard Business Review blog series in 2013 (Bertini and Reisman 2013) and a further paper is pending publication (Reisman and Bertini 2014). Other collaborations with Adrian Payne and Pennie Frow led to a presentation at the Naples Forum on Service in 2015 (Frow, Reisman, and Payne 2015), and further collaborative work is in progress.
How It WorksâCustomer Participation in Pricing as a Privilege
We have been conditioned to think only of seller-set prices (the price tag) or traditional negotiation (haggling over price) that work in a context of isolated transactions. FairPay is a logic that operates more holisticallyâit introduces a new kind of balance of powers that works over a series of trans-actions to build a relationship. A customer is selectively granted new power to set prices, but the seller decides whether to continue granting that power to that customer. The relationship continues as long as both are satisfied. This feedback control loop creates a new logic for adaptively seeking winâwin value that grounds and enriches the customer journey.
It is anticipated that FairPay would be offered to customers selectively, as a privilege, as an alternative to a conventional pricing such as a paywall, but that conventional set-price paywalls would remain for customers who do not adapt well to this new responsibility for fair, winâwin pricingâthe implicit contract of what I call an âinvisible handshakeâ (as explained later).
FairPay is designed to become a primary pricing model, but first it can be trialed in low-risk tests, such as premium tiers and loyalty programs, customer acquisition/retention, or for other selected product tiers or market segments. It builds stronger customer relationships for greater profit from a wider market. Early uses should be targeted to customer segments expected to take well to itâstarting with the most promising relationshipsâand then gradually expand more broadly as its benefits become clear, and customers become familiar with this new logic.
The core mechanism suggested for FairPay is outlined in the following boxes and Figure 1.1.
How FairPay Works
... over a relationship,
... through a deceptively simple balancing dynamic:
Selectively empower the buyer to unilaterally set whatever value-based price the buyer considers fairâafter the sale, when the real value is experienced and known.
Track that buyer value-based price and determine whether the seller agrees that is fair, and use that information to empower the seller to decide whether to make further offers on those terms to that buyer in the future. (Unfair buyers are eventually downgraded to lesser offers or fixed price.)
Continue this balancing in future transactions, to build a relationship based on fair value exchange, which adapts and evolves over time. Frame the value that was delivered, and a suggested price for thatâand nudge the buyer to be generous by offering more value for more generosity.
This revocable privilege gives buyers a strong incentive to price fairlyâand enables sellers to limit their future exposure to those who do not.
More broadly, it shifts the entire focus of customer relationships from price to value.
ConsumersâPay only what seems fair to you:
Pay what you think fair for products or servicesâafter you try them.
Make every purchase on a trial basisâso you can always be sure to get your personal fair value for your money.
Agree to set your price fairlyâin your judgmentâand explain why you think it is fair.
Maintain that privilege as long as you can convince the seller that you are being fair.
BusinessesâGet the most revenue from the most customers by continuously learning what each one values:
Engage in real dialog with each of your customers and listen to their perceptions of the value they get from your products/services.
Make a trial offer to every potential customer who sees potential value.
Suggest a price after use that you think is fair for that particular customer, considering usage and all other relevant factors.
Provide incentives, such as premium tiers and perks, to entice fairness, and even generosity.
Let your customers self-select into segments (based on usage, value perception, willingness and ability to pay, âŚ)
Limit your risk from those trial offers by tracking the results (fairness) for each buyer, and limiting future offers if you judge that buyer to not pay fairly.
Retain set-price plans for those who refuse to be fair.
Learn how much freedom (FairPay credit) to extend (or what re...