Price it Backward! -- Pay What You Want Forever

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Also sought are researchers interested in doing studies of Fairpay.

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

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

Business Model Generation with a new spin: FairPay Revenue Models

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

offer-pricing-reputation

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The FairPaynomics of Abundance -- an iPad Travel Guides Example

Travel guides on smartphones and tablets (like iPad) present an nice example of some of the richly flexible kinds of pricing behaviors that become feasible with FairPay, the radically adaptive pricing process. I call this FairPaynomics because of the interesting business and behavioral economics issues it creates. One aspect of FairPaynomics is how FairPay can enable nearly unlimited access to content from varied sources, while giving the providers of that content reasonable compensation for the value they provide. The following example suggests the sophistication that advanced uses of FairPay can provide.

A recent article on travel guides for iPads triggered some thoughts on how app stores and e-book vendors could provide new services for buyers, and expand revenues for guide publishers. It points out how guide pricing is a challenge, and how the market is changing from print to mobile. It also noted some limited moves toward slicing and dicing guide content with PDF chapters.

FairPay puts much of the pricing process in the hands of users, and develops a FairPay reputation to select for those who generally pay at fair levels and can be trusted to use discretion in setting prices based on the value received--after trying the product. (A brief explanation is on the sidebar to the right, and fuller explanations are on the FairPay site.)

The challenge in pricing travel guides is that different readers get very different levels of value, so set prices may be too high for some potential users and too low for others. What if I could have access to many guides, and pay based on the use I made of them? It is impractical for sellers to set prices on such a flexible basis, but relatively easy for me to do so (on an intuitive basis, aided with reference to detailed usage data).

Consider the range of situations for using a guide. On some trips I might spend a week or two in one large city, acting as my own guide, and want to make extensive use of one, two, or more guide books to plan excursions, consult while sightseeing, select hotels and restaurants, etc. On a return trip to the same city some years later, I might not need nearly as much help. On a far-away small-ship cruise, I might stay a few days in two terminus cities, plus have day stops in half a dozen small towns in as many as five or six countries along the way (some with guided tours, some on my own). On that cruise trip I might want limited use of one or two guides for each of the countries visited, even though some small ports might have little or no coverage.

Paying a set price for each guide as usually packaged creates significant dis-economies. For my multi-country cruise, buying even a single set of guides to all cities/countries visited is a poor value proposition (well over $100), so I might not buy any. For the single-city first visit, paying maybe $10-40 for one or two guides is reasonable, even a bargain. I probably end up paying less than I would be willing to pay in both extremes. I might be willing to pay more than the set price of the guides for intensive use, and I would pay something more than zero for light use of many guides. Under conventional pricing, I suffer and the publisher(s) suffer.

So how is FaiPay better? Obviously it would be difficult for a publisher or even a full-service bookseller like Amazon or B&N to set multi-factor prices that worked for such extremes of usage. The beauty of FairPay is that they don't have to -- I would set the price. Knowing the list price of guidebooks, I might feel that I am willing to spend $20-40 per week, if I am using my guide(s) heavily, and less if not. I might go higher if covering a lot of cities, and lower if just in one place, and higher if the places are covered in depth, less for small towns with little or no coverage. If I used multiple guides, I would want to divide my payment based on which I used most and which were most valuable (such as tipping me off to good "finds").

How can this work? I would not mind if the sellers had meters that recorded my usage, but I would be put off by knowing that there are set charges per page or minute of viewing, with a meter going ka-ching. I would be OK with such metrics of usage as suggestive of what I should pay, but not as a ticking meter of set charges. With FairPay, I could have it my way.

Amazon or B&N (or Apple or Sony, or whoever) could administer the store, collect the metered usage data, and let me pay as I see fit. As long as I paid at reasonable levels (considering my usage), they would continue to let me get more guides (for my next trips) on a FairPay basis. If I did not pay well, they would cut me off and it would be back to the old way. For my return trip to the big city, they might offer use of an updated guide, and expect only modest payment, resulting in another win for both me and the sellers.

Good for me, some work for Amazon or whoever, but do-able -- but is it good for the publishers? Overall, they might do much better. I would have only bought one or two guides conventionally, for $10-40, so under my FairPay allocation, I might pay $20-40 to those one or two publishers, and so the second might have a sale he would not have gotten. But I would have used other guides in those places as well, and paid something to those publishers, as well. I also would have used guides at various cities on the cruise trip, and paid for the moderate level of usage that was foregone because I did not want to buy guides I would use only lightly (maybe paying $20-30 for those as well). Also, I would feel much better about being able to use and pay for guides accessed my way, not the way the publisher pre-packages them into "titles"that don't fit me, and so would be willing to pay at higher levels. The publisher and the store would get more from me, and I would be much happier about the fairness of the value exchange.

Such FairPay offers might be structured as packages for specific trips, with pricing set by the user soon after the trip. Frequent travelers would place high value on the flexibility this offers, and be careful to pay at good rates to retain the privilege of doing the same for future trips. Occasional travelers, and those on tight budgets might pay at lower rates, but without Fairpay, they might otherwise not buy guides at all. (To prevent low-paying buyers from hopping from seller to seller, the sellers might share their reputation data, just as they do with their credit rating data.)

The bottom line nearly ideal Internet economics. I get access to all the guides I feel I have use for (exploiting their near-zero marginal cost), and pay based on how I use them (based mostly on my intuitive allocation of value, grounded in the reality of usage data). The publisher can sell to anyone who has use for the product, and get revenue commensurate with that use. Doing that with conventional pricing models would be impractical, and the ka-ching of a ticking usage meter would put a damper on the kind of casual use that, with FairPay, might result in added revenue (after the fact, when the value was known). This may sound utopian, but the Internet enables many utopian capabilities. Think about it. It can work.

FairPay for the App Store -- A Radical Pricing Process for Higher Revenue

FairPay, a radically new spin on Pay What You Want pricing (PWYW), could transform pricing for apps. It offers a way to let developers break through the "penny gap" to get a fair price, while giving buyers a high degree of freedom to set their own price.

Apps are becoming a huge business, but the vast majority of them are free. (A recent analysis suggests 81% of iPhone app downloads by volume are free, even though other reports indicate that only about 28% are free by title. This effect has been described as the "penny-gap" -- products go like hotcakes when the price is zero, but demand drops hugely when the price increases to just 1 cent. This makes price setting a major dilemma for app developers. (One attempt to solve this software pricing dilemma was "shareware," in which buyers could Pay-If-You-Want, at a suggested price, but that has proven only marginally successful.)

FairPay can provide a way to bridge this penny gap, using a radically new variation on Pay What You Want, one that still limits buyer risk, but strongly encourages fair prices to sellers. As described elsewhere on this blog, and on the Web, this new variation, FairPay (short for Fair Pay What You Want), uses Internet feedback on what buyers pay, in order to develop a reputation for fairness. The seller (or multiple sellers) then use this FairPay reputation feedback to decide whether to extend further offers to a user based on how fairly he pays. Thus FairPay does not just rely on innate buyer fairness, but looks over their shoulder to help give that sense of fairness real teeth.

(This process also applies to other digital content, as explained elsewhere. The case of e-Books is especially similar to this example of apps. That should be fairly apparent, but I expect to do a blog post more specific to e-books in the near future.)

This process works best with an ongoing buyer-seller relationship, so in the context of an app store, FairPay would be best implemented by the store operator (Apple or Google, or whoever). That way the FairPay reputation feedback is collected across all purchases by that buyer. This enables a dynamically adaptive cycle of offers, prices, feedback, and further offers that rewards those who pay fairly, and cuts off those who do not. I suggest that app store operators should try this (and I would be happy to assist in such an effort).

Such a FairPay pricing process for an app store can be quite simple.

• The store offers to let buyers try a small number of FairPay-eligible apps on a FairPay basis, with the understanding that the buyer can try the apps for a time, see if they like them, and then set whatever price they consider fair (post-sale PWYW).
• The full FairPay process would be explained in detail up front, so buyers understand that future offers will depend on what reputation they develop for paying fairly. Their alternative will be to pay pre-set prices for future app purchases. A suggested price for each app might be provided for guidance.
• The buyer tries the apps, then sets prices, and can indicate why they paid what they did. For example a buyer might explain that they were disappointed in a product, if that is why they decided to pay little or nothing for it. (Of course they can also say the love it, and elect to pay especially well.)
• The store then assesses the prices paid, and the reasons, and decides whether to offer that buyer more items on the same FairPay basis. Criteria might include consideration of app-specific suggested prices set by the developer, and the prices set by other FairPay buyers.
• Obviously those who pay well will get a continuing stream of further FairPay offers (as long as they continue to pay reasonably well). Those who pay well for some, and explain why not for others, might also get a few further offers (effectively on a probationary basis), until it is determined by the store that they either do or do not pay fairly in general.
• Those judged by the store to generally not pay at an acceptable level can be cut off from further FairPay offers, and restricted to conventional, set-price prepaid sales (at least for some time, possibly extending a second chance to try FairPay sometime in the future).
• The cycle continues, based on these evolving FairPay reputations. The longer this process runs, the more meaningful the FairPay fairness reputations of the buyers, and the better able the store and developers are to manage revenue and risk, by controlling what offers are made to which buyers.

Presumably the store would implement and manage this process as a platform service, enabling developers to opt in to offer their apps on FairPay terms, typically in combination with the alternative of conventional pre-set prices. Developers might set suggested target prices and other evaluation parameters, and could change those parameters or opt-out, depending on results.

The result is that FairPay can be a win-win solution for both the developers/stores and for the consumers:

• Buyers will feel more respected and empowered by the added trust and flexibility.
• Some will pay less than the standard going rate, but some will pay more.
• Many who might not make a conventional paid purchase (because of the penny gap) might be willing to pay something reasonable for a FairPay purchase, once they can see that they have gotten a useful app -- the penny gap is smoothed over, and the developer and store get more revenue.
• Developers need not feel they must make their apps free in order to attract buyers (since FairPay gives a try-before-you-set-the-price option).
• The store can (with inputs from the developers) individually and dynamically tune the details of the offers and the process to encourage good payment levels, and to send free-riders back into the hard "pay wall" of the conventional pre-set price.

Fair Pay-What-You-Want Pricing for Music and Games

FairPay, my radically new spin on Pay What You Want pricing (PWYW), may be especially timely for the music business and the video game business. It offers a way to encourage fair levels of pricing while giving buyers a high degree of freedom to set their own price.

The music business has been turned upside down by the challenges of Internet distribution and related piracy, to the point that the prominent band Radiohead offered its 2007 album for download on a PWYW basis. While a reported 60% downloaders did not pay at all, enough did (paying an average of $8.05 in the US and $4.64 elsewhere), to make that experiment modestly successful, and led to other similar offers by other groups. Downloadable games have also been offered on a PWYW basis, with similar modest success.

As described elsewhere on this blog, and on the Web, my new variation, FairPay (short for Fair Pay What You Want), uses Internet feedback on what buyers pay, in order to develop a reputation for fairness, that gives a strong incentive to pay fairly. A key part of this method is that the seller (or multiple sellers) use this FairPay reputation feedback to decide whether to extend further offers to a user based on how fairly he pays. FairPay does not just rely on innate buyer fairness, but looks over their shoulder to help give that sense of fairness powerful weight.

This creates a dynamically adaptive cycle of offers, prices, feedback, and further offers that rewards those who pay fairly and cuts off those who do not. The method works best for an ongoing series of offers and sales. That may not be very effective for a single music group or game developer who can make only infrequent offers of new products, but can be very effective for a music label or game distributor who has an ongoing library of products to offer for sale.

I suggest that labels and distributors seeking better revenue models should try this, and offer to assist in such an effort. I also suggest that individual artists or game developers who prefer not to work with a conventional label or distributer might seek to band together to create a shared distribution co-operative to achieve the modest critical mass of products needed to enable an effective FairPay feedback process.

The FairPay process for such a business can be quite simple.

• A distributor of music or games offers to let buyers try a few items on an enhanced PWYW basis, with the understanding that the buyer can try the item for a time, see if they like it, and then set whatever price they consider fair (post-sale PWYW).
• The full FairPay process would be explained in detail up front, so buyers understand that future offers will depend on what reputation they develop for paying fairly.
• The buyer tries the items, then sets prices, and can indicate why they paid what they did. For example a buyer might explain that they were disappointed in a product if that is why they decided to pay little or nothing for it. (Of course they can also say the love it, and/or love the band/developer, and want to pay especially well.)
• The seller then assesses the price paid, and the reasons, and decides whether to offer that buyer more items on the same basis.
• Obviously those who pay well will get a continuing stream of further offers (as long as they continue to pay reasonably well). Those who pay well for some, and explain why not for others, might also get a few further offers, effectively on a probationary basis, until it is determined by the seller that they either do or do not pay fairly.
• Those judged by the seller to generally not pay at an acceptable level can be cut off from further FairPay offers, and restricted to conventional, set-price prepaid sales (at least for some time, possibly extending another chance sometime in the future).
• The cycle continues, based on these FairPay reputations.
• Unlike most conventional PWYW offers that are restricted to short-lived special promotions, FairPay can be a long term proposition.

Clearly buyers using this FairPay process will recognize that they cannot pay zero, or very little, and expect to get further FairPay offers (except for occasional cases of explainable dissatisfaction). Instead of a majority of buyers paying little or nothing, we can expect a majority paying a reasonable price. And the longer this process runs, the more meaningful the FairPay fairness reputations of the buyers, and the better able the seller is to manage revenue and risk, by controlling what offers are made to which buyers.

This method might be especially attractive in situations where it is known that the artists or game developers get the dominant share of the revenue. Buyers will be especially motivated to pay at reasonable levels if they know that their payments are going to the artist or developer, rewarding them for a good product, and providing the compensation they need to enable them to continue to produce future products. This can work for studios as well, especially if they position themselves as being very supportive of their artists (or even owned by them, like the old United Artists).

Of course FairPay is also applicable to large recording studios and music and game distributors as well. For example, iTunes or Amazon could easily make similar offers across their entire inventory of downloadable music, or across some subset. They might experiment with some selection of songs or albums. Perhaps they might start with less popular and familiar items that might especially benefit from the try-before-you-set-the-price features of FairPay, to increase sales (and revenue) even if the average unit prices are reduced. Similarly, subscription services like Rhapsody and Pandora could apply FairPay to their subscription offers (much like newspapers or video services, as described in other recent posts).

In summary, FairPay can be a win-win solution for both the artists/developers/distributors, and the consumers:

• Buyers will feel more respected and empowered by the added trust and flexibility.
• Some will pay less than the standard going rate, but some will pay more.
• Many who might not make a conventional purchase might be willing to pay something reasonable for a FairPay service -- added revenue to the seller.
• Sellers can individually and dynamically tune the details of the offers and the process to encourage good payment levels, and to send free-riders back into the hard pay wall of the conventional sale price.

FairPay for The Times?...for JournalismOnline newspapers?...or Google Newspass?

Newspapers feel they must charge for Web content or go under. My radical new FairPay pricing process could provide an important tool for doing that.

Major players are moving from free to freemium combinations of limited free access (to some small number of articles per month), with a "pay wall" requiring paid subscriptions for more access. The New York Times has committed to this (as nicely described by David Carr), and News Corp recently bought into Journalism Online, which is building a similar platform for other newspapers. Most recently, reports are that Google will jump into this game as well, with a similar platform called Newspass.

Clearly this could be a wrenching change, and reflecting that, talk has shifted in nuance from the rigidity of a "pay wall" to the idea of "dialing" pricing policy into a "metering" system that can be adjusted to market conditions.

FairPay puts the objective of flexibility on steroids, by shifting toward a Pay What You Want model that give readers more control, while still giving publishers the last word (over time). How can that be? FairPay develops a buyer reputation for payment, based on direct feedback on pricing, to a dynamically adaptive hybrid of free and paid content. My article on FairPay explains this radical "Fair Pay What You Want" pricing process in some depth.

Here are some comments relating to this class of newspaper models and how FairPay could be used as a complement to their metered offering (as suggested in this diagram).

How it works:

1. Selectively offer to let the reader set any price he considers fair after each month of subscription (Pay What You Want, post-sale).

2. Let the publisher track that price and use that information to determine whether to make further offers of that kind (FairPay renewals) to that buyer in the future.

Those who pay fairly, rise above the pay wall -- those who do not, must face it.

First, an experimental program might be offered to a selection of readers based on FairPay pricing. This might be aimed at regular users on the following terms:

• Unlimited access is offered on a month-by-month basis upon subscription.
• Before the start of the next month, the user decides on a FairPay price to pay for the current month (with a usage report provided to the user for reference).
• Depending on the FairPay price set by the user, the publisher decides whether the subscription offer will or will not be extended for the next month.
• By coexisting with the paid subscription model, users will have a reference price, and the usage report might indicate how their usage compares to averages (and to the standard number of free articles).

Once tested, this FairPay subscription plan might be enhanced and offered more broadly, with more varied levels of service:

• Price setting might gradually be reduced to a quarterly or yearly cycle for established subscribers with good FairPay reputations, easing the hassle of price setting, and extending "FairPay credit."
• Usage reports would be provided to assist in the pricing reviews.
• Payments might be monthly (even if price setting is yearly), for better cash flow and flexibility.
• The options offered to any user on each renewal/pricing cycle could be adjusted based on their payment history (with consideration of any relevant circumstances known or reported). Those who pay better than average might get added rewards, and those who pay less might get less.

Thus those who pay fairly get increasing levels of trust and other rewards, and float above the pay wall, but those who do not get kicked back down into the pay wall.

This benefits both the publisher, and readers:

• Users feel more respected and empowered by the added trust and flexibility.
• Some will pay less than the standard subscription rate, but some will pay more.
• Relating pricing to usage might help get heavy viewers to pay more, compensating for those who pay (and/or use) less.
• Many who might refuse the conventional subscription service might be willing to pay something reasonable for a FairPay service -- added revenue to the publisher.
• The details of the offers and the process can be individually and dynamically tuned to encourage good payment levels, and to send free-riders back into the hard pay wall of the standard plan.

Bottom line:

• an even more nuanced and individually set dial that give readers some say in pricing, but leaves ultimate control with the publisher.
• more happy users, plus more revenue to the newspaper to support quality journalism.

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A rough sample of how a FairPay offer might be presented to subscribers is on the FairPay Web site, along with an FAQ and other details.

The Long Tail of Prices -- Uncoil it with FairPay

Just as Internet-based retailing allowed Chris Anderson's Long Tail (of Items) to be uncoiled, I suggest that Internet-based pricing is poised to enable the uncoiling of a similar Long Tail of Prices.

Anderson’s Long Tail is a tail of items ranked by units sold. As described in his Wired article and book, online merchants like Amazon and Rhapsody can stock many times more titles than brick and mortar stores, since they have essentially no limit to shelf-space. A result, it turns out that half of Amazon's total sales are accounted for by books that are not even stocked by a Barnes and Noble store. The well-known curve shows a plot of the number of items sold, ranked by popularity.

Similarly, The Long Tail of Prices is a tail of potential buyers ordered by the price they are willing to pay.
Conventional set prices lop off the tail by refusing to make sales to those unwilling to pay the set price. This eliminates a potentially significant market, out of fear that selling to those buyers will cause the other buyers to demand lower prices. Conventional set prices also lop off the top of the fat head, since the seller gets only the set price, even from those who might be willing to pay more. So revenue is only the green box, even though there is a red surplus at the top of the head, and a long amber tail to the right. This shows the huge opportunity that FairPay opens up.

With FairPay, prices are individually set, based on what buyers are willing to pay (subject to sellers using feedback on FairPay reputation to weed out free-riders who don't pay at an acceptable level, as explained more fully in my FairPay introduction). For digital products with near-zero marginal cost, the acceptable price level, for at least some buyers, might be very low.

This means that the Long Tail of Buyers might turn out to contribute a very large portion of total revenue. Large numbers of buyers at low prices, who would not otherwise be buyers, can add up to a very large revenue figure.

Yes, there is a concern that sellers might find that revenue from some of their current market drops (the curve shifts downward), because buyers have freedom to pay less than the conventional set price. It may at first seem that sellers could not tolerate the risk that many FairPay buyers might pay well under standard prices. That is the usual problem with Pay What You Want pricing.

The trick to making FairPay work is that it gives the seller a new ability to selectively manage the offer process by framing the offer and using feedback effectively to incentivize most buyers to pay at a reasonable level, and to screen out those who do not (again, see my article, and some of the other posts here). To the extent that is done, the new revenue from their previously non-addressable market can become a very large total. And also, even though many current buyers might pay a bit less, some might be motivated to pay more. FairPay changes pricing from a seller's game to a cooperative dialog with buyers, leading to a mutually beneficial exchange.

So the areas under the curve in red and amber potentially represent found money, money that would otherwise be left on the table. Why not sell to all who will pay more than the marginal cost of the product? Since prices are individually set, low prices to some need not imply low prices to all. If you can get buyers to consider fairness, and to look at this value exchange, most will accept that there are reasons why some deserve lower prices than others.

And why not try to motivate your happiest customers to pay a bit more? If you position that payment as going to a good cause (like museums and artists do), some who can afford to pay more will see reason to do so. Enlightened businesses recognize the value of likability -- this is a way to capitalize on being likable.

It is not a matter of altruism, but simply of practical economics, on a basis that takes broader market factors and behavioral economics into the equation, and using a more dynamic and cooperative process.

FairPay for Hulu? (or YouTube, or...) -- A better way to charge...

With the recent reports of a pay-to-view subscription (Hulu Plus, $9.95/mo.) planned to be added to Hulu's free (ad-supported) video plan, FairPay offers a very timely way to ease the pain all around. FairPay develops a buyer reputation for payment, based on Internet feedback, to go beyond freemium, to an adaptive hybrid of free and paid content. My article on FairPay explains this radical "Fair Pay What You Want" pricing process in some depth.

Here are some brief comments relating to Hulu, and how FairPay could be used as a complement to their planned Hulu Plus offering (as suggested in this diagram).

How it works:

1. Selectively offer to let the subscriber enter the FairPay Zone, where he can set any price he considers fair after each month of subscription (Pay What You Want, post-sale).

2. Let the seller track that price and use that information to determine whether to make further offers of that kind (FairPay renewals) to that subscriber in the future.

Those who pay fairly, rise above the pay wall -- those who do not, must face it.

First, an experimental program might be offered to a selection of Hulu users based on FairPay pricing. This might be aimed at heavy users, and offer ad-free access to both current and new premium content on a subscription basis on the following terms:

• Ad-free* unlimited access is offered on a month-by-month basis upon subscription.
• Before the start of the next month, the user decides on a FairPay price to pay for the current month ending (with a usage report provided to the user for reference, and considering both basic and premium content viewing).
• Depending on the FairPay price set by the user for the previous month, Hulu decides whether the subscription offer will or will not be extended for the next month.
• By coexisting with the conventional paid subscription model, users will have a reference price, and the usage report might indicate how their usage compares to averages (for basic and premium content).
• FairPay might be applied just to basic content, possibly in an ad-free version, to allow for a more basic FairPay service to those who don't want or qualify for the premium version.

Once tested, this FairPay subscription plan might be enhanced and offered more broadly, with more varied levels of service:

• Price setting might gradually be reduced to a quarterly or yearly cycle for established subscribers with good FairPay reputations, easing the hassle of price setting, and extending "FairPay credit."
• Usage reports would be provided to assist in the pricing reviews.
• Payments might be monthly (even if price setting is yearly), for better cash flow and flexibility.
• The options offered to any user on each renewal/pricing cycle could be adjusted based on their payment history (with consideration of any relevant circumstances known or reported). Thus those who pay better than average might get added rewards, and those who pay less might get less.

Thus those who pay fairly get increasing levels of trust and other rewards, and float above the pay wall, but those who do not get kicked back down into the pay wall.

This benefits both Hulu, and users:

• Users feel more respected and empowered by the added trust and flexibility.
• Users might get ad-free basic content [as a future enhancement*], at some modest cost, presumably less than the $9.95/mo. Hulu Plus rate.
• Some will pay less than $9.95 for the premium content, but some will pay more.
• Relating pricing to usage might help get heavy viewers to pay more, compensating for those who pay (and/or use) less.
• Many who might refuse the conventional Hulu Plus premium service might be willing to pay something reasonable for a FairPay basic service -- added revenue to Hulu and its content partners.
• The details of the offers and the process can be individually and dynamically tuned to encourage good payment levels, and to send free-riders back into the hard pay wall of the standard Hulu Plus (or basic Hulu) plans.

Bottom line: more happy users; more revenue to Hulu.

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*Update 6/30/10: As announced, Hulu Plus is not ad-free. That does not materially change any of the points above --there is still a pay wall separating basic from premium content, and FairPay can rise above it, as outlined (simply ignore the references to "ad-free"). Future ad-free offerings might also fit in as described, as another premium segment, or as a bonus reward to those who pay better than average.

Introducing FairPay: An adaptive pricing process that can change the game in the media/content industry

The Internet has led to a crisis in revenue models for media/content -- but the Internet also enables a way to create a radically new kind of pricing process.

What is needed in a revenue model, is not to choose the right price for digital products (free or not), but to create an adaptive pricing process.

1. Selectively offer to let the buyer set any price he considers fair after the sale (Pay What You Want, 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 of that kind 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.

Call this enhanced process Fair Pay What You Want, or FairPay for short.

Because FairPay variations on Pay What You Want set prices after the sale, the buyer can have the product, use it, and verify its value, with no risk -- and then pay whatever he thinks fair.

• By adding FairPay feedback, the seller gains reduced risk and indirect control. The buyer develops a history, a FairPay reputation, that affects his future opportunities.
• That gives the seller the control needed to make FairPay offers only where his expected risk/reward profile is attractive. Instead of static pay walls and freemium schemes, this process supports seamless and dynamic hybrid models. Those who pay fairly, rise above the pay wall -- those who do not, must face it.

FairPay creates a win-win dynamic that can make both buyers and sellers much happier, and the economy much more productive.

• Sellers can profitably sell to everyone who sees a potential value, at a price corresponding to the perceived value to that individual buyer.
• Some will pay well, some will not. But sellers can expect that many more people will buy, and they will pay a fair price because their reputation is at stake.
• FairPay can take many forms, and can enable free sampling and blends of free and paid that are more dynamically adaptive and effective than ordinary “freemium” models.

The result is that total revenue, and total profit, might be significantly higher than with a fixed price (at least for products with low marginal cost, as with digital media) -- and that total value created can be maximized.

A fuller introduction to FairPay is provided at the FairPay Web site.

The FairPay Zone Blog -- Why not?

This blog is intended to promote a new approach to pricing that I hope might remedy the current crisis in revenue models for content (and other products/services), and to stimulate discussion on its practical application.

This “modest proposal” may seem naïve and impractical. But I suggest the impediments can be overcome, and the potential benefits to some businesses, and to society, can be huge.

If you agree that this is promising, I ask your support to help take our digital economy to a new level. If you think not, I would be interested to understand exactly why not. Your input is welcome.