So Last Century! - It's Time to End the Tyranny of Set Prices

We think we know what a price is, but new kinds of markets require new kinds of prices. A price has a function, and that function has changed.

We recognize that electronic markets and digital products have created a new age, but we seem to not recognize that these markets and products need a radically new approach to pricing. FairPay is a new concept of what a price is for these new markets.

Expanding on ideas in Harvard Business Review, Marco Bertini and I have co-authored an article, "A Novel Architecture to Monetize Digital Offerings" that has been submitted to a leading journal for publication [now published in the Journal of Revenue and Pricing Management*].

Conventional thinking about prices is blinded by a mind-set that we all grew up with and take for granted -- but that is actually a historical oddity. As we observe in the article:

Throughout most of the history of commerce, price was the outcome of a negotiation between individual sellers and buyers. Different buyers achieved different prices depending on their current situation, needs, and bargaining power. In other words, prices were very personal.

Starting in the 1850s, however, the shift to mass retail shoved this tradition aside. Shoppers no longer bought from individuals, but from organizations interested in standardization and scale. Indeed, the price tag gained popularity in the early 1860s with the arrival of the department store—John Wanamaker, the trailblazing American merchant and religious leader, opined that if everyone is equal before God, then everyone should also be equal before price. The company dictated terms, with prices set to maximize profit or some other objective and offered to the market on a take-it-or-leave-it basis.

Now that commerce is shifting back to personalization, it is interesting that one of its central ingredients, price, lags behind. Businesspeople appreciate that prices should be fitted to people’s personal valuations as they once were, but there is no real agreement on how this comes about.

Our suggestion seeks to undo the tyranny of fixed prices while retaining the efficiency inherent to institutionalized commerce...

Specifics of how and why to do that are explained in the article (preliminary version online at SSRN). Additional background is in other posts on this blog.

To be clear, our answer is not to try to somehow go backward to automate traditional negotiation. Instead we need to go forward with new ways to build relationships based on human values in a world of electronic markets and digital experiences. What we need is a totally new concept of what a price is, how it is arrived at, and why.

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Article abstract:    

The shift of commerce to the digital domain has forced many organizations to rethink their attitude to value creation, at times backtracking to the very question of what “value” actually means. Electronic commerce facilitates and thrives on social interaction, yet the way companies convert digital anything into cash they can bank seems to be stuck in time, obeying rules and practices that may have worked for physical goods but make far less sense today. We believe that earning revenue in the digital age needs a fresh approach. This short article seeks to lay the foundations for such an approach and proposes FairPay as one viable alternative.

*The text here may not reflect final edits in the published article.

[Update:] Short NPR Video: The History of the Price Tag
This is worth watching as an amusing perspective on how the price tag was introduced and took hold. It emphasizes how haggling became impractical as commerce scaled with department stores, but glosses over the human dimension that was lost with this "take it or leave it" solution.

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More about FairPay

For a full introduction to FairPay see the Overview and the sidebar on How FairPay Works (just to the right, if reading this at FairPayZone.com). There is also a guide to More Details (including links to a video). 

Even better, read my highly praised new book: FairPay: Adaptively Win-Win Customer Relationships.

(FairPay is an open architecture, in the public domain.)  

(My work on FairPay is pro-bono. I offer free consultation to those interested in evaluating and applying FairPay, and am happy to address questions.)

Better than Groupon! -- A FairPay Coupon/Trials Service

Trial coupons (like from Groupon) can be a very effective way to attract new customers, but as generally done, this process tends to attract bargain-hunters who may not be the ones a business really wants to attract. FairPay promises to enable a better way to attract your real target market.

The idea for FairPay (Fair Pay What You Want) came from thinking about the problems with digital offers and how to solve them, but it also has significant potential for use with real products and services, especially for experience goods, where the true value is only apparent after having the experience.* I suggest a Groupon-like service that similarly offers "coupons" for trial offers, such as for restaurants, service establishments, and the like, but based on FairPay pricing. Think "Groupon What You Want" or "PriceMeNot."**

FairPay is based on taking the risk of low payment on some product offers, in order to seek to build a profitable relationship with a prospect. The prospect is told that they can set their price as they think fair (possibly within limits), but that such offers will continue in the future only if the seller(s) agree the buyer's price is fair (based on individualized criteria). Unlike conventional coupon offers, which offers a pre-set discount, FairPay lets the buyer set their own discount, higher or lower, after they try the product or service. If the esperience was good, the discount is smaller, but if it was bad, the discount can be higher (possibly even 100%).

This is attractive to those seeking fair value, by eliminating their risk of buyer's remorse. It makes trying new places nearly risk free (at least as to cost), and offers a fair discount for taking the risk of a bad experience, but can be selective enough to exclude those who just want a bargain and will never be good customers.

In the case of a coupon aggregator (like Groupon), the aggregator would collect feedback from the buyer on why they set the price they did, and from the seller on whether the price seems fair, given those reasons and given other data about the buyer's values, demographics, and ability to pay. The aggregator can explain that they will develop a reputation for the buyer, and use that to target other offers (or not). Thus the buyer has a strong incentive to be reasonably fair.

For example, for the case of a restaurant (which has significant marginal costs), the offers may be framed so that the buyer is told they can pay any price they want, but if not at least a target percentage (maybe 50%, maybe more), must explain why they think it is fair (with a few multiple choice questions that are easily scored automatically). They might also be told that a suggested fair price should be between 25% and 75% of the normal billed price. This reflects the objective of providing a discount for the risk of a disappointing meal, but with the idea that even a disappointing meal is usually worth something (say 25% of full price), and a very good meal deserves a good price, even as a trial (say 75% of full price). The buyer might be free to pay zero, but only in truly rare cases (such as for buyers that usually pay well) would that not be taken as a black mark on their reputation score that might exclude them from most or all future offers. This pricing might be set directly with the aggregator right after the meal (such as in a mobile app), who would then settle with the restaurant privately. Other kinds of service establishments could use a similar process.

By doing this over a series of offers, the aggregator can characterize each buyer with a FairPay reputation, maintain that in a database (along with rich, transaction-level detail on what they pay well for and what they do not -- and why), and use that reputation data to target additional offers. Merchants most eager to attract customers will make offers to a wide range of prospects (with correspondingly high risk), while other, more successful or selective merchants might limit offers to those who have already gained a reputation for paying fairly (thus taking relatively low risk, and from more valuable customers). The aggregator can also limit the number of offers that a particular merchant makes to untested buyers with unknown fairness reputation, to limit the risk even for marginal merchants.

The benefit to buyers is that those who are willing to pay fairly when they get value can be given trial offers for quality establishments that they may be likely to revisit.  It can be made clear that buyers who price at above the suggested value can generally expect to become eligible for more attractive offers, and those who price below that value will generally get less valuable offers. Some will price for quality and style, and some will price for the biggest discounts they can get (if they do not squeeze too hard). Offer flow will vary accordingly.

The benefit to merchants is that they can target the prospects most likely to appreciate what they offer, in a way that calibrates their risk. Some will seek new customers at relatively high risk, while others we be selective, and take little risk.

The benefit to the aggregator is not only a more effective coupon business, and a new broader range of consumers participating, but a valuable new database of very fine-grained data on buyer value perceptions and willingness to pay.  Much like a credit rating database, this FairPay reputation database can become a very valuable asset in itself. (And the aggregator can maintain the privacy of the customer data by not revealing the data to the merchants, but just using it internally to manage the offer process based on merchant-specified criteria, much as many ad-targeting services do.)

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*As a well-tested reference point in the non-digital world, consider the experience of many restaurants, theaters, hotels, and other businesses who have tried pay-what-you-want offers.  These do not include any of the reputation tracking controls that FairPay applies to limit free-riding, but even with that limitation, PWYW has proven effective in many such situations.  See, for example, references cited in my Resource Guide to Pricing , such as the one that studied the restaurant Kish. For a more widespread example, check out Panera Cares.

**[Update] This can also apply to services analogous to Priceline's, especially for products like hotel rooms that have a high experience good aspect. A number of hotels already do PWYW offers at off times, so FairPay is a clearly attractive alternative. (Note that the "Name Your Price" feature of Priceline is very different from the Fair PWYW approach of FairPay, since with Priceline the seller can and will reject your price if it is lower than his secret minimum price. With FairPay your price is never rejected -- you just won't be allowed to continue setting unfairly low prices more than very rarely.)

Making Customers Want to Pay You -- Research on How FairPay Changes the Game

Wouldn't it be nice if buyers volunteered to pay businesses a fair price for what they are offered? Seems like a silly idea! But recent business experiences and research suggest we may just be stuck in the mind-set of the last century.

"Modern" mass-market commerce is a race to the bottom that assumes and appeals to the worst in people. Sellers set prices as high as they think they can to maximize total profit -- so buyers' only option is to take it, or bargain-hunt. What we have here is what behavioral economists call an exchange relationship norm. Exchange norms are zero-sum, quid-pro-quo. As described in other posts, FairPay seeks to find a better way.

Insight into how and why a very different model can work emerges from a growing body of research and real business success with Pay What You Want (PWYW) pricing (which has proven to be not quite as as foolish as it might first seem.)  FairPay builds well beyond this -- it promises to be significantly more effective than conventional PWYW -- and sustainably profitable for large-scale business -- by applying feedback and tracking in ongoing buyer-seller relationships, not just one-time sales. (Some background on PWYW.)

How to understand the power of FairPay was made a bit clearer to me in a very interesting research paper by Santana and Morwitz, "We’re In This Together: How Sellers, Social Values, and Relationship Norms Influence Consumer Payments in Pay-What-You-Want Contexts." That paper suggests an interesting two dimensional behavior model, which I interpret as follows.

The two dimensions of behavior are:

• Social Value Orientation (SVO), essentially pro-social versus pro-self, as individual traits. 
• Economic/Exchange Relationship Norms versus Communal Relationship Norms, as situational variables in a relationship. 

These are more fully explained in some excerpts from the paper below, but the bottom line is to clarify the motivation for the two dimensional strategy that FairPay seeks to apply to getting buyers to willingly pay a fair price:

1. Segment customers based on their Social Value Orientation traits -- are they receptive to and driven by social values, or not? Tactics for managing the FairPay process will be a bit different for high, medium, and low SVO trait segments.
2. Nudge all customers toward Communal Relationship Norms, in ways tuned to each segment -- to seek to bring out their Social Value Orientation to the fullest extent possible.  

Based on this, the FairPay process diagram can be understood to work for each segment, but with rather different control parameters applied to each. In all cases the objective is to foster a situation that favors Communal Relationship Norms, and that draws out whatever level of Social Value Orientation can be elicited.

• The sweet spot is targeting high Social Value Orientation (pro-social) customers, and moving them toward Communal Relationship Norms. They are the ones who will respond best to the pricing privilege that the seller grants to the buyer in FairPay -- to price in a way that considers fairness to the seller -- and who will be least inclined to abuse that privilege.  Managing that for these buyers will be mostly carrot, and not much stick. 
• The secondary focus is on moving medium-to-low Social Value Orientation (more pro-self) customers toward Communal Relationship Norms. They will need more nudging to emphasize the carrot (why the seller is deserving of communal norms), while keeping the stick in sight (why it is in their best interest to price fairly). Those who do not respond with at least minimum levels of fairness (uncooperatively pro-self) can be treated as a third segment -- to be excluded from FairPay (at least until they seem ready to behave more sociably), and be left to buy on the conventional set-price terms that routinely work for pure Exchange Relationships.

Businesses can seek to maximize profits with a mix of FairPay and conventional set-pricing by doing the following:

• Position themselves as deserving of Communal Relationship Norms. This can cover the whole spectrum of corporate citizenship, customer relations, quality, style, artistry, craftsmanship, service, and support. (A number of posts expand on this.) 
• Sustain that positioning throughout their customer relationships. This is deeply embedded in the FairPay processes.
• Seek to market to high SVO (pro-social) customers as the preferred market segment. This is the segment that will be most willing to pay you generously for your product or service (if you position yourself as deserving, and ask in the right way).
• Manage the segmentation throughout the business processes to appeal in the right way to the right people. FairPay provides an architecture that supports this. In contrast, freemium has been very popular because of its crude segmentation between those who pay and those who don't, but has been found to be limited in managing to optimize and up-sell that.

A further insight from this study is to reinforce that the nudging of buyers in the adaptive control process of FairPay is best done with a gentle hand. Communal Relationship Norms are a delicate thing. There is an inherent quid-pro-quo in FairPay -- in the future, those who do not pay well will get fewer and less generous offers than those who do pay well. But this should be managed with enough flexibility and forgiveness of minor lapses to not poison the effort to nudge toward Communal Relationship Norms.

This research helps to clarify the behavioral principles that underlie FairPay, and reinforce expectations that it can work very effectively over a wide range of customers and product types. It provides a perspective to better understand my other posts on the motivations, mechanics, and benefits of FairPay.

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Some detail on these behaviors from the paper:

• Social Value Orientation, as individual traits (p. 9-10): 

"People who are motivated to maximize their own gain irrespective of others’ gain are labeled as individualistic. Those who are motivated to maximize the relative difference between their own gain and that of others are said to be competitive. Those who seek to maximize joint gains for self and others are labeled as cooperative, and those who are motivated to maximize gains for others are said to be altruistic....SVO research tends to focus on cooperative, individualistic, and competitive orientations or the more general distinction between pro-social (i.e., cooperative and altruistic) and pro-self (i.e., individualistic and competitive) orientations...We argue that pro-socials will be more likely to take the seller’s welfare into consideration than pro-selves. However, we expect this payment behavior to vary according to the salience of relationship norms between the buyer and the seller when the pricing decision is made..."

• Economic/exchange relationship norms versus communal relationship norms, as situational variables in a relationship (p.10-12):

"Consumers can form relationships with brands that mimic social relationships with other people...As such, these brand relationships are guided by norms in the same way as individual relationships...Perhaps the most common distinction among relationship norms is the exchange / communal norm distinction...Exchange norms are typically based on economic factors, while communal norms are based more on social factors. In general, exchange relationships are guided by norms of quid-pro-quo, where partners provide benefits either in response to benefits given or with the expectation of getting similar benefits returned in the near future. Conversely, communal relationships are governed more by norms of conferring benefits to the partner...Keeping track of inputs and outputs, comparable benefits, and repayment behavior are all hallmarks of exchange relationships; while helping others, keeping track of others’ needs, and responding to others’ emotional needs are all hallmarks of communal relationships. Business partners and acquaintances are typically guided by exchange norms, whereas friends and family are typically guided by communal norms."

"...These findings demonstrate that relationship norms affect consumer behavior, and although commercial relationships are typically governed by exchange norms, that buyer-seller communal norms are possible. We extend these findings to the PWYW context by suggesting that relationship norms can affect how much individuals pay in such settings. Specifically, when an exchange norm is salient versus a communal norm, consumers will be less likely to consider social factors in generating their purchase price, resulting in lower payments and a lower likelihood of overpayment."

Interview: FairPay -- Making Pay-What-You-Want Profitable and Sustainable for the Mainstream

Tom Morkes, author of "The Complete Guide to Pay What You Want Pricing," interviewed me about FairPay, as a bonus for readers of his excellent how-to guide.  FairPay draws on the increasingly popular PWYW pricing model and makes it "ready for prime time." FairPay builds on key aspects of PWYW in a way that can be highly profitable for mainstream businesses, not just a fringe strategy for Long Tail content or special promotions. The audio of the interview was recently make available for download separately, as well. Both are available from Tom (on a PWYW basis, of course!) at the links here:

• The Complete Guide to Pay What You Want Pricing -- full e-book, with or without the Bonus package that includes my interview.
• Interview on FairPay, only --  standalone audio recording (40 minutes).

Tom's e-book and related bonuses offer a rich and useful guide to using PWYW, and are full of insights and experience on best practices for making it work.  PWYW draws on subtleties in human behavior -- it can be very powerful, but there is nuance to framing such offers, and making it profitable on a sustained basis is often difficult.

My interview focuses on FairPay, and how it builds on the core benefits of PWYW, and goes far beyond conventional approaches, to make it more sustainable and profitable, and scalable to large businesses.  Most uses of basic PWYW are for limited promotions. FairPay adapts it to be more predictable and workable for ongoing use -- whether on small scale, or for seller who aggregate items or offer ongoing subscriptions, even to the scale of Amazon or the iTunes Store.

Using Tom's PWYW Checklist as a nice starting point, I clarify how FaiPay adds a process that builds an ongoing relationship based on dialogs about value. Tom lists 11 steps to making a PWYW offer work.  I group Tom's list as follows, and add one more:

#1-4 are prerequisites to using these methods, both PWYW and FairPay:

1.  Identify a Competitive Marketplace
2.  Identify and Target a Demographic with Fair-Minded Customers
3.  Determine a Product with Low Marginal Cost
4.  Create a Product that can be Sold Credibly at a Wide Range of Prices

 

...And #5-11 enhance the process of using these methods, also relevant to PWYW and FairPay:

 

5.  Establish a Strong Relationship with Your Customer
6.  Clarify the Offer
7.  Show the Customer You’re Human*
8.  Appeal to Idealism
9.  Anchor the Price
10. Steer the Customer to the Right Choice
11. Remind Your Audience to Contribute

...To which, FairPay adds a new 12th step, to make it an ongoing, adaptive, individualized process:

12. Repeat offers contingent on fairness -- build continuing relationship and dialog

Doing that involves a number of component steps, as described in the interview and elsewhere on this blog.  (An earlier post provides some diagrams that may be helpful while listening.)  The interview also expands on the rationale for how FairPay applies to various business contexts, and the behavioral economics that show how it can be effective.

I hope you will enjoy this material, and will want to use FairPay to take your business to the next level.  Comments are welcome, and I offer free consulting to those with a serious interest in considering FairPay.

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[*Added note:  Even large corporations can emphasize their human values and the people behind them.]

Times Premier? [/Insider?] -- What is it really worth? ...FairPay can tell

The recently introduced Times Premier premium subscription service provides a nice case study of the problems with conventional pricing models for digital content, and how the more adaptive model of FairPay promises to do much better.

[Update 1: Apparently Times Premier did not meet objectives and was re-introduced in 2015 as Times Insider. The differences seem insignificant with regard to the points made here.  
Update 2: Apparently Times Insider fared no better as a one-size-fits-all premium service, and the program lives on only if the form of Times Insider stories that are included in the standard offering.  For the reasons I explain here, maybe they should consider FairPay, or simpler, but related "risk free" post-pricing / post-bundling models.]

"For those with a curiosity that matches our own," the Times' pitch reads, but what I am most curious about is whether and how I would value it. ...And whether the value to me would be consistent, or highly variable and hard to predict.

The Times' metered paywall has been working better than many feared, but is obviously leaving money on the table from loyal, engaged readers who can and would pay more for Times' journalism and extras.

Premier attempts to capture that value, but, like the old "Godfather"-inspired joke, they have made me an offer I cannot understand.

• It offers me a combination of new features, some in specific quantities.
• I don't know what these are, have never seen many of them, have no idea if I will like them. And, even if I do like some of them, how many will I want in any given 4-week cycle?
• Some sound interesting, and some not at all
• Even after I have tried them, I expect my desire and opportunity to enjoy them will vary and might decrease over time
• I may want more than the included number of some features, while having no interest in others

I can afford the extra $10 per 4 weeks cost,* but have no confidence I will value the service.

• Maybe I might try it and, if not too disappointed, just continue to pay the $10 without much thought (as the Times might hope) -- but profiting from my inattention leaves me feeling exploited.
• Alternatively I might try it for a while, then cancel -- even if I would be willing to pay something for the occasional feature -- leaving both me and the Times losers.
• In any case, I feel little temptation to even bother -- again leaving both me and the Times losers.

The core problem is a rigid, one-size-fits-all pricing scheme for a time- and quantity-varying experience good that is offered to diverse buyers with different and time-varying needs.

I had previously suggested to the Times that FairPay offers a new adaptive strategy that is far more promising. As explained further elsewhere in this blog, this is how it might work:

• The Times identifies me as a current digital and print subscriber, and offers to let me try Premier on a FairPay basis, as a "patron" of their quality journalism.
• They "bill" me in arrears on a pay what you want basis, telling me for the past 4 weeks how much of each Premier feature I used, and advising me of a suggested price based on that usage and my history. The suggested price may reflect volume discounts and a maximum for "unlimited" use, and may have adjustments for students, disadvantaged, or affluent patrons.
• They try to nudge me to pay well by reminding me of their quality journalism, telling me that others are paying much as they suggest, and offering added incentives.
• I decide whether I think it is fair to pay as suggested, higher, or lower, and check off possible reasons for that. 
• The Times weighs the reasons, considers my history, demographics, and usage, and decides how fair my price seems -- on an individualized basis.
• After a period of probation, the Times decides whether to continue as is, bump me up to more privileged offers, or drop me from FairPay pricing and require that I pay the standard $10 per cycle if I want to continue Premier.
• This dynamic adaptation continues indefinitely, as the product and the relationship change and evolve.

This has a number of benefits to both me and the Times:

• It builds a true patronship relationship where I feel empowered, participate in real dialog about what I do or do not value, and build on my experience with the Times and my reputation for fairness.
• It encourages me to recognize the value of what I get from the Times, and to reward them accordingly.
• It lets me try Premier at no risk, but (optionally for the Times) with the understanding I am expected to pay, even for the first 4 weeks, if I find value in it.
• Each cycle, I can pay as suggested based on my usage -- or more or less -- as I wish. 
• If I have an occasional heavy usage cycle, I can apply whatever "volume discount" I like to avoid an unduly high charge, as long as I don't abuse that privilege.
• If I thought the features were especially good that cycle, I can pay a bit more, and increase my fairness rating to show my "patronship" -- and earn more priviliges.
• If I thought the features less good that cycle, I can pay less, and only harm my reputation and privilges if I make a habit of devaluing the product.

Some of the key benefits to The Times

• They can get far more people to try Premier, and retain far more, for wider market reach and greater profit. Many may pay less than the standard $10, but some may pay more, generally in line with the value they receive.  The net profit can be higher, with a lower average price, but from more patrons.
• Since Premier is a new offering, they would not risk cannibalizing existing revenues.  Even after it is new, an added FairPay option could extend its reach down-market, and add more premium revenue up-market.
• They can build a deeper relationship with their patroms, based on this deeper empowerment, dialog, and experience. 
• That can shift the relationship with the Times from quid-pro-quo business exchange norms to cooperative, communal norms, and fosters social values of fairness and reciprocity, both of which increase willingness to pay.
• They can learn far more about what their patrons value and why.
• They can justify different prices to patrons with different value propositions and abilities to pay.
• They can start with fairly simple decision rules and liberal continuation criteria, and gradually add more nuance and discrimination as they and their patrons gain experience with the process.

Trying a radically new approach like FairPay has risks, and takes some effort, but I suggest that a FairPay version of Times Premier offers far more profit potential and far better relationships with the Times' patrons than the conventional version. Time will tell.


[UPDATE:]  I did try Times Premier, and cancelled after the four week trial. As I feared, the value of offers was very episodic, and a constant subscription price makes no sense when my usage and value varied widely from week to week or month to month (much of the time low). The insider features at the time were not of great interest to me (the David Carr item that was of interest came up weeks after I cancelled). The free e-books were only specific titles that were not the ones I would have been interested in. If I could have run-of-the-house access, and pay commensurate with what I actually found interest in (as FairPay would permit), I would have been very willing to be a patron. As far as I can tell, not very many others have found this offer attractive, and readers I have talked to about it saw little appeal.

[UPDATE 11/18:] I since subscribed to the re-launched Times Insider, mainly to see what they were doing. I have gotten very little value from it, but did not cancel out of professional curiosity. However, on checking on 11/28/18, it seems they no longer sell this as a premium feature, even though some items are still identified by that name. I seem to no longer be billed separately, and have not gotten a "Times Insider" newsletter since 3/18/18 (which I had not noticed until now). Apparently few saw a viable value proposition here, at least not as offered. What I proposed might have worked better...

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*My print insert offer says $10, but the Web page says $11.25. The print insert offers a free 4 week trial, but the Web page asks for $0.99.  Seller pricing manipulations that are hardly endearing to patrons!

Beyond Freemium -- Free? Paid? Freemium?... Finding Whatever Works

Pricing for digital offerings continues to be a fundamental challenge, and the debates over free, paid and freemium rage on.

"Making 'Freemium' Work" by Vineet Kumar in Harvard Business Review (5/14), nicely sheds light on companies' real world experience with freemium, highlights the challenges of making it work, and suggests how companies can tune it to get good results.

Here, I expand on my online comment on that article that refers to the HBR Blog post I did with Marco Bertini, introducing FairPay to HBR readers. Excerpting most of my comment on Kumar's article:

...a new strategy beyond freemium that addresses the same business needs, and exploits the attraction of "free," in a way that promises to be more powerful and flexible. We motivate this as moving the exchange between seller and buyer from the transactional to the relational, based on three pillars of relationship: empowerment, dialog, and experience/reputation. The six questions raised here are important to this new strategy as well. 

Freemium has offered a good start to dealing with new economics of digital offerings, but this new strategy, called FairPay, takes the driving objective of freemium - exploiting "free" to move toward a profitable relationship over time - and makes that the driver of a variable boundary between free and paid tiers. FairPay moves the strategic question of what to exchange at what price from a pre-set seller decision to an emergent, dynamic process that balances the interests of the seller and different individual buyers. That provides more nuance and flexibility than freemium's gross segmentation into just two (or a very few) set tiers (free or paid). 

We suggest the more individually adaptive techniques of FairPay can be applied to get better market reach and profit, and to build deeper and more profitable long-term relationships. The six questions identified in this article remain important: FairPay provides a systematic method for (1) adapting (and softening) the boundary between free and paid, focusing on (2) customer understanding and (3) conversion rates, (4) evolving over adoption life-cycles, (5) encouraging referral incentives and communications, and (6) guiding ongoing innovation. With both freemium and FairPay, we see an opportunity to move beyond the debate over free vs. fee, to focus on empowering and communicating with customers and finding ways to reward those who opt to pay.

How FairPay does this is more fully explained elsewhere in this blog and related Web site (see sidebar), but here are some comments specific to Kumar's six questions.

1. What should be free?  With freemium, this is a very visible static parameter that is hard to guess right, and hard to change. With FairPay, the boundary is soft and dynamically individualized. The buyer sets it for each transaction, always getting a price he considers fair, but the seller controls future offers, thus providing a balancing force to drive the buyer to price in a way that both sides consider fair, over the course of a series of transactions that build toward a profitable relationship.  The seller need not shoot in the dark to set a rigid boundary that is inevitably too high or too low for many buyers. Instead of upwards of 95% of customers paying nothing, a majority can be driven to pay some workable amount -- and some to pay very well. (But the buyer is always free to pay nothing, at any time he feels that the product is not satisfactory.)
2. Do customers fully understand the premium offer?  FairPay is built around a structured dialog about offers and value received, and lets customers in good standing try both regular and premium offers whenever they want, and then determine the value they see in it. The seller highlights the value, based on their individual usage patterns, and if a buyer does not value it enough to satisfy the seller, that buyer's trial of a premium service can end (but it can be extended long emough and often enough to be a proper test -- at any stage of the relationship). The basic process is structured, but lightweight, informal, dynamic, and intuitive.
3. What is your target conversion rate?  Freemium centers on a single all-or-nothing boundary between free and paid that make it costly to guess wrong, and either miss much of the market or leave money on the table (by undercharging good customers). (See my "Long Tail of Prices" post for more on this.) With FairPay, "free" users are permitted to pay 0% of suggested price, while paying users can pay 10%, 80%, 120%, 200% or whatever -- the conversion process is one of nudging customers up the pricing curve, and getting them to try (and pay for) more valuable features. This multivariate dynamic optimization process is more complex, but even simple heurisics can offer far more nuance and flexibility than the hard boundary of freemium.  (Adding additional premium tiers to freemium can add a bit more nuance there, but still in a static way that is not easily changed.)
4. Are you prepared for the conversion life cycle?  As Kumar observes, early adopters are less price-sensitive than others, and are often people for whom the value proposition is unusually compelling.  Freemium has no way to adapt to such variations over time, except to move the boundary for everyone. The core process of FairPay is driven by ongoing dynamic adaptation to different price-sensitivities and value perceptions, so identifying and dealing with such individual behavior is baked in to the process. 
5. Are users becoming evangelists? Free users can have value as evangelists (as Kumar notes) and also as a target for advertising (a key revenue source for many services), and viral marketing can be very important. FairPay can accommodate whatever value factors the seller and buyer choose to consider: Free users can claim credit for evangelism and receiving and acting on ads, and viral offers can draw on the same process to offer FairPay "trials" that suggest pricing with a trial discount that encourages those new users who do see value to start paying something immediately or very soon (while still letting those who try it but do not acknowledge any value pay nothing).
6. Are you committed to ongoing innovation? Freemium is very focused on customer acquisition, but FairPay is designed to do its adaptive work throughout the life cycle, as usage and understanding of the product matures and changes over time.  Because it is based on an adaptive value discovery engine that always sets prices in accord with current perceived value, it works throughout product and customer life-cycles, and continually drives the seller to make more desirable offers, based on detailed, real-world customer preference data. FairPay offers the potential to not only serve as a pricing engine, but also to serve as an engine for partly automating product innovation, as well. Detailed value perception data can be used to drive offer bundling and product development. So, once you get FairPayworking adaptively to set near optimal individualized prices, why would you drop it for a less adaptive alternative? If things are stable it works near optimally, and if things are changing, it is a nealry ideal tool to identify and adapt to the changes.

Kumar's article provides a nice framework for understanding both freemium and FairPay. Pricing is the heart of commerce, and is never simple. Debates over free versus paid tend to oversimplify and overgeneralize.  One post specific to the free vs. paid debate is "Free AND Paid! -- To Each His Own Price." Other commentary on why and how I think FairPay will provide an architecture for better pricing that subsumes both free and paid are throughout this blog and the FairPay Web site. 

"E-Books Are Reading You" -- How That Enables a New and Far Better Economics

"As New Services Track Habits, the E-Books Are Reading You." While some view this as creepy, it offers powerful benefits that are yet to fully emerge. Wouldn't it be good to pay for books depending on how you read them?

This recent NYTimes article by David Streitfeld highlights the instrumentation behind e-books and other digital media, and how distributors, publishers, and authors can use it to better understand their markets. People are talking about how Big Data enables "The Quantified Self" -- think of this aspect as "Quantified Media."

With the FairPay pricing model, this gains far greater potential -- and clear benefit to the reader. How much you have to pay for a book can depend on how you read it -- how much, how long, how deeply, how repetitively. That data is indicative of the value you receive from the book. Why should what you pay to read it not depend on how you read it?

Start a chapter or two and quit, and pay nothing -- just like a Kindle free sample. Skim the whole book in 15 minutes and pay little or nothing -- much like Amazon's "Look Inside." Read a novel all the way through and pay a normal price. Read it three times and pay a bit extra. Study a how-to book, highlight sections, and go back regularly over many months, and pay accordingly (but with a volume discount). Use six travel guides on four countries during a one-week cruise and pay the equivalent of buying one travel guide (a detailed example is in this older post).

Already, individual reader usage data is affecting pricing between distributors and publishers (as Streitfeld notes for book subscription offerings):

On Oyster, once a person reads more than 10 percent of the book, it is officially considered “read.” Oyster then has to pay the publisher a standard wholesale fee. With Scribd, it is more complicated. If the reader reads more than 10 percent but less than 50 percent, it counts for a tenth of a sale. Above 50 percent, it is a full sale. 

Offering a subscription service "introduces a sort of interesting business opportunity to collaborate with publishers rather than be at odds with them.”        

Distributors collaborating with publishers instead of being at odds with them? What a thought! Of course that can lead to win-win pricing models.

With FairPay, a similar win-win collaboration involves the reader as well. FairPay lets readers pay whatever they think is fair for books, based on how they read them. If the distributor agrees that is fair (including consideration of any explanations offered) their subscription or buying privileges are continued (but in any case the buyer's price is final for the current transaction). This removes the barrier of price from reading a book.  It invites anyone with an interest to try a book, and only pay to the extent that they feel they got value from it. It allows those on limited budgets to apply discounts, and business readers to be expected to pay more, having derived greater value. It also strenghtens the bond between the reader and author, where readers feel an obligation to pay to authors who give them a valuable reading experience (especially if they know a fair share goes to the author). It also strengthens the bond between the reader and a publisher/distributor who gives them the kind of e-books they value, and supports authors they value.

Such ideas of variable pricing are unfamiliar in most consumer markets, and take some getting used to, as the Times article (and some thoughtful comments) make clear. However, we can look to the proven success of "performance-based pricing," which has seen growing acceptance in B2B markets.  As outlined in a Harvard Business School article by Benson Shapiro, current performance-based pricing strategies offers win-win benefits and reduced risk, but are primarily suited to high-value B2B situations, in which complex joint pricing analysis can be done for each customer situation. FairPay takes similar performance-based "dialogs about value" and streamlines them for a consumer e-commerce setting, with a high degree of individualized automation that can work on a much more intuitive and fuzzy level.  This offers a way out of the digital pricing dilemma that has brought book publishing and other content industries (music, journalism, etc.) to the brink of disaster.  (See many related posts on this blog.)