FairPay-What-You-Want for Costly Products? Etsy? Everlane? Tiffany?

[UPDATES 12/27/17: Everlane PWYW sales on again.5/10/17 article broadly covers "What do people want to pay for their clothes?" and mentions FairPay (as "Fair PWYW") - reports 13% pay more than minimum.12/29/16:  Everlane has again done a PWYW sale. It is advertised as "Twice A Year," so it must be successful!
7.12/16 article reports 10% of customers voluntarily pay more than the minimum price.] 

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Not just digital? Can FairPay work for real products that have significant replication cost? -- such as for a fashion retailer like Everlane or an artisan marketplace like Etsy? There are actually some very interesting opportunities.

FairPay (short for Fair-Pay-What-You-Want) is a new architecture for participative price-setting that adaptively seeks win-win value propositions in ongoing customer relationships. As discussed throughout this blog, the case for FairPay is most obvious for products that have negligible marginal cost to replicate, such as digital content -- since there is no out-of-pocket loss when the occasional customer does not pay fairly-- but a minor variation of the process promises to work well for costly products as well.

The variation is very simple: set a minimum price floor that allows the buyer to set whatever price they want above that minimum. That can ensure that sales are not at a loss, and limit the FairPay adaptation process to apply only to the profit margin that the seller should receive above the cost. This builds on the simpler idea of Pay-What-You-Want (PWYW) with a price floor, which has been common, as described below.

FairPay goes far beyond PWYW to add in seller controls to nudge buyers to price fairly and to exclude those who do not. (It also shifts price setting until after use, when the value of the experience is known.) 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). [Added 12/30: Also see this background on studies of conventional PWYW.]

A nice example of conventional PWYW with a floor was just provided by fashion e-tailer Everlane.com. They have a 5-day Christmas sale that offers an array of items at any of three different prices [see 12/31 Update below], Using the example described in a news report at Racked a woman's coat said to normally sell for $250 can be had at any of three prices, and a mouseover frames the rationale for those options:

• $110: "$0 to Everlane. This only covers our cost of production and shipping."
• $132:  $22 extra to Everlane. This helps to cover production, shipping, and overhead for our 70-person team."
• $225.  $115 extra for Everlane. This helps cover production shipping, our team, and allows us to invest in growth. Thanks!"

FairPay is a new concept that would enable such sales to become a regular option for selected customers (including those found to pay well on special sales like this Christmas sale).  For customers who develop very good reputations for pricing fairness, many items might be offered that way all the time.  For customers who gain moderately good fairness reputations, such offers could be more limited, but still for many items (often, if not all the time). Thus FairPay becomes an interesting next step for such a retailer, as explained further below. 

FairPay with a price floor -- for retailers and for marketplaces

Beyond the example of a single retailer like Everlane, FairPay can also apply to a platform for serving many sellers, like Etsy.com, a platform that provides a marketplace for many designers and artisans. 

Let's look at the details of how FairPay can apply to either:

• The conventional offering is for products to be sold at prices pre-set by the seller. All of the issues with conventional pricing apply here -- notably no allowance for individually varying value perceptions, and no post-pricing that enables the price to be set after the value is known.
• A 100% FairPay offering would allow buyers to set any price they think fair, after receiving and trying the product, even as low a zero. The seller takes the risk that buyers will not be happy or fair, and that they will set very low prices, possibly well below cost. Even with FairPay's reputation tracking and limitation of sales to those who do not maintain a reputation for fair pricing, sellers face the risk of not recovering their costs on some sales.
• A solution is to add FairPay with a price floor -- similar to PWYW with a price floor (as used by Everlane), but with the added controls of FairPay that I propose.
• This hybrid version of FairPay could provide for a minimum "floor" price that is pre-set by the seller, plus a profit margin bonus that is set by the buyer. This floor price set by the seller might be paid prior to shipment (as with conventional sales), to ensure coverage of costs. The FairPay portion would address the profit margin bonus price, which would be set by the buyer, after experiencing the product, as with pure FairPay. 
• Note that just changing conventional PWYW to have sellers set prices after using the product can have significant benefits in getting better PWYW pricing -- buyers no longer need to discount their prices for fear being disappointed by an untried item. Thus sellers should seriously consider this idea of post-priced PWYW, even before moving to the more advanced FairPay process.

How FairPay works with a price floor

Such a hybrid two-level pricing process (conventional seller-set floor price prior to sale, plus FairPay bonus price set by buyer post-sale) could provide a very effective solution to adaptively seek win-win sales.

• The process would be explained up front, so that buyers and sellers understand that the initial price is just a base price that only covers the cost of the product (and perhaps a very small profit margin), but that buyers who are happy with the product are expected to pay more than that, once they see the value of what they have gotten.
• The seller could post a suggested bonus price (with profit margin), but buyers could decide to price higher or lower, based on their own judgment of fair value. 
• Buyer risk is much less than at full price. Refund options could still be provided to deal with serious dissatisfaction over even the "at-cost" base price.  However, with the lower base price, fewer buyers would be so unhappy they would wish to bother with a return for refund. Many would be willing to keep a marginally satisfactory product at a "bargain" price, given that the value is now known, and there is no further effort to doing that.
• Seller risk is low, because they will at least cover their costs (except for a smaller than usual number of returns for refund).
• Both benefit by getting more customers to try the product.
• The bigger benefit is in cooperatively seeking a fair profit margin. Sellers who are happy can decide just how happy they are, considering all relevant factors, now that the value is known -- and can set the bonus prices accordingly. Sometimes this process might lead to a price below a conventional price, sometimes above, but in any case it leads to repeat customers with loyalty.
• The reason that is important is the "long tail of prices." Some buyers will happily pay more than a conventionally pre-set price, and that generates added revenue. Many buyers (the long tail) will be unwilling to pay a conventionally pre-set price, but would be willing to buy the product at the lower base price, and then consider adding a bonus. Any added bonus is added profit. Thus the seller sells more products and makes more buyers happy.
• This can work especially well for quality producers who delight their customers and motivate them to pay generously by triggering the use of communal norms. If Everlane's experience is like that of other PWYW vendors, positioning as a dedicated provider of quality and service can elicit high levels of fairness under communal norms.
• In the case of artisanal/craft products like on Etsy -- and building on the person-to-person nature of sales in such a marketplace -- communal norms of fairness should be especially applicable to motivate high levels of generosity.

The key to making this profitable and manageable is the fairness reputation tracking and feedback controls of FairPay. The seller (or platform) can track how individual buyers respond to individual offers (and sellers), to learn how fairly a buyer sets prices for what kinds of products (and from which sellers). This provides a database on value perceptions and fairness for each buyer that can be used to manage what is offered to specific buyers (by which sellers), so that sellers can control their risk and nudge individual buyers to maximize their fairness.

• Offers can be restricted to only those buyers who have a reputation for pricing fairly for the class of product being offered, so that sellers have a reasonable expectation that they will set a fair bonus price.
• Sellers can decide how much risk they want to take and how wide a market reach they want. Those who prefer a lower number of sales at higher prices can limit their offers to those known to price generously. Those more eager to expand the quantity they sell, at some greater risk to their profit margin, can expose offers to a broader segment of buyers who price fairly but less generously.
• Some sellers will set liberal fairness thresholds for some products for unknown buyers, so that their behavior can be learned at manageable risk. They may do this with selected product lines (or for limted promotions like Everlane's Christmas sale) that they can use for testing. Tighter fairness threshholds can be applied for sellers or product categories for which they want only more generous buyers.
• In the case of a multi-seller marketplace like Etsy, the personal reputation data of buyers that is collected by the marketplace need not be exposed to individual sellers (to protect privacy) -- the marketplace can simply avoid matching a buyer to offers from sellers who set a fairness rating threshold that is higher than the buyer's fairness rating. All the seller knows about the buyer is that any buyer who see their offer has at least the desired fairness rating.
• This mechanism gives a buyer a strong incentive to price fairly and even generously, to maximize the number and quality of offers they see. Buyers will know that it is the most desirable offers (and the most desirable sellers in a multi-vendor marketplace) that set the tightest fairness thresholds -- so the less generous they are, the fewer top quality offers they can expect to see in the future.

Why would this work?

Consider the lessons of conventional pay what you want (PWYW) offers.

• PWYW has proven reasonably effective for both virtual and real products/services. People can be motivated to willingly pay fairly even when they do not have to.
• Many sellers of digital products like music and games have done PWYW offers with a minimum price set to at least cover download and credit card transaction costs, with good results. (Additional evidence may come from sellers like Everlane.)
• Research studies suggest that price floors can be effective, but there is a downside to consider -- setting a minimum can signal a lack of trust in the buyer, or leave the impression that a fair price is not much above the minimum.
• In the case of real goods with substantial costs, it seems likely that the risk-mitigation of a price floor is more important than the signalling concerns.* Care in framing the floor price as not really fair -- in that it provides no profit and is thus not sustainable -- can help push generosity upward -- as can care in how the suggested profit margin is framed.

So it seems there is good reason to think this could work well for many real goods. Everlane seems a promising example, as a retailer seeking to establish an image for value, fairness, and transparency. Similar advantages may be applicable for design/craft/artisan products -- the seller can emphasize the human value of the artisan. Such use of FairPay could benefit a multi-seller marketplace like Etsy, especially where buyers are unsure what to expect from a seller they do not know (and vice versa). This could be good for the buyer, good for the seller, and good for the marketplace.

Could it work for very high-end products? -- such as for Tiffany? Perhaps not as well as conventional pricing, since at the very high end, high set prices are a signal of exclusivity -- a vendor with cachet like Tiffany can command prices that less prestigious brands cannot. I would guess Tiffany will be among the last places to try FairPay, for that reason. But who knows what variations might become workable once FairPay becomes widely used and understood?

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[Update 12/31:]  Wide press coverage of this sale in Business Insider (twice), NY Magazine, Inc, HuffPost, Daily Mail, and others shows the promotional value of PWYW offers, Hopefully they will also report on Everlane's results.

Some of this coverage raised concerns about how well PWYW works, notably in NYMag. Here is an expansion of comments I posted on that article:

This raises many interesting and important questions about how to apply new participative pricing methods like pay what you want (PWYW) that try to find a win-win with the customer -- but we are at very early stages of understanding how to do them most effectively. I believe Everlane is on the right track, and that with proper framing of the offer, and what is expected of them, PWYW -- and more advanced variations on it, like FairPay -- will change how we buy things.

The cited research by Gneezy (which I included in my Resource Guide to Pricing) and others is very interesting, and offers many insights, but does not tell us what results can be obtained with better framing (and after people gain familiarity with such new approaches). A more established example of PWYW is tipping in restaurants. True, it makes some people a bit uncomfortable, and some want to eliminate it, but most of us manage to do it as second nature (apart from any arithmetical challenges that an online system would eliminate). We simply look back on the experience and consider whether service was better or worse than average (intuitively considering many factors, including how we feel about the server, and our plans to frequent the restaurant in the future), to come up with a tip that seems about right. With some experimentation, much more effective variations on how to present PWYW offers can be explored and refined.

(BTW, Panera has been doing PWYW continuously since 2009 in their Panera Cares locations, and are now serving about one million people per year.)

Simple improvements to PWYW:  Here are two very simple things Everlane and others could test to improve their results (even without the sophisticated feedback control process that FairPay adds):

1. Provide a slider that allows any price within an allowable range. For the coat example, the quantum jumps in the allowed prices are quite large: from $110, to $132, to $225. Maybe I am willing to pay $150 or $175 because I want to support them, but $225 just seems a bit steep for an overstock sale -- but I only pay $132.  The same framing levels could be presented, but with the ability to pick an intermediate price that seems fair to me.
2. Let people pay the base price up front, and then follow up to ask them to decide on the bonus price after they receive the product and know how they like it. This would be only a bit more complex to do, would still assure costs are covered, but would gain all the benefits of post-experience pricing. Instead of wondering if I will really like the coat, and pricing low, because I am afraid to end up disappointed, I would know how much I liked it, and not have to discount from what I would later agree would have been fair.

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*Of course a price floor can be used in any FairPay context, including digital goods with low marginal cost (just as is done for PWYW offers). Market testing (as by Everlane) is needed to understand under what conditions that is desirable, and how to set and frame such a minimum price.

(Acknowledgement:  My thanks to Florian Gypser, an architect and designer based in Austria and Thailand who contacted me to inquire about using FairPay for consumer fashion products. That led me to begin this post, to highlight these opportunities. ...And to Everlane for provding a nice case study -- which I hope they will add to with a report of their results.)

Design Thinking for a Smarter Media Industry -- Redesigning the Customer Experience

A recent NY Times article on Design Thinking at IBM leads me to suggest how movement toward the FairPay architecture can complement and help fuel the trend toward design thinking -- especially for digital content and services (notably in the media and entertainment industry). That article suggests that "In the design thinking way, the idea is to identify users’ needs as a starting point" and that it involves "user journeys" and understanding user "empathy maps." I suggest that FairPay helps move us toward better design thinking at two levels:

• As a form of design thinking, FairPay makes consideration of the user -- and empathy and experimentation related to that -- central to every customer relationship.  FairPay is a new logic for conducting ongoing relationships that adaptively seek win-win value propositions in which price = value. FairPay sets prices through an emergent process of ongoing experimentation, with the full participation of the customer. This shifts the entire focus of customer relationships from price to value.
  
• FairPay can help drive entire businesses and industries to re-center on design thinking -- by shifting the customer journey to drive dialog with customers about value propositions -- and to reflect that in pricing, so that it factors directly into the bottom line. That can drive everything else.

My own career-long focus has been on what I have called "user-centric" thinking (my half century in media technology began with a user focus, and on the customer side of IBM, with two decades inside IBM "large account" customers, before shifting to media technology entrepreneurship).

• That focus is what led me to develop the FairPay architecture as a more user-centric form of customer relationship that solves many problems inherent in our old logic of seller-set prices,  take-it-or-leave-it value propositions, and inhospitable customer journeys. 
• FairPay is built on consumer participation in pricing, as an emergent process that seeks adaptively win-win value propositions. It adds explicit dialogs about value as a core process within every customer journey cycle. 

FairPay is particularly well-suited to the media industry, where the new economics of digital content challenges traditional notions of value and fair price (as outlined on the HBR Blog). These challenges have put the news and music industries in disarray, and are disrupting TV/video, games, books, software, and other digital services.

There is growing recognition of the problem, and the strategic opportunity for more adaptive and user-centered thinking, as exemplified by this NY Times article and the recent Harvard Business Review cover articles it refers to. There is also growing recognition in the media industry that piracy and ad-blocking are symptoms of customer-hostile value propositions, and that what is needed is not more coercion, but more cooperation.

Having gained recognition of the potential of the FairPay concept from Jim Spohrer, who was the driving force behind IBMs Service Science initiative, I hope to find wider interest in this new strategy from elsewhere in IBM, as well as other companies providing business strategy and process improvement services to the media industry. My hope is that such service providers will help executives in media businesses appreciate the strategic importance of experimenting with unconventional business strategies like FairPay. Again, the appeal here is that the win-win customer journeys of FairPay not only embody design thinking and service-dominant logic, but bring it directly into the bottom line, to help fuel a broader transformation in business.

Specific to the media industry, an IBM white paper is entitled "Smarter Media and Entertainment: Reshaping the operating model and the customer value proposition in the era of big data." While there is obviously much to do in that regard, and much progress is being made, I submit that FairPay provides processes for taking this far deeper than is generally recognized to be possible.

I am now devoting much of my time to developing FairPay as a pro-bono project, because I think it can change the world for the better. I would be happy to work with media companies and their service providers to help develop these concepts and prove them in practice (at no charge). I am also collaborating with some eminent academics who can help with that, and have some interest from media subscription platform providers.  (I welcome inquiries at fairpay [at] teleshuttle [dot] com.)

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Background on FairPay and how it works

To understand just how FairPay can fuel this transformation, see the Overview of FairPay 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). 

Forrester's Next Wave? -- Adaptive Subscription Billing with FairPay (+ Zuora, Vindicia, Recurly, Digital River...)

The recent inaugural Forrester Wave Report on Subscription Billing Platforms, shows that the trend toward subscription models -- as an aspect of relationship marketing -- has become very important in many industries.

Key drivers behind the experimentation and subsequent adoption of transformative business model relationships include a desire for stickier customer relationships, a thirst for customer insights, an eagerness to capitalize on the cloud, and an inclination to experiment with connected products.

The next-generation FairPay strategy (as described on the Harvard Business Review Blog) has not yet surfaced through Forrester's radar, but it is on the radar of some of the companies Forrester reviewed, including Zuora, and Vindicia.

FairPay further transforms subscriptions and similar recurring relationships, to re-center the customer journey on value -- adaptively seeking win-win value propositions. This can change the fundamental nature of the customer relationship and how we think about pricing and selling services. It is especially relevant to B2C businesses (and SMB-oriented B2B).

Companies in the subscription/recurring revenue space should be thinking about FairPay and how to do controlled trials to see how it can transform their business. More about that below, but first some general insights from Forrester. (A free copy of this $2,495 Forrester report is available from Zuora.)

"Innovation Is Enabling An Era Of Continuous Customer Relationships"

Firms are shifting from one-time perpetual sales or fixed monthly subscriptions to consumption models that blend one-time, subscription, and usage-based billing... CEOs recognize this shift toward business models that reflect the value of the relationship with the customer:

“There’s a secular movement that’s happening . . . more to an annuity relationship as well as a subscription relationship. These are the long-term relationships we want to have with all customers.” Satya Nadella, CEO Microsoft (May 2015)

“If you went to bed last night as an industrial company, you’re going to wake up today as a software and analytics company.” Jeff Immelt, CEO GE (October 2014)

“We’ve gone from selling boxes, cloud, mobility, or any other solution, to partner with customers on their outcomes.” John Chambers, CEO Cisco (May 2015) 

The report outlines "four key drivers behind the experimentation and subsequent adoption of transformative business model relationships that firms have with their customers" -- two of these are significantly enhanced by FairPay:

• A desire for stickier customer relationships. ... an additional emphasis on loyalty...
• A thirst for customer insights. ...to build long-term relationships, monitor engagement, and perform sentiment analysis. 

The eight vendors Forrester reviewed all serve both B2C and B2B businesses, "Zuora, Vindicia, Digital River, and Recurly had unique strengths in supporting consumer or hybrid B2C or B2C-focused subscription scenarios." ("Apttus, Aria Systems, goTransverse and SAP hybris were especially well suited to supporting complex B2B billing scenarios.")

Forrester also noted that some of these vendors have strong relationships with Big Five consulting firms, as well as many ERP and CRM platform providers.

I have had discussions with some of these companies (notably Zuora), and have had expressions of interest by them in adding FairPay support to their offerings if a customer has interest. Should your firm want to consider testing FairPay, please contact me to assist in assembling the appropriate resources (including such platform vendor services, as well as academic researchers willing to help design and evaluate trials). I have been working on FairPay as a pro-bono project, and am happy to explain the concepts, and help companies develop applications of it, at no charge.

How FairPay strengthens customer relationships to change the subscription game

Why you should want to try FairPay? The short answer is better and more profitable relationships with more customers who value your services. It is especially attractive in markets like digital content and services that offer experience goods that are cheap to replicate but costly to create, and for which managing and quantifying the customer's perception of value is a challenge not well met by one-size-fits-all pricing methods. FairPay adaptively seeks personalized price discrimination in a way that customers accept as fair.

This blog includes an Overview of FairPay and a 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). Some of the posts most relevant to subscription billing platforms are:

• Paywall 2.0 ...and Paywall 3.0 -- Focus on the Customer!
• Beyond Freemium -- Free? Paid? Freemium?... Finding Whatever Works
• Beyond the Deadweight Loss of "All You Can Eat" Subscriptions
• Win-Win Customer Journeys -- With Dialogs on Value
• Patron-izing Journalism -- Beyond Paywalls, Meters, and Membership
• FairPay for The Subscription Economy -- My Dinner with Zuora and Friends 

A significant and growing portion of our economy is conducted in ongoing customer relationships -- FairPay is the way to adaptively seek win-win in those relationships, to make them stronger and more profitable over time. Let's work together to see how to make that happen for your business.

Price = Value

Price = Value. The essential logic of FairPay is that Price = Value ...in context, and over time.  Or at least it should, and an efficient economics will seek to approximate that.

Isn't that only fair? -- the only win-win way to do business? Why should we -- both producers and consumers -- settle for prices that are anything less than the best reasonable approximation of the actual value we receive?

FairPay is a new logic for conducting ongoing relationships that adaptively seek win-win value propositions in which price = value.

• The core idea is that prices should equate to value. Not the producer's preconception of value for an average consumer, but what value a particular consumer actually perceives as realized  in the experience of using the product or service, in the fullness of their individual context.
• Such a concept of price = value is win-win for both the producer and the consumer. They agree to do business if they expect a value surplus over cost, and both benefit if they divide that value surplus fairly -- fair value to the consumer, while providing a fair profit to sustain and motivate the producer. It allows a producer to provide value to a maximum number of consumers who seek it, in a way that can maximize revenue and profit as well -- especially for products and services (such as digital content) for which consumers may challenge any pre-set price as arbitrary and unfairly out of line with their actual perceived value.
• Adaptively seeking such win-win value propositions is required because the valuation considerations are complex. It is hard to do this accurately for any one transaction (which is why value-based pricing is now done only in high value B2B contexts). But an adaptive, intuitively reasonable approximation can be cooperatively converged upon over a series of transactions -- and can continuously adjust as things change over time.
• Ongoing relationships provide an environment that justifies and enables the process of adaptively seeking those win-win value propositions. If the marginal costs of the product/service are low, producers can afford to take limited risks at the start of a relationship (just as they do with free trials or freemium), in hopes of building a productive and loyal relationship that is profitable over the lifetime of the relationship.
• FairPay is a new logic in that this idea -- that price must be co-created, as a dynamic and personalized approximation of value as exchanged -- creates a very different conceptual framework for how our markets work. It shifts us from a mentality of take-it-or-leave-it prices pre-set by producers, which are often unfair, to a cooperative process of creating value in a way that explicitly seeks to be fairly win-win.

From this perspective, FairPay is a form of co-pricing for services, in which buyer and seller agree on a process to adaptively seek a win-win value exchange -- not focused just on single transactions, but over the life of their relationship. That ongoing relationship perspective opens up a whole new dimension in customer relationships that can deeply alter how we do business -- transforming the nature of the customer journey, as well as the workings of our broader business ecosystems.

This formulation encapsulates the core conceptual perspective that I have absorbed over the past year, drawing on current marketing and service science theory (see my recent posts about ISSIP and the Naples Forum on Service).


Those with a purely practical focus might skip the rest of this post and turn to more pragmatic information on FairPay. The core dynamic of the FairPay choice architecture is described in the sidebar and the practical implications and applications to various businesses are discussed throughout this blog. Check out the Overview, and More Details. 

Conceptual Perspectives on this New Logic for Business

The greatest danger in times of turbulence is not the turbulence, it is to act with yesterday's logic.   --Peter Drucker

That quote is one of the inspirations behind an emerging reformulation of marketing -- the idea of a "Service-Dominant Logic" (S-D-L), in contrast to the "Goods-Dominant Logic" that developed over the past centuries -- "yesterday's logic." Now we are in a service economy, and are beginning to see that the value of goods is really in how they enable a service -- for example, the value of a car has little to do with the physical product in itself -- its value is in how it provides the service of transportation, in a particular use and context. Is it reliable, comfortable, safe, economical, fun? ...in what mixture, to meet what needs? (Long ago a wealthy friend of mine owned an expensive new Jaguar, but was afraid to drive it far from home for fear it would break down -- high price, costly to create, but low value.) The value of services is understood to be "co-created" by the provider and the consumer in a particular use-context. This has many important implications that have been the subject of an extensive body of work. Proponents of this thinking (including the related field of service science) have been among the most receptive to the ideas of FairPay, such as at my Naples Forum and ISSIP presentations.

I pick up on this further now, by suggesting that what FairPay adds might be thought of as a Value-Dominant Logic (V-D-L) -- as opposed to yesterday's Price-Dominant Logic (P-D-L). FairPay offers a process for seeking fair value, in which price becomes emergent from buyer's and seller's interactions over time. Thus price remains the metric of net value-in-exchange, on which our economy is centered, but now price tracks to value-in-context instead of being pre-set in ways that track poorly to value. The processes of FairPay -- as embodied in cycles of customer journeys -- set price to approximate value. This not only can transform business, but makes a better economics, because prices that track to value make the economy more efficient and productive.

This builds on an earlier post that describes a thought experiment based on imagining an economic demon that reads the minds of buyers and seller to determine the actual value-in-context for each transaction, figures out the value surplus (over cost), and negotiates an equitable sharing of that value surplus between the producer and consumer. Prices set by such a demon would be win-win for both sides. The FairPay process of repeating dialogs about value over a series of transactions serves as a way to approximate what that demon knows, at least on average, over time.

Another post describes how this can be viewed as an invisible handshake -- an agreement between the producer and consumer to work together through the FairPay process to try to come to a common understanding of individual value propositions over time. While this emergent approximation may not be very accurate for any one transaction (especially when the relationship is new), the process seeks to converge on a level of fairness over time, as the parties get to understand one another.

This is win-win for producers and consumers because it allows producers to sell to all consumers who find value in the producer's service, at prices that are dynamically personalized to approximate ideal price discrimination.  That leads to a near-maximum number of profitable and loyal relationships, to maximize total revenue and total value creation. It also enables a near-maximum number of risk-free trials by consumers who think they might find value. All of this brings more value to more people.

Price ≠ Value

We are so used to our current practices of seller-pre-set prices that discriminate poorly (yesterday's logic), that we tend to not realize how that distorts our economy and makes it inefficient. Why do all users of a service -- such as digital newspaper or digital music or video subscription service -- pay the same price? Some use such services heavily, others lightly. Some obtain high value from the services, others just minimal levels of value. Yet they all pay the same price. Not only is that unfair, but it distorts our markets, as a deadweight loss. Many pay less than they should -- and many forgo using such services at all because they the price is too high, even though a lower price would create value and profit.

At a theoretical level, one of the open challenges of service research is that its focus on value-in-context works well at a microeconomic level, but does not translate well into macroeconomics, because value-in-context is hard to measure at a macro level. I suggest the reason is that macroeconomics is centered on price, and in current practice Price ≠ Value. How can our macroeconomics be effective when Price ≠ Value? Revenue is the total of a firm's prices, but total revenue tracks poorly to total value. Similarly for GDP. If we can get prices to track better to value, then our whole economics will be centered on that, and will work better.

Broad considerations of value

Another implication of this Value-Dominant Logic is that value should be very broadly defined to include all aspects that matter to the producer and consumer. Many of the current challenges in getting businesses to better address social values stem from the limited scope of prices, since they are not set to reflect such broader values. We speak of Corporate Social Responsibility (CSR) and Creating Shared Value (CSV) and triple or quadruple bottom lines because our current bottom lines are missing many important components of value. Here again, FairPay provides a rich broadening -- Price = Value, including whatever social aspects of value matter to the consumer. If the consumer values broader social benefits, they can reflect that directly in the price they pay, which then adds directly into the bottom line..

Making it happen

It seems clear that we should be seeking prices that map better to value. We should be exploring how to do that. FairPay suggests an architecture for a process that does that. If the particular process I suggest is found to not work as well as hoped, perhaps understanding why, in detail, will lead us to variant processes and/or process architectures that will work better. One way or another, going down this path should lead us to more value for all of us.

How Consumers Can Nudge Corporations for Good

Richard Thaler raised some interesting points about The Power of Nudges, for Good and Bad in a NY Times opinion piece on 10/31. "Nudges, small design changes that can markedly affect individual behavior, have been catching on" he observes, and then explains his concern that "Many companies are nudging purely for their own profit and not in customers’ best interests."

He concludes the piece with this observation (emphasis added):

As customers, we can help one another by resisting these come-ons. The more we turn down questionable offers like trip insurance and scrutinize “one month” trials, the less incentive companies will have to use such schemes. Conversely, if customers reward firms that act in our best interests, more such outfits will survive and flourish, and the options available to us will improve.

I take that as a nice statement of the power of FairPay, a new framework for choice architectures designed to use the power of nudges to adaptively seek win-win value propositions, and to directly reward firms that work with us to serve our joint best interests.

• Using FairPay, firms and consumers can jointly create a virtuous cycle in which the consumer nudges the firm to understand what they value and are willing to pay for, and the firm rewards those consumers who work with them by delivering more of what those consumers show that they value. 
• This builds customer journeys around cycles architected to build a mutually beneficial relationship of service, value, profit, and loyalty.

From this perspective, the appeal of FairPay is in how it deepens the relationship between a firm and its consumers to be more open and responsive, and shifts focus toward value -- in context, in the broadest sense, over the life of the relationship,

• It not only channels the nudges from the company to the consumer, but also creates a framework for nudges from the consumer to the company. 
• Consumers who use FairPay fairly will get the most value, and companies who use FairPay effectively will attract and keep the most profitable and loyal customers.

- - -
Background

The core dynamic of the FairPay choice architecture is described in the sidebar and the broader implications are discussed throughout this blog. (Check out the Overview, and More Details.)  Some posts of particular relevance to nudging for good:

• Thinking Fast and Slow about FairPay: A New Psychology for Commerce in a Networked Age.
• Making Customers Want to Pay You -- Research on How FairPay Changes the Game
• Turning the Invisible Hand to Create Shared Value -- The FairPay Strategy

New Video on FairPay -- Reisman Presentation to ISSIP 10/14/15

Video is now online at ISSIP from my 10/14/15 presentation on FairPay. ISSIP is the International Society of Service Innovation Professionals, "a professional association co-founded by IBM, Cisco, HP and several Universities with a mission to promote Service Innovation for our interconnected world."

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Video Details:  This is about 24 minutes of presentation, plus some Q&A, with a very interesting and interested audience. A full slide set (including some supplementary slides not on the video) is also online. (Should there be any difficulty with those links, there are alternative locations for video and slides, and future updates of presentation slides will also be online.)
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I was introduced to ISSIP when I met Jim Spohrer of IBM, one of its founding board members, at the Naples Forum on Service in June. Jim immediately saw the appeal of FairPay, and how it embodies many of the principles ISSIP is helping to illuminate. He has been very supportive in introducing me to the ISSIP community. That led to this presentation, which was facilitated by Haluk Demirkan of the University of Washington.

As my still-formative and inexpert encapsulation of how FairPay fits with service science and Service-Dominant Logic (S-D-L), these teachings suggest that much of our conventional thinking relates to "Goods-Dominant Logic" that developed over the past centuries -- "yesterday's logic." But now we are in a service economy, and are beginning to recognize that goods matter only in enabling a service -- for example, a nail has little value in itself -- its value is in how it provides the service of fastening, in a particular use and context. The value of a service is understood to be "co-created" by the provider and the consumer in its particular use-context.

From this perspective, FairPay is a form of co-pricing, in which buyer and seller agree on a process to seek a win-win value exchange over the life of their relationship. That opens a whole new dimension in customer relationships that can deeply alter how we do business. (Details of how are in the video, and other pages here.)

One perspective on this might be thought of as Value-Dominant Logic (V-D-L) as opposed to our current Price-Dominant Logic (P-D-L). FairPay offers a process for seeking fair value, in which price becomes emergent from buyer and seller's interactions over time. Thus price remains the metric of net value-in-exchange, but now price tracks directly to value-in-context instead of being pre-set in ways that track poorly to value. The processes of FairPay -- as embodied in cycles of customer journeys -- dynamically set prices to approximate value. This not only can transform business, but makes a better economics, because prices that track to value make the economy more efficient and productive. (Some insight into this stems from my thought experiments relating to an all-knowing economic demon.)

The idea is very simple: P=V. Price = Value (in context). Price should at least seek to approximate value over time. Doing that would make our economy work better for all of us. FairPay suggests a way to adaptively seek P=V. (I plan to expand a bit on this in a separate post.)

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On the video, after the talk, is a few minutes of Q&A, with some very interesting questions.

(To add one clarification, I should have given a fuller answer on the first question in the Q&A. The question was about crowdfunding and crowdsourcing. I neglected the second part, and would add this: Crowdsourcing fits very nicely into the FairPay logic, since it is just another form of value, which flows in reverse, from consumer to provider, and just one more dimension of value to be mutually considered and netted out in the "dialogs about value," Just as value from the provider can be measured and then valued, so can value from the consumer.)

Win-Win Customer Journeys -- With Dialogs about Value

Competing on Customer Journeys is a very interesting article in the 11/15 HBR that presents an emerging marketing paradigm, one that provides just the context for a further step of proactivley ensuring the journeys are maximally win-win. The subtitle is "You have to create new value at every step" -- my work on FairPay suggests a way to enrich the customer journey to do that much more explicitly and effectively.

Edelman and Singer explain that:

The explosion of digital technologies over the past decade has created “empowered” consumers so expert in their use of tools and information that they can call the shots, hunting down what they want when they want it and getting it delivered to their doorsteps at a rock-bottom price...  

Rather than merely reacting to the journeys that consumers themselves devise, companies are shaping their paths, leading rather than following. Marketers are increasingly managing journeys as they would any product. Journeys are thus becoming central to the customer’s experience of a brand—and as important as the products themselves in providing competitive advantage.

They suggest how this can enable "a 'loyalty loop,' ... a monogamous and open-ended engagement with the firm:"

I suggest that this is a big step forward in developing long-term profitable customer relationships, and that it meshes well with the similar kind of continuing feedback loop that drives FairPay. The idea that FairPay adds is to insert "dialogs about value" into each cycle of the journey after the "enjoy" step -- when the consumer knows the value of the experience -- and to adapt the pricing based on that. The enables participative personalization of the value proposition, as a simplified form of value-based pricing:

• Buy
• Enjoy
• Value (added -- dialogs about value, to personalize the value proposition)
• Advocate
• Bond

Without this added step, the loyalty loop does not fully realize a central driver of engagement and loyalty -- a proactively personalized value proposition that is win-win for both the consumer and the firm. Without this we just perpetuate the idea that the firm decides on value propositions and tries to coax consumers into accept them. Adding explicit value assessment into the loop engages the customer more deeply and enables the firm to serve the customer far more effectively. This participative element builds consumer loyalty by demonstrating the firm's commitment to learning exactly what each customer values in varying contexts, and seeking to deliver it by customizing the value proposition to match.

Edelman and Singer go to the threshhold of this, and we just need to add this one more step (emphasis added):

We’re now seeing a significant shift in strategy, from primarily reactive to aggressively proactive. Across retail, banking, travel, home services, and other industries, companies are designing and refining journeys to attract shoppers and keep them, creating customized experiences so finely tuned that once consumers get on the path, they are irresistibly and permanently engaged. Unlike the coercive strategies companies used a decade ago to lock in customers (think cellular service contracts), cutting-edge journeys succeed because they create new value for customers: Customers stay because they benefit from the journey itself.

As emphasized on this blog, the driving goal of FairPay is to make price=value, over time. When it comes to value propositions, firms remain coercive, effectively saying: "We give you this value package for this price. If you don't like that, how about this other value package for this other price? If none of our options suit you, we are not listening -- you will have to settle or go elsewhere." FairPay dialogs about value open a new dimension of adaptivity and dialog to personalize value propositions based on individual context, needs, and value perceptions. These dialogs about value become central to the journey, and a key driver of the loyalty cycle. How that is done is shown in the sidebar, and expanded on in the Overview and More Details pages.

Adding this focus on value does not just increase loyalty, but promises to dramatically increase profitability as well. The article presents an example about Sungevity, a provider of residential solar panels:

Sungevity is ... using what it knows about its customers to extend the journey... With granular data on each household’s energy use and habits, Sungevity can advise people one-on-one about managing their energy consumption, and it can recommend a tailored package of products and services to help them reduce their dependence on the grid and reap savings. ... Ultimately, the firm plans to integrate its services with home-management networks that can automate energy conservation (adjusting lights and heating, for example) according to decision rules that Sungevity develops with each customer. Another project is to create conservation-oriented customer communities. 

The value step I propose would bring value pricing into this journey -- in a uniquely simple and lightweight form -- to enable Sungevity to evaluate the savings their services actually deliver to the customer, and to engage in dialog with the customer to share a portion of that value with them. Rather than expecting the customer take a risk that they will get a predicted value, and discounting the price they are willing to pay to allow for that risk, Sungevity can design the journey to share the risk, measure the realized value, and share in that value. Examples of how effective such value pricing can be are in this other HBR article.

FairPay is a very natural extension to the customer journey perspective. Edelman and Singer explain that "The move from selling products to managing a permanent customer journey has required mastering the four capabilities that all companies will need to compete: automation ...; personalization ....; contextual interaction ...; and journey innovation .." The same four capabilities support FairPay as well. 

As the new "logic" of customer journeys becomes accepted in marketing, the related new "logic" of FairPay" and its adaptively win-win value propositions should become increasingly accepted as well. Different levels of FairPay empowerment may be applicable to different consumers and different business contexts, but a more explicit focus on value can benefit almost any customer journey.

[UPDATE:]  See related post: Customer Journeys of Value -- Measuring the Elements of Value 

Tipping, Fair Pay, and FairPay

Tipping in restaurants made the news this week, raising many questions about "fair pay" the social movement toward fair wages -- but also bearing on the very different issues of "FaiPay" the new strategy for value-based consumer pricing described on this blog (and outlined on the Harvard Business Review Blog).

The news is that the prominent NYC-based Union Square restaurant group is phasing out tipping entirely in most of its restaurants (Union Square Cafe, Gramercy Tavern, The Modern, ...). This is a very complex issue, as noted in the NY Times article on 10/15/15, including issues of customer service, fair wages for labor (the "fair pay" issue), economic policy (do minimum wages apply to tipped workers) and even tax policies.

As described in other posts and the sidebar, FairPay is a strategy for setting prices with user participation, having elements of pay what you want (PWYW) that are much like tipping.

• What FairPay adds to PWYW is that it is applied in the context of a relationship that continues only as long as the payments are considered fair by the business. Thus the consumer can pay any price they want for a given transaction, but the business can decide to stop offering FairPay transactions to a consumer who they consider to be free-riding. That gives the consumer strong reason to pay fairly, to maintain that privileged relationship.

• This works very much like restaurant tipping -- especially in the case of diners who might be regulars at a given restaurant, and thus concerned about their reputation for tipping fairly, and how that affects their ongoing relationship with their servers (who may provide less service to those they feel were unfair, and superior service to those who are generous). So the behavioral economics of tipping, and of PWYW, are very relevant to FairPay.

My focus here is not on the complex issues of wage equity in restaurants, but on the behavioral economics of the FairPay model -- as applied to other kinds of value exchange -- how tipping sheds light on broader issues of customer value propositions. Still more broadly, these are questions of the overall effectiveness of how businesses relate to their customers, and the processes for determining how value is shared among consumers, businesses, and workers.

Price=Value

The essence of FairPay is the idea that price should correspond to value -- as actually experienced by the customer in the full context of that experience, as it evolves over the course of the relationship. It is based on open dialog and transparency about the value exchange, the costs, and the economic value surplus that is "co-created." If the parties behave fairly, this lead to economically optimal pricing that produces the greatest overall value for all. The details all have to do with getting that fair behavior.

The Times article on tipping makes some interesting points. One is very supportive of this core benefit, an agreed to value exchange that is win-win for both sides:

Many customers remain deeply attached to the right to reward attentive service, or to withhold that reward. And servers often say that the bonanzas they take home after busy nights far outweigh the risk of getting nothing once in a while.

It is widely recognized that when restaurant service is built into prices, with no discretionary reward for service quality, quality is often poor and customers dissatisfied. There are of course some customers who tip unfairly (or not at all), and depending on the demographics of the clientele, this may or may not be a serious problem. But presumably the problem decreases among regular customers, and it is in just such long term relationship contexts that FairPay seems most likely to do well (and I suggest that its use be limited to such contexts). Just to reinforce the key points, I repeat that quote, with added emphasis:

Many customers remain deeply attached to the right to reward attentive service, or to withhold that reward. And servers often say that the bonanzas they take home after busy nights far outweigh the risk of getting nothing once in a while.

Better for both parties!

Clarity and transparency

As always, the devil is in the details, and there is much complexity here. Some of that relates to clarity and transparency as to who is being compensated for what. Another quote:

By increasing prices and ending tips, Mr. Meyer said he hoped to be able to raise pay for junior dining room managers and for cooks, dishwashers and other kitchen workers. Compensation would remain roughly the same for servers, who currently get most of their income from tips. Under federal labor laws, pooled tips can be distributed only to customer service workers who typically receive gratuities, and cannot be shared with the kitchen staff or managers.

Much of that was news to me, in spite of having tipped in NYC restaurants many hundreds of times over many decades. My impression was that it was the servers who got the tips, not the kitchen staff (but I was not sure if that was always true), but I still have no clarity on whether my tip goes to my waiter alone, to all waiters, or to other service staff (which I presume varies with the restaurant). Makes it hard to know what is fair doesn't it? Without knowing who my tip goes to, it is hard to be fair. But if I know what goes to my server, I have a pretty good sense of the fairness of that (as long as I am cognizant of the common "reference price" that 20% is fair for a normal level of good service).

Another aspect of transparency is that the "dialog" about value in a restaurant is very limited. There is the service and the tip, and maybe some polite chatter or body language, but that is about all. It is rare that either party communicates specifics as to why a given tip might be fair or not.  FairPay suggests that convergence on a mutually desirable exchange will be most effective with clear dialog on what is or is not working with all aspects of the value proposition. That may well be awkward with a restaurant server, but it can be very direct with a business that uses modern computer-mediated dialog services such as feedback forms, and that invites and responds to such dialog.

So the NYC restaurant issue involves many factors not directly relevant to FairPay as it applies to other industries -- such as service versus kitchen staff and wage and tax laws -- but the essence seems to reinforce evidence from studies of PWYW in other contexts that people do pay fairly when given clear information on what they are paying for and why. It seems the problem with tipping is not that it doesn't work well for servers, but that other workers are not doing as well. The article goes on:

“The gap between what the kitchen and dining room workers make has grown by leaps and bounds,” Mr. Meyer said. During his 30 years in the business, he said, “kitchen income has gone up no more than 25 percent. Meanwhile, dining room pay has gone up 200 percent.”

This begs the question of why take tipping away from those it works for? Tipped workers were clearly much better served than non-tipped workers. (As a reference point, the CPI increased 221% in the past 30 years.) Again, my issue is not whether tipping is good labor practice, but what this tells us about pricing models more broadly. It may well be that tipping is less effective in less high-quality, service-oriented restaurants (or where waitstaff may be at risk for abuse by customers or management). But it is those contexts where quality and service are key elements of the value proposition that I suggest are the prime opportunities for FairPay.

Computing value

Another thing that tipping teaches about FairPay is how easy it is for people to compute value intuitively. On hearing about FairPay in other contexts, such as for digital content subscriptions, people often ask "isn't it a difficult cognitive burden for customers to have to think about the value?"

But tipping provides a clear answer -- this computation is not difficult -- it is highly intuitive. We easily do a complex multivariate, multi-dimensional analysis in our head, during and after a meal and know immediately whether we think the service was average, or better or worse, and by roughly what degree. We can then easily figure whether we adjust our average tipping level up or down, and whether to adjust for being a regular or any other special factors, to conclude that we should tip X%. Any computational difficulty is just doing the arithmetic of how much X% of the bill is (with or without tax, rounding, etc.). Other complications relate to whether our tipping is visible to others in our party that we might want to impress -- which is something that may or may not be relevant in FairPay contexts, and may not be much of a problem even when it is a factor.

So all in all, it seems the behavioral economics of tipping is very supportive of the idea that FairPay will prove very effective in selected business contexts. Whether tipping can and should survive in restaurants -- given all of the unique social, labor, and legal issues involved -- is a different question.

Ad-blocking -- Kicking and Screaming to Win-Win Value Propositions

Media companies are in a panic over ad-blocking, as an existential threat, now that Apple has enabled it for mobile -- but this may just force the end of an era of consumer abuse deservedly left behind, and the beginning of a new era of win-win value propositions. Advertising strategies have become increasingly consumer-hostile, and that has caused consumers to say "I'm as mad as hell and I'm not going to take this anymore." While this may seem the end-of-days for publishers, we may just be turning a corner toward a much more effective blend of advertising and subscription models. What we need is a new and more collaborative, win-win mind-set.

Things have long been in a downward spiral, as publishers are squeezed at both ends -- lack of subscriber revenue and decreased ad effectiveness.  Even though we have entered an age of personalization and targeting, desperate publishers overload users with a poorly targeted barrage of ads, and fed-up users choose to block them. That it is nicely illustrated in this diagram:

Apple's enabling of ad-blocking in Safari may be the coup de grace for current models. The recent PageFair/Adobe Ad Blocking Report shows how this has been growing over 40% per year for several years, to a loss of tens of billions of dollars, even before the new Apple support gives ad-blocking increased legitimacy.

As my friend Bill Rosenblatt observed on Forbes, to publishers, ad-blocking looms much like piracy. Publishers have relied on ads to pay the freight, so consumers could buy their content at low rates. Some sites even have terms of service that make the contract explicit -- you agree to view our ads in exchange for access to our content. As with piracy, legal counters to prohibit ad-blocking are being sought by some. Bill referred to Digital Content Next (DCN, formerly the Online Publishers Association) as taking a more nuanced and consumer-friendly view, and a few days later, the CEO of DCN co-authored an interestingly balanced opinion piece on re/code (which contained the diagram above).

The underlying problem is that the advertising value proposition has been a bad one, shoved down the throats of consumers. Publishers decide what the ad burden should be, with little regard to the consumer's view of the value proposition. They set the prices and the ad loads, and seem to care little about how oppressive and obnoxious the ads are. (In an extreme case, a page on Boston.com reportedly took 8 seconds to load editorial, and 30 seconds for ads! -- who wouldn't want to block that?) They tell the consumers to take it or leave it. Contempt for the customer seems to have reached the breaking point:

• Given no reasonable say in a value proposition they loathe, consumers react with subversion -- blocking ads, just as they react with piracy when they think content prices are rapaciously high. Consumers demand fairness from their suppliers, and if they feel it is not granted, they will seek to take what they feel they deserve by whatever means necessary -- a Robin Hood strategy.

• And why not? Do they get relevant ads? Do they get to choose how to balance subscription fees and ad load? Publisher have declined to give them any choice, but now the ad-blockers do. The whitelist features of ad-blockers provide new power to consumers to pick and choose their value propositions, whether publishers like it or not. A site with a reasonable ad load may get whitelisted, while one with a heavy hand gets blocked.  

Publishers, why haven't you given your users some say in how to set the balance? Instead you forced them to do it for themselves, with their ad-blockers -- how is that working for you? Now ad-blockers may be just the thing that will force publishers to add some form of "reverse meter" that lets users get credit for their ad viewing, and to decide what mix of ads and fees they prefer. The DCN is advocating moves in this direction, and PageFair is providing tools to publishers to facilitate that. As noted in another DCN piece:

...ad blocking is endemic only because online advertising has become so invasive that hundreds of millions of people are willing to take matters into their own hands. To sustainably solve ad blocking, we must treat these users with respect, not force feed them the popovers, interstitials and video ads that they are trying to get rid of.

Sites which sign up for PageFair are given an analytics system precisely aimed at determining how many visitors are blocking ads, as well as a supplemental advertising system that displays adverts to adblockers only. The idea is that websites use those supplemental ads to ask visitors to turn off ad blocking software, appealing to their better nature and laying out the economic difficulty with operating in an environment where ad blocking is commonplace.

The trend seems to clearly require that publishers reconsider their value propositions, and make them more transparent, personalized, and win-win.

Any move in that direction will bring publishers closer to still more advanced models like FairPay, which apply adaptive processes to find personalized, win-win value propositions. Instead of arbitrary fixed prices for all you can eat (regardless of whether you eat a lot or a little in any given period), FairPay seeks prices that dynamically adapt to individual, time-varying usage patterns -- and the widely varying value-in-context that is received by each consumer at each point in time. Such prices are based on a new kind of value metering that acts as a flexible guide, not an oppressive sledgehammer. And it is a value meter that runs in both directions -- charges for value received, and credits for value given (such as in the form of ad viewing, personal data that can be sold, viral promotion, user-generated content, etc.). All of this is based on a win-win balance of powers. The Internet has leveled the playing field, and the sooner suppliers recognize that, the better for all of us. More about how this can work is in my recent post Patron-izing Journalism -- Beyond Paywalls, Meters, and Membership.

To the extent that publishers make ads more targeted, relevant, and useful, they will make money on ads.To the extent they fail, subscriber fees will be their only option. Either way, adaptive models like FairPay that offer truly win-win value propositions tailored to each user promise to be the most efficient model for doing both. Why shouldn't the consumers have a say in how many ads they view? -- as long as they pay a fair price, whether that be in money or in attention.

[Update:]  See this more recent related post:  Reverse the Biz Model! -- Undo the Faustian Bargain for Ads and Data.

Patron-izing Journalism -- Beyond Paywalls, Meters, and Membership

[Update 8/16/17: A newer post, The Missing Piece of the Membership Puzzle -- Agreeing on Value for Each Member, updates some aspects of this, but this post remains highly relevant.]

Who will pay for journalism? The turbulent first decades of our new digital era suggest no one -- or at least too few. Commodity news is free and advertising values are collapsing. Those who seek to preserve serious journalism, who believe we need more than clickbait and the uncritical crowdsourcing of news, have been scrambling -- and they are actually finding many ways to get revenue (as summarized below). Nevertheless, it is hard to have conviction that even the best of them can be sufficient.

These are very turbulent times for journalism. But as Peter Drucker said, "The greatest danger in times of turbulence is not the turbulence, it is to act with yesterday's logic." What we need is a new logic. What I suggest is a new logic that draws synergy from all relevant revenue streams, in a way that leverages digital, to radically transform the relationship of journalists with their audiences.

Customer or patron? 

Why be a customer? Why pay? The only way for journalism to survive in this new century is to refocus on a new logic for patronship -- getting readers to patronize content providers in the fullest sense: "to give money or support to." To find sustainable business models for journalism in a digital world, me must figure out how to find patrons (in this broad sense), and how to work with them so they are happy to contribute at sustainable levels.

Newspapers, magazines, and news video services are struggling to find a logic that works. Paywalls, "soft" "metered" paywalls (a form of freemium), have been adopted by many publishers as a primary model (but avoided by many others). They seem to be just marginally working, even in the best of cases. But we have been looking at the trees, not seeing that there can be a new kind of forest.

• Paywalls (soft or not) treat customers as faceless, undifferentiated cattle to be herded and milked. There is no invitation to be a patron, no personalization of the value proposition, even though individuals vary immensely in how they value and consume journalism. How can a single price possibly be right for all subscribers? 

• Premium level subscriptions (such as Times Premier) have emerged as a supplementary strategy to try to get the most loyal patrons to pay more, based on the realization that some of them can be enticed to pay more. But here too, value propositions are not customized, 

• Patronship at the high-end has always been a key support for journalism, from the rich owners of times past, to Bezos, Henry, and Omidyar today.  That is a nice contribution but it seems a shaky foundation for something so important to the public -- something that should be answerable only to its public. 

• Crowdfunding seeks to move patronship to a wider base, but that seems fragmented and very limited as well.

• Membership has become the latest hot topic (subject of a CUNY / Tow-Knight conference led by Jeff Jarvis on August 26 that I attended). This gets much closer to the core ideas of patronship. These efforts are a big step toward recognizing the need for more flexible targeting of value propositions, and addressing the many different kinds of value can be exchanged. This can include a very wide spectrum of offers to the audience(s) -- from added features, access to journalists, events, and bling, to pure contribution (drawing on the model of public radio and TV memberships). It also begins to recognize that value also flows from consumers to providers of journalism, the "reverse meter" suggested by Jeff Jarvis in 2011. It was evident at the conference that membership is a rich and promising area, already generating some success, but how to manage this almost too-rich variety of value propositions is a challenge.

• This is not to forget that advertising remains an important source of revenue, even if increasingly limited. Many of the audience would pay to reduce that burden -- and some might accept more (to get more value, another reverse meter) -- but, again, there is little customization of such value propositions.

The bigger picture

We have a growing variety of revenue sources, but none a silver bullet. Where is the overarching synergy? What is tomorrow's logic?  

I suggest the answer is to link this rich constellation of value propositions into a coherent, adaptive process -- one that seeks to find the right combination of value propositions for each individual, match them to their willingness to pay, and serve them in a customized bundle -- in a cooperative way that makes every regular customer into a true patron. If journalism has value, shouldn't those who are served by it recognize that value, and pay to sustain it? (As has been observed, "if you are not the customer, you are the product.")

That can be done in many ways, and many are being tried and improved on, but I suggest the most effective way to apply the best methods in concert will be by drawing them into the FairPay architecture. This is touched on on the HBR Blog, and in more detail in this blog's Overview page. This architecture shapes a platform for applying all of the best methods in unison, to cooperatively find the right value proposition (and the right price) for each patron.

Since I am co-organizer of an event on The Future of Journalism: “Why Should I Pay for Quality Content?” for MIT Enterprise Forum of NYC (October 27), this seems a good time to revisit my perspective on these issues, and to summarize how FairPay points the way to win-win solutions.

Re-engineering the value proposition of journalism for the digital era

The big picture idea is that FairPay refocuses journalism businesses on their relationship with their individual audience members -- with all the tools of the digital era -- to center on personalized, win-win value propositions. It builds this relationship on a cooperative understanding of individualized value that integrates all of the relevant elements on both sides of the value exchange. It seeks to enable a holistic view of value (and revenue) related to all aspects of the service that journalism provides -- basic subscriptions, premiums, membership options, perks, and any other kinds of offers, over all aspects of the value exchange.

From the provider to the consumer, FairPay focuses on the total value of all kinds, as actually delivered to each particular consumer -- the value-in-use for exactly what is consumed and how (what items, how many, how intensely), including content, membership perks, etc. -- the value of that experience and potentially even the outcomes that result (enjoyment, appreciation, and even the results enabled -- did our advice improve your health or you stock market returns?). This can also include "soft" values, such as

• service and support
• participation, listening, and responsiveness (comments, access to the journalists) 
• events and merchandise
• the social value of investigative journalism, community services, and good corporate citizenship.

From the consumer to the provider, FairPay considers not just monetary payments (subscription or membership fees, or pay-per-use), but other currencies. Thus it factors in credits (the "reverse meter") for

• attention to advertising (including the possibility of customized levels of ad loads) and 
• personal data that can be used or sold (again with possible customization)
• the value of user-generated content
• the value of viral promotion and leads
• up-sell/cross-sell revenue potential
• volunteer-provided services to the provider

An ideal economic exchange would fully consider all of these aspects of value, and determine how to balance the exchange in a way that shared fairly the "economic surplus" (of value over cost) between the provider and the consumer -- as described in Harnessing the Demons of The Digital Economy. That post explains how this is not only an economic ideal, but how FairPay provides a practical process for getting consumers and providers to cooperate in approximating that ideal -- an adaptive engine for jointly evaluating the value actually received, and sharing fairly in the surplus.

FairPay re-engineers how the providers of journalism interact with their audience members to deal with value, compensation, and sustainability, and creates a new balance of power. It recognizes that journalism co-creates value with its audience(s), and applies an adaptive method of co-pricing that (1) gives audience members the power to pay commensurate the value they perceive and can afford, while (2) retaining the power for providers to demand that be done fairly and sustainably.

This approach draws support from

• The latest thinking in marketing theory, in which journalism is recognized as being not a product but a service -- and in which services involve not a unidirectional transfer of value from a producer to a consumer, but a joint co-creation of value. 
• Recent behavioral economics findings on how people will pay voluntarily for services, if asked in the right way.
• The success of "value-based" pricing (or "performance-based" or "outcomes-based" models) for pricing industrial equipment used by companies like GE -- where a cooperative team of both producer and customer negotiate not a specific price, but a method for analyzing value as actually achieved by the customer in use, and then basing the price on that after the data is known. Just as the Internet of Things is making that more widely applicable, FairPay points to how a lightweight, heuristic variation on that theme can work for computer-mediated mass consumer markets.

Making it work -- How to serve patrons and how to price for that

This may seem very abstract and impractical, but the Overview page and the How FairPay Works box in the sidebar (at FairPayZone.com) explain more of how this can actually work, building on a simple balance of powers. Other posts on this blog explain the mechanics in detail, and how it can apply to journalism and similar content businesses.

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A guide to  further details is at the end.
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Why take the risk?

Journalism is in a downward spiral, with a shrinking market of people willing to pay for it (at least on current terms). FairPay brings a robust and coherent strategy that applies across the spectrum of patronship:

• For the long tail of pricing, FairPay promises to make it more affordable for the huge population of people who might pay something, but do not pay at all now because they will not pay as much as paywalls demand. FairPay's customized pricing can adapt to the lower, but still profitable, payments of the large population who consume lightly.
• For the fat head of pricing, FairPay also promises to capture a larger "share of wallet" of those who are already paying. Unlike the complex and confusing value propositions of membership and other set-price premium subscriptions, FairPay can tailor rich value propositions to the desires of each patron, especially those willing to pay to get what they really want, not just some arbitrary, standard bundle.

The result is a holistic view of value propositions, and how monetary payments fit in with other aspects of value, that enables the engine to individually manage a win-win relationship over time.  It motivates a very wide range of consumers of journalism to act as patrons, who provide an individualized mixture of money and other currencies of value that are a fair and sustainable exchange for what the consumer uses and values. It works as an adaptive, emergent process that identifies desired value propositions, delivers on them, tracks the results, and sets prices that patrons accept as fair and are happy to pay, Subscriptions, premiums, membership, and patronship fit together into an integrated engine of value creation and exchange, one that patrons can understand and fully buy into. This goes beyond the old invisible hand -- which is no longer operative for digital services -- to the more collaborative balance of an invisible handshake.

While FairPay is very much aligned with the latest thinking in marketing and e-commerce, applying something so unconventional is not without risk. Established businesses will want to test FairPay first at the margins, in limited, controlled trials. This can be done in many areas, including premium tiers, acquisition offers, and retention offers (see the slide on “'Toe-in-the-water' examples for News Subscriptions" -- currently slide 18). Even if it does not work quite as expected, FairPay points us in the right direction -- that of constantly learning about realized value propositions and adapting to what each individual patron wants and values at any given time. 

Trying it will lead to learning how to do it right -- how much power to give to your patrons, in what way. Really listening to our customers is now something that technology not only greatly facilitates, but requires us to do very well. It is not optional, something that can be neglected -- it is now central to the co-creation of journalism --and the business of journalism.

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[Addendum 9/3/15 -- Aggregation and FairPay]  Until I do a fuller post on this soon [Update: see the "Additional posts" just below, especially "Risk -Free..." and "The Case Against..."], here are some quick notes about news aggregation and how FairPay enhances that:

Aggregation is valuable to make it easy for consumers to access journalism from varied sources. Blendle has gotten much recent attention, and the proposal for The Internet Trust Exchange seems very promising. These approaches generally rely on micropayments to address varying levels of usage. Micropayments have had a troubled history (as Clay Shirky summarized long ago), but they do partially address the challenge of linking price to value when usage varies widely.

FairPay is very applicable to use by aggregators, and it addresses the problems of micropayments directly, so that consumers need not fear the ticking meter, as explained my posts on "post-bundling" (focused on TV but also applies to journalism) and on “all you can eat” subscriptions. Post-bundling builds in volume discounts after the fact. With full FairPay, these volume discounts are soft and forgiving suggestions that are not binding, so consumers need have little anxiety about usage.

Even without the more radical aspects of FairPay, if we do nothing more than apply pre-set discount rates from a provider-specified discount schedule, there is still a significant benefit. Why should my incremental cost for one more article be very low (actually zero) if I am an average subscriber on an unlimited usage subscription plan, but high if I have the same activity level using a micropayment system? The incremental charge for an added article should be very small (once beyond some minimal level of volume). The reason consumers hate micropayments is this constantly ticking meter – if we cannot make the meter go away, we must at least make it tick very softly.

(Blendle does take one smart step in the direction of the participative nature of FairPay, by making it easy to demand an instant refund if not satisfied with an article.)

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Additional posts relevant to journalism include:

• "Risk-Free" Subscriptions to The Celestial Jukebox?
• The Missing Piece of the Membership Puzzle -- Agreeing on Value for Each Member
• "The Case Against Micropayments" versus "Subscription Hell" -- Finding Flexibility
• A Platform for Teaching Men to Fish -- Revenue-as-a-Service for Non-Profit Impact
  [and Journalism]
• Panic in the Streets! Now People are Ready to Patron-ize Journalism!
• Finding Value in The Subscription Economy
• What Lies Beyond Paywalls -- A Better Way
• Ad-blocking -- Kicking and Screaming to Win-Win Value Propositions
• "Why should I pay you?" - Bezos' Washington Post - a New Business Model for Journalism 
• Pierre Omidyar: Adventures in New Business Models for Journalism
• Times Premier? [/Insider?] -- What is it really worth? ...FairPay can tell 
• How Blendle Could Do Much Better with FairPay
• Finding Good and Fair Customers -- Where Are the Sweet Spots?
• Profiting from Habit -- Seamless Monetization

...and much more on the More Details page.

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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.