Price Should Reflect 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—especially now that there are major sectors where scarcity of supply is simply a non-issue. 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. Some are affluent and some are not. Yet they all pay the same price.
The focus of this book is on why that is not simply a matter of being unfair, but how it makes markets inefficient, reduces demand, and results in a deadweight loss to our economy. Many pay less than they should—and many more forgo using such services at all because the price is too high, even though sales at a lower price acceptable to them would create added value and profit that would be a clear win–win.
The essential logic of FairPay is that price should reflect value—in context as used—and over time. An efficient economics must seek to approach that over each relationship. It is the logic of seeking to approximate and apply what my pricing demon knows about value.
Isn’t that the only win–win way to do business? Why should we—both businesses and customers—settle for prices that do not reflect the best reasonable approximation of the actual value the customer receives? Of course, as we will explore, in setting prices that reflect value, we must also factor in the cost to the provider, and a fair sharing of the value surplus over that cost between the producer and the customer.
FairPay is a new logic for conducting ongoing relationships that adaptively seek win–win value propositions in which price corresponds to value.
The core idea is that prices should reflect value. Not the producer’s preconception of value for an average customer, but what value a particular customer actually perceives as realized in the experience of using the product or service, in the fullness of their individual context (the value my demon sees).
Such a concept of price corresponding to value is win–win for both the producer and the customer. They agree to do business if they expect a value surplus over cost, and both benefit if they share that value surplus fairly—fair value to the customer, and a fair profit to sustain and motivate the producer. It allows a producer to provide value to a maximum number of customers 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 customers 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. Both parties learn to see and compare notes on what my demon sees.
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.
An All-knowing Economic Demon Informing an Invisible Handshake
So FairPay is a process, an engine for seeking to approximate what my demon knows—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 customer.
Prices set by such a demon are 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.
This can be viewed as an “invisible handshake”—an agreement between the producer and customer to work together through the FairPay process to try to come to a common understanding of individual value propositions over time, and to co-design them. An agreement to cooperate—to seek transparency and honesty—to come to a joint understanding of value—so that we can jointly seek to maximize that value for the benefit of both of us. 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 handshake is a repeated game—when properly structured, it is in both parties’ interest to collaborate on seeking win–win. (This variation on Smith’s invisible hand is expanded on in Chapter 5.)
FairPay is win–win for both producers and customers because it allows producers to sell to all customers 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 customers who think they might find value. All of this brings more value to more people.
Service Relationships—Win–Win Customer Journeys Based on Dialogs About Value
This cooperative focus on value ties in with a number of emerging trends in marketing strategy. FairPay fits well with these new concepts, and offers a way to make them more concrete, with results that flow directly to the bottom line. Consider the following trends, which can be seen as complementary perspectives on marketing, and on the new logic of FairPay:
A pervasive new logic for marketing and business in general is the explicit focus of the emerging body of work on a “ Service-Dominant Logic” (Lusch and Vargo 2014), in contrast to the “Goods-Dominant Logic” that developed over the past centuries—“yesterday’s logic.” Now we are in a service-dominant economy, and are beginning to realize that the value of goods is really in how they enable and help deliver a service. (My use of the Drucker quote and the idea of a logic builds on that work.) FairPay centers on the questions of how we set value on services. This is especially relevant to digital services (including content services and software), where replication is essentially free.
A related emerging focus is the idea of “co-creation of value” (Payne and Frow 2013). This becomes especially clear when we consider the logic of services, and look beyond our obsolete logic of goods. A significant body of work emphasizes that value is not just created by an active producer and handed over to a passive customer, but is actively co-created by the process in which they work together to realize a service, and to share in the value of the experience that the service creates. That leads to realization that there is a whole chain of collaborative activities such as co-design, coproduction, copromotion, co-pricing, codistribution, and the like. From this perspective, FairPay is an embodiment of co-pricing that seeks to fairly share in the value that is co-created.
A third emerging focus is that of the “customer journey” (Edelman and Singer 2015). For most businesses it has become clear that the real objective of customer relationship management is not just to respond to problems, and to deal with isolated transactions, but to proactively focus on ongoing relationships, to seek to retain customers and maximize customer lifetime value (CLV). The idea of the customer journey is emerging as the way to close and tighten the “loyalty loop” on repeat sales. FairPay builds on that perspective by adding explicit dialogs about value into every cycle of the loyalty loop.