The commentary on FairPay that I published in the HBR Blog series with Marco Bertini in 2013 (Bertini and Reisman 2013) provides a perspective on how FairPay builds on and extends key directions in modern consumer marketing.
It begins with a brief review of the challenges of selling digital content and the turmoil in the content industries, as they face the conflict between free and paid, to suggest how companies can cope with these new challenges and opportunities by moving toward a new architecture that moves the exchange between seller and buyer from the transactional to the relational.
Starting at a broad, strategic level, the article explains how this architecture reflects three key ingredients of today’s social marketplaces:
Empowerment. Companies are embracing the idea of delegating activities to their customers. We see this in marketing with product development and advertising, mostly. But what about monetization? How about letting customers participate—at least to some controlled extent—in price setting to raise their level of engagement?
Dialog. Gaining customer feedback is intuitive. But how often does the seller get involved and create a true dialog? And, even if there is discussion, how often is it tied directly to the pricing process? Modern e-commerce systems can enable rich automated valuefocused interactions, but this capability is underused.
Reputation. Integrate the idea of social capital in the monetization approach. You can do this by creating a reputation score that relates directly to customers’ conscious use of the pricing power granted in point 1. Importantly, this score evolves over the course of multiple transactions.
Those are general, flexible strategies that can be configured in many ways. The article then suggests FairPay as a more specific configuration of these strategies:
Empowerment. We take an extreme view: buyers first experience the product and then have the power to pay whatever they wish, including zero. The timing matters because (a) customers should know the product they are asked to sacrifice money for, and (b) it fosters reciprocity, a strong social norm. Moreover, there is a constraint in place to avoid free riding: companies retain the right to make future FairPay offers (i.e., they can take away a customer’s price-setting privilege).
Dialog. Firms suggest reference prices to anchor a customer’s price offer and can provide reports to remind people of the value received. Customers are asked to justify the prices paid by indicating their reasons. Firms respond with counterarguments. Importantly, this dialog is structured for scalability and personalization through the use of modern choice architectures. The technology is there.
Reputation. Customers have a fairness rating. Choice architectures are then applied to segment customers in terms of fairness (and other attributes) and apply “carrots” (relating to product tiers, perks, etc.) to improve profitability or “sticks” (the threat to remove a customer’s price-setting privilege) to at least sustain it.
To put this in the more concrete terms of its operational core, FairPay applies a fundamental mechanism of balancing (= Dialog) to two elements: on one side, customer post-pricing power (price it backward, after the experience = Empowerment) and on the other side, business power to control what further offers are made (extend it forward, if the customer is being fair = Reputation). That turns commerce into a repeated game, in which it is in the customer’s interest to price fairly, building social capital, so the seller will continue to make further offers that continue to grant them pricing empowerment. This book explains why and how to do that. It also explains the extensive body of experience that shows that consumers will naturally take to it, once they see the empowerment it offers—and shows how companies can readily learn how to apply it (with ever-growing sophistication).
The promise is dramatic expansion of markets and profitability, and increases in customer loyalty and lifetime value.
Overall, the FairPay architecture can be viewed at a hierarchy of levels:
Level 1: Adaptively seeking win–win: The general strategy of setting dynamically personalized pricing—based on adaptively seeking win–win pricing and value propositions, for specific customers in specific time-varying contexts, as understood through a Cloud of Value. It seems that sooner or later this has to become the best basis for a productive economy.
Level 2: The core FairPay cycle (the invisible handshake): The fundamental process for balancing.
the power of customers to do post-pricing (price it backward) with
the power of a business to control whether and what further offers are made to each customer (extend it forward?).
This seems the only promising process architecture for achieving Level 1—one that promises to work very well once it is tested and refined.
Level 3: The particulars: How and where FairPay complements or supplants other pricing techniques, and what specific forms it takes in varying business and market contexts—and how that evolves from low-hanging fruit to broad use. Here we can only guess, but time will tell—if we do reasonable experimentation to get from here to there.
Entrepreneurial Opportunity—Platforms, Databases, and Network Effects
FairPay can be implemented entirely within individual businesses, but it can also be provided as a database and platform service to multiple businesses. The FairPay dialogs about value create a new kind of Big Data—a Cloud of Value—with new detail about individual customers’ value perceptions and fairness that can be very valuable within and across businesses—serving much like a credit rating. The software needed to implement FairPay can be provided as a platform services to many merchants or service businesses. Just as there are now Subscriptions as a Service platform offerings, this could extend to Pricing as a Service. Both the platform and the databases offer significant network effects and first mover advantages. This could be a huge entrepreneurial opportunity, and lead to new kinds of Ecosystems of Value. (See Chapter 13.)
Making It Happen—Adaptively Seeking Win–Win
Every company should be thinking about this new logic for seeking prices that map to value—as win–win for both customers and producers. FairPay provides an architecture for an ongoing process that seeks to do that, to enable a new kind of Cloud of Value Marketing. The particular processes I propose are just a starting point framework—they need to be tested in specific contexts, to enable learning that will lead us to variant processes that will work increasingly well. One way or another our path forward is to apply some form of Cloud of Value Marketing that is adaptively win–win. That path should lead to more value for all of us. The critical questions for top executives are where, when, and how.