Rethinking Revenue Models for Digital Services - 3/28/19 - NY Angels

Rethinking Revenue Models
for Digital Services
The future of digital subscriptions is to be risk-free to the consumer
Presented to New York Angels Education Meetup 3/28/19
Copyright 2019, Teleshuttle Corp, all rights reserved
Richard Reisman
fairpay [at] teleshuttle [dot] com
@RReisman, #FairPayZone
1
{Rev 3/28/19)
Techonomy 10/15/18
Journal of Revenue and Pricing Management 2/26/18
FairPay book 9/16
Harvard Business Review 11/18/13
Links to background info included

The future of subscriptions is to be
risk-free to the consumer
• For digital services, the provider risks nothing,
…except the opportunity to take money
in exchange for no value.
• That will be less and less tolerated.
• Risk-free subscriptions can attract and keep more
customers, for more total profit.
• It’s the relationship, stupid!

”The greatest danger in times of turbulence
is not the turbulence,
it is to act with yesterday's logic.“ --Peter Drucker
• FairPay – a logic for tomorrow (…not a product)
• Reisman – The FairPay Story
– Pioneering digital services for people since 1960’s
• Diverse businesses and roles – B2B and B2C, content and services
• >50 patents, licensed to >200 companies, for billions of users
– Steeped in disruption – business model crisis in content industries
– A new way forward – simple new logic – deep implications
– Shift the focus of customer relationships from price to value
• Ideas that can change the world
– Save industries + Create new value (journalism, music, video, …+nonprofits)
– Human-Centered Markets – win-win values, convergent across profit spectrum
– Work pro-bono with business + academia on research, trials, applications
…seeking collaborators, evangelists…and offer free consultation
(More information at FairPayZone.com)
3

• Extensive conceptual development
– online, book, patent filing in public domain
• Extensive discussions with businesses
– Vendors (NYTimes, News Corp, Disney, Spotify, Rhapsody, IBM, American Express, Verizon, plus startups)
– Platform providers (Zuora, Salesforce, TheNewsProject)
– Research firms (Forrester and MECLABS/MarketingSherpa)
• Key elements already proven in wide use
• New combinations supported by behavioral
economics and emerging marketing theory
• Find the sweet spots with partial steps, trials
• Eminent scholar collaborators to assist in trials
Toward FairPay…
An open architecture, not a product
4

21st Century Customer Relationships
Two Interrelated Sea Changes
1. Computer-mediated relationships deepen
1-shot games (transactions)
 repeated games (loyalty)
2. The Invisible Hand flails
Scarcity of supply
 digital: no scarcity to ration
A new social contract to sustain creation
– An Invisible Handshake
Win-win relationships
– Empowered, loyal customers
Central focus: actual value to each customer
5
Compounding factors…
• Consumers hate risk
– Risk of surprise by a big bill
– Risk of paying but not getting value
• Risk-aversion is amplified for digital
– Content “wants to be free”
– Unpredictable value of experience goods

21st Century Customer Relationships
Two Interrelated Sea Changes
6
1. Computer-mediated relationships deepen
1-shot games (transactions)
 repeated games (loyalty)
2. The Invisible Hand flails
Scarcity of supply
 digital: no scarcity to ration
Central focus: actual value to each customer
– An “Invisible Handshake,” balanced powers
Central focus: actual fair value to each customer

Relationship Business Models
Fundamental Questions
• Who takes the pricing risk?
Value and Risk = f(Experience, Time, Price)
– Who decides the price?
Advanced strategies
built on behavioral economics
– When do they decide it?
Simple “Risk-free” “Post-bundling”
7

A Revenue Train Wreck and Consumer Nightmare
The Celestial Jukebox vs. Subscription Hell
• The vision:
“Every record ever recorded”
…anything you want, 1 click away
• The reality:
“Subscription hell”
…subscriptions for every channel or publisher
• The price:
Flat-rate, all you can eat (wanted or not)
…share of wallet vs. value obtained
8

The Problem of Consumer Risk
Desired Value/Cost vs Experienced Value/Cost
A. Unlimited, Flat-rate Subscriptions
(All You Can Eat)
– Pay for the month, don’t use much?
– Subscription hell:
Want many content sources, but can’t afford many?
B. Micropayments (Usage pricing)
– Ticking meter:
Surprise at huge bill?
– Pay for items, but not satisfied with them?
– Scan many items lightly, pay full price for all?
9

A Risk Free Subscription?
(Compare to $5/mo AYCE*)
• Run of house access
• Month-end bill, on value of usage -- discounted
• No use = $0 (not $5)
• Increasing usage ramps up fee
…but with volume discount (often <<$5)
• Cap for high usage ($5+?) – no nasty surprises
• “Quality Refund” button on each item
• “Reverse meter” credits value of attention to ads
 Acquire and keep more customers
More profit, even if lower average CLV
(*All You Can Eat)
10

Climbing the ladder of value
Customer-value-first
(Trust, loyalty, recurring revenue)
Customer-value-hostile
(Distrust, resentment, churn)
11

Climbing The Ladder of Value
Relationships, Risk, Timing, and Participation
• Relationship Perspective: Transactional Relational
• Pricing risk: Will I get my money’s worth?
• Value: Value-in-use is best assessed…
– after use (timing = pre-pricing/post-pricing)
– with recipient input (participation = seller/joint/buyer)
• Price/Value: aspects:
– Packaging: who defines packages, before or after use?
– Usage levels: does pricing depend on actual usage?
(with fair volume discounts?)
– Price schedules: set by seller?– buyer? – joint?
– Ability to pay: fair to each buyer (and the seller)?
FairPay points the way up the ladder
12

A Thought Experiment
Imagine an all-knowing Economic “Demon”*
• Read buyers’ & sellers’ minds
to learn value-in-use, value-in-context
• Know how used, liked, value obtained,
willingness/ability to pay
• Know cost, economic “value surplus”
(including cost to sustain)
• Arbitrate fair sharing of surplus
Set personalized and fair prices
---
• Practice: Better strategies
• Theory: Better insights
(*Like Maxwell’s Demon and Laplace’s Demon in physics)
13

The Relationship Economy
The Journey Experience is as Important as the Product
15
[News publishers are getting smarter about the conversion funnel,
…the loyalty loop, not so much!]

“The Subscription Economy”
16

“The Age of the Customer”
…Based on Digital Transformation
Mind-shift:
• Linear to cyclical
• Customer-centric
(empowerment)
• Top-down and bottom-up
• Big-Data insights
• Transformed operations -- across functions
(innovation, marketing, sales, finance, IT,…)
• Transformed Customer Experience (CX)
17

From products, to services
From transactions, to relationships
18
• Goods-Dominant Logic  Service-Dominant Logic
– “Customers want holes, not drills” (Stanley Tools)
– “Power by the hour” (Rolls-Royce jet engines), “Tires by the mile” (Michelin fleets)
– Book of the Month…Dollar Shave…iPhones…Cars
– Anything as a Service (AaaS)
• From isolated transactions to continuing relationships
• Service Level Agreements, CX, Customer Success
• New Success Factors (KPIs)
– Customer Lifetime Value (CLV)
– Customer Acquisition Cost (CAC)
– Churn/Retention

The Game Theory of Commerce
One-shot vs. Repeated Games
• Transactions = one-shot game  zero-sum contest
• Relationships = repeated games  win-win cooperation
19
(Buyer)
1. Set the rules 2. Consume
Accept/buy/use
(Buyer)
Continue or churn?
(Buyer)
Pre-set offer (& price)
(Seller)
3. Repeat the game?
Loyalty?

“Pricing and packaging
…for subscription businesses it is one of the most
powerful growth levers you can have...”
... you're not pricing an object, you're pricing
an outcome... customers may assign different
value to the same outcome.
...But what happens when you get it right?
…customer acquisition gets much easier
…churn gets reduced. …value is translated
into revenue...a virtuous cycle...You can
create intuitive customer journeys... when
your pricing model locks into that subscriber
journey, …your business model locks into
subscriber relationships, …a valuable
company is born.
[emphasis added] 20
(Zuora -
SaaS for 900+
Subscription
Businesses)

• Operations
– UX/CRM/CFM/SM/chatbots…
– Dialog
• Essence
– Value exchange
– Value propositions
• Dialogs about value
– Talk at customer?
– Hear from customer?
– Transparency, trust
Connecting the Value Exchange
21
dialog
dialog
dialog
dialog
dialog
dialog
business

Aligning Price with Value
• Exchange of value as basis
• Price as the monetary balance
• Prices usually set by business
– Take it or leave it
– Uptake, churn, retention deals (squeaky wheel)
• What basis for price???
– Cost-based?
– Competition-based?
– Value-based? (average or customized)?
22

23
Set Prices Are So Last Century!
(Watch video on YouTube)

Set Prices Are So Last Century!
Now taken for granted, but unnatural!
• Historically: Prices personalized (village market)
– Personal negotiation – human buyer and seller
– Personal contexts – needs, bargaining powers, relationships
– Communal norms (win-win): caring, fairness, even generosity
• Mid-1800s: Price tags / institutions (department stores)
– Institutional sellers – mass market of “consumers”
– Scalable – simple, operationally efficient
– Exchange norms (zero-sum): take it or leave it, bargain hunting, exploitation
• E-commerce: Mass-personalization? 1:1 marketing?
– Why not price?
– End race to the bottom, commoditization – personalize a fair price for value
– How to do it fairly, effectively, efficiently at scale???
24

Value-Based Pricing
(for Consumer Markets?)
• Prices based on actual performance/outcomes
• Proven effective in B2B markets*
– Win-win: Buyer and seller agree to share in the
actual “value surplus” – as co-created
– High economic efficiency, reduced pricing risk,
transformative competitive advantage,
customer-first
– But: high cost/effort for custom analysis
*See Value-Based Pricing Is Transforming B2B -- Now for B2C... and Finding Value in The Subscription Economy
25

Usage-based Pricing
…More value-based
• "at its heart, usage-based billing is a way of quantifying
value...how they actually use your service...a 'value metric.'
Simply put, a value metric should do three things:
– align to customer needs,
– grow with the customer,
– and be predictable (both for customers and the organization).“
• Based on Zuora customer data (900+ companies, B2B+B2C):
– Fastest growth is neither 0% nor >50% usage-based.
– Easy stop and start also contributes.
– Referring to cable companies, "smarter usage-based billing...will
make their video content services more responsive and valuable.”
• Conventional wisdom: consumers dislike usage-based pricing
• Is there a smarter way?
26

Through the digital looking glass
The Paradox of Digital Abundance
And Artificial Scarcity
27

Monetizing:
Digital Offerings in Networked Markets
• Dilemma: Pricing for digital information
– “Information wants to be free” (infinite replication)
– “Information also wants to be expensive” (creation)
• Answer: Re-think our value exchange process
– Not allocating scarce resources (no invisible hand)
– Still need to sustain creation (pay for future services)
Balance value, ability to pay, cost, profit …How?...
Hint: Consumers want to pay (...if you deserve it)
30

The Long Tail of Customer Demand
Customers are not the same!
Customer experience is not the same!
31
• Green revenue: capped at set price
• Red head: lost surplus
• Amber tail: lost sales
…Dynamic and context-dependent
(see Long Tail blog post)
[You can lead the Long Tail of the horse to convert,
but how do you keep it from churning???]

A digital “product”?
• Valued as an “experience good” – a service
– Not discrete, scarce “product”
– Access, entitlements, usage
– Personalized variations (items, time, intensity, volume, actions, …)
– …all measurable – rich instrumentation in use – Cloud of Value
New data on value for each consumer
• Near-zero replication cost ( “Free”)
• “Free” as a selling tool (eliminate price risk to customer )
– freemium, pay what you want, tipjars/crowdfunding, free trials …
 Better: Embrace dynamic variability, control pricing risk
32

A key part of the answer…
Separate the Sale from the Price!
Post-Pricing
33
–Thanks to John Blossom, Shore Communications (ContentBlogger)
“Pay as You Exit: FairPay Explores New Content Pricing Discovery Regimes”
Watch video on YouTube
(Relevant portion is 1:30-2:15, but all is amusing. If video is removed from YouTube, search by title for an equivalent version. Also may be available on DVD.)

A key part of the answer…
Separate the Sale from the Price!
Post-Pricing
Why not price the experience after it is known?*
• Unlike typical up-front offers (Pay What You Want, etc.)
• Remove the consumer’s risk discount (or rejection)
• Signal supplier’s value and trust
(Timing aspects: packaging/bundling, usage levels, unit price schedules)
_________
*= post-pricing = ex-post pricing = price in arrears = price as you exit = price it backwards
34
–Thanks to John Blossom,
Shore Communications
(ContentBlogger)
“Pay as You Exit: FairPay
Explores New Content
Pricing Discovery
Regimes”
– Watch the episode

Relationship Business Models
Fundamental Questions
• Who takes the pricing risk?
– Who decides the price?
Seller (usual)? Buyer (PWYW)? Jointly?
• Manage value and risk to each party
• Apply best information
– When do they decide it?
Before selection/experience? At…? After…?
• Knowledge of selection/experience
• Effect on decisions and risk
35

Climbing The Ladder of Value
Relationships, Risk, Timing, and Participation
• Relationship Perspective: Transactional Relational
• Pricing risk: Will I get my money’s worth?
– Sellers can reduce customers’ risk (if low marginal cost)
• Value: Value-in-use is best assessed…
– after use (timing = pre-pricing/post-pricing)
– with recipient input (participation = seller/joint/buyer)
• Price/Value: aspects:
– Packaging: who defines packages, before or after use?
– Usage levels: does pricing depend on actual usage?
(with fair volume discounts?)
– Price schedules: set by seller?– buyer? – joint?
– Ability to pay: fair to each buyer (and the seller)?
FairPay points the way up the ladder*
*Post-bundling as an intermediate example: post-packaging / discounted usage / seller-set price schedule.
36

FairPay
A Strategy and an Architecture
Information wants to be free
Consumers want to pay…
(when they think it fair)
37

Steps Toward FairPay
Post-pricing + Pricing participation
• Conventional: pre-pricing + seller control
• Post-pricing / post-bundling only + seller control
– Risk-free subscriptions
• Voluntary FairPay = Post-pricing + buyer control
– Voluntary pricing (PWYThinkFair) + soft fairness
nudging
• Balanced-FairPay = Post-pricing + balanced control
– Fairness-gated PWYTF + fairness nudging
38

The Relationship Economy
How can we center on value? (in B2C)
39
(See my journal article and/or this summary article)

The Game Theory of Commerce
One-shot vs. Repeated Games
• Transactions = one-shot game  zero-sum contest
• Relationships = repeated games  win-win cooperation
40
(Buyer)
1. Set the rules 2. Consume
Accept/buy/use
(Buyer)
Continue or churn?
(Buyer)
Pre-set offer (& price)
(Seller)
3. Repeat the game?
Loyalty?

Change the Game!
One-sided Loyalty vs. Joint Fairness
• Conventional repeated game = Customer Loyalty:
“Here is our monthly price, take it or leave it. We
hope you will take the risk -- and be satisfied
enough to continue this game.”
• FairPay repeated game = Joint Fairness:
“We will remove the risk and let you pay what
you think fair for you after each month’s use --
but we will continue that game (beyond a few
trial cycles) only if we agree that you are being
reasonably fair.”
41

Accept/buy/use
(before pricing)
(Buyer)
Set “fair” price
(after buy and use)
(Buyer)
Track price
(Seller)
Fair to seller???
(Seller)
Gated FP Offer
(selective privilege)
(From Seller)
Price it BackwardExtend it Forward?
(after trial)(limit FairPay credit)
FairPay Dialog Cycle
Continuous journey of adaptation – a new balance of powers – a “repeated game”
1. Set the rules 2. Set the price
3. Repeat the game?
*
* Can relax criteria in Voluntary Payment Mode ** Can restrict buyer pricing power for more conventional control
**
Fairness?

FairPay Value “Sweet Spot” Discovery Engine
Continuous journey of adaptation – Frame/nudge/track
Seller-
gated
Premium
FairPay
Offer
Seller-
gated Basic
FairPay
Offer
Buyer
Accepts
FairPay
Offer
?
Buyer
Tries
Product
/Service
Buyer
Sets
FairPay
Price
Seller
Tracks
Fairness
of Price
High
-Fair
Low-
Fair
Un-
Fair
Buyer
Seller Sets Price
(take or leave it)
Buyer Accepts
Set-Price Offer ?
Buyer Uses
Product /Service
FairPay Zone (revocable privilege)
Conventional Set-Price Zone (Paywall)
43
Value/FairnessOffers
*
* Can relax criteria in Voluntary Payment Mode – no paywall (positive nudges only)
** Can restrict buyer pricing power for more conventional control
(Also a repeated game, but less cooperative and win-win)
**

Seller Control and Predictability?
Frame/nudge/track
• Managed dialog – “choice architecture” – fully personalized
– Seller: 1. Set the rules
• defines the offer / reports usage
• provides a suggested price personalized to that buyer’s usage
• frames the pricing rationale, and nudges with incentives (+, -)
– Buyer: 2. Set the price**
• sets FairPay prices (as a differential from suggested price)
• states reasons for their differential (multiple choice)
– Seller: 3. Repeat the game?*
• evaluates fairness of reasons – reciprocal value proposition
• frames new offers – manages FairPay credit and incentives
• Nudge buyers toward suggested prices – as fair exchange
• Test/review value propositions, offers, framing, incentives
• Start with those who will be delighted and fair…
44*Can relax criteria in Voluntary Payment Mode – no paywall (positive nudges only)

Aligning Price with Value
Pricing for the Co-Creation of Value
Intuitive blend of diverse factors, emerging over the relationship
 From provider to consumer (soft/fuzzy meter)
– Value-in-use / experience / outcomes
– Other “soft” value
• Service / support
• Participation / listening / responsiveness (comments, access to reporters, curators)
• Social values / “triple bottom line” / ESG (investigative journalism, community)
 From consumer to provider (“reverse meter”)
– Monetary payments
– Other currency -- “Consumer” as provider of value to “provider”
• Attention to ads (customized levels) / Personal data to exploit (customized levels)
• User-Generated Content / Co-creation (eg: participatory journalism)
• Promotion / virality / leads
• Volume/loyalty discounts
Can extend through the ecosystem value chain
– Even with ads, the user becomes the customer  value propositions matter
– Designations of value share to creators/suppliers (vs. intermediaries)
– Sustaining Bonus contributions (split to creator/supplier)
45

Lifetime Value in Relationships
Seeing through the Customer’s Eyes
• Customer Lifetime Value (CLV) – to Vendor
– Not current sale, but lifetime value
– Balance CAC (Customer Acquisition Cost) with CLV
• Vendor Lifetime Value (VLV)– to Customer
– Convenience, trust, real loyalty, communal norms
– Dialogs about value (outcomes) -- “Value nurturing”
– Procedural utility: “Not only what, but how matters”
46

From Invisible Hand to Invisible Handshake
…Creating Shared Value over relationship – a repeated game
47(see Invisible Hand, Invisible Handshake, and Customer Journeys posts)

Key Evidence and Enablers
Consumers want to pay (…if deserving and fair)
• Behavioral Economics and Game Theory
– People are not heartless profit maximizers (eg: traditional, PWYW generosity)
– Traits: Fairness, reciprocity, altruism, self-image, acceptance, …
– Situations: Social/communal norms vs. economic/exchange norms
– Repeated game: Invest in fairness reputation to gain continuing privilege
– Treat me as a patron, make me want to be a patron
• Computer-mediated dialog (AI) – Customer journeys
– Facilitate automated dialog about what I value, on what basis …and act on it
– Engage me as a patron, show you hear/understand me
• Big Data + IoT + Predictive analytics (AI) – Cloud of Value
– Use data to validate customer dialogs about value, incentivize honesty
– Customize offerings and how they are framed
– Show that you recognize and respect my desires as a patron
 Adaptive, cooperative, “customer-first” relationships – “dialogs about value”
1. Segment based on fairness traits (social values) and value propositions
2. Foster social/communal norms (participation and dialog)
3. Nudge buyers toward fairness, perception of value, sharing value surplus
4. Motivate a repeated game that is win-win
48

FairPay Usage Scenario
Newspaper Subscription – “The Bugle”
Just one simplified example
[Example slides moved to end (91)]
49

Phasing in…
1. How much pricing power to yield to customers?
• Can limit FairPay to a contained niche offering
• Can build and apply in incremental stages
Level 1: Voluntary Payment Mode (much like tipping)
• Simple Pay What You Want  Pay What You Think Fair + Post-Pricing
• Pricing unrestricted by fairness – no fairness gating – but soft nudging
• Post-pricing (“as you exit”) based on value – makes PWYW more fair
• Good transitional step for services that are currently free (or extras)
Level 2: Balanced FairPay (nuanced seller control)
• “Gated” by seller (minimum fairness threshold) – most of the cost, complexity
• Manage thresholds adaptively -- loose or strict control by seller
• A “repeated game” – to keep playing, invest in reputation for being fair
50

Phasing in…an 80/20 half-step
2. Post-pricing only – maintains full seller price control
The “Risk-free” Subscription
• Many sellers fear yielding any price control
• “Risk-free” “Post-bundling” achieves post-
pricing benefits, retains full seller price control.
• Less adaptable to varying experiential value or
ability to pay, but still far more fair and flexible
• For any kind of content/service – news, mags,
TV/video, music, games, podcasts, etc.
51

A Risk Free Subscription?
(Compare to $5/mo AYCE*)
52
• Run of house access
• Month-end bill, on value of usage -- discounted
• No use = $0 (not $5)
• Increasing usage ramps up fee
…but with volume discount (often <<$5)
• Cap for high usage ($5+?) – no nasty surprises
• “Quality Refund” button on each item
• “Reverse meter” credits value of attention to ads
 Acquire and keep more customers
More profit, even if lower average CLV
(*All You Can Eat)

TV/video Post-Bundling
vs. Cable channel bundles
• Price as a bundle at period end (after use)
• Buyer gets run-of-house access (by category/level)
(No lock-in or lock-out by pre-selecting premium channels)
• Bundle price reflects volume discounts
(align with unlimited usage plans, factor in premium items)
• Offer a price cap to limit risk
(like unlimited, maybe a bit above)
• Discounting versus flat-rate Pay Per View (micropayment)
• Seller retains full control of price rate schedules
“Risk-free”
53

The money-back guaranty
Disappointing items are free
• Quality Refund button on each item
• Full or partial refund at user discretion
• Monitor user refund request patterns
• Optionally cap excessive refunds
= A basic form of FairPay fairness gating

Value metrics
A design parameter
• Consider item type, count, usage
duration/dwell, sentiment, item feedback
• Weight based on “Value Models”
• Normalize to price schedule and apply
• Track/analyze price and usage feedback
• Calibrate/refine Value Models

Extensions
From Risk-Free to Participative FairPay
• Publisher sustaining bonus
– Request sustaining contribution – voluntary???
(based on value-usage)
– Nudge (at selective intensity, based on value-usage)
• Creator/author sustaining bonus
– Flag likely candidates and suggest contribution
in invoice (based on value-usage) – voluntary???
– Nudge…

Aggregation? (Netflix, Apple, …)
Win-win ecosystems
• Customers want value and convenience
• Publishers want direct relationship
…and so do loyal customers
• Aggregators fill the gap when usage is sparse
• AYCE: zero-sum battles: platforms vs. publishers
• Risk free: facilitates finding win-win blend
– Interoperable
– Graceful transitions from casual to dedicated
– Fair, win-win sharing of revenue, data ownership
57

Thinking about the road to FairPay…
58

FairPay can be tested, phased in
“Toe-in-the-water” examples for News Subscriptions
Acquisition =“Fuzzy Freemium”
Paywall balkers? – special limited usage “trial”
versions, tie-ins, gamification, membership
”club”
Retention (Saves) low usage, low price
Premium “club”/“patron” segments curated, early access/new releases, quality,
downloads/offline use, added features
Usage /style segments
Limited usage?
low/high usage, low/high cost,
song frequency, …
Content segments: Long-tail / genre indies, back-list, genres
Device segments phones, embedded systems
Family Plans “seats,” concurrent use
“Deserving” sellers compensation to artist/creator
Trials, sampling, coupons, specials limited offers
Special branding distinct from conventional
Retention offers (“Saves”)
(Revenue recapture)
low usage, low price
Acquisition (=“Fuzzy Freemium”)
(Revenue from day one)
versions, tie-ins, gamification, membership
”club”
Premium “club”/“patron” segments
(Eg: NY Times “Premier”/”Insider”)
curation, early access, journalist access,
archives, downloads/offline, extra features
Usage /style segments low/high usage, low/high cost, alerts acted
on…
Content segments: Long-tail / genre investigative journalism, analysis, financial
insight, sports insight, crosswords
Device segments phones, embedded systems
Family Plans “seats,” concurrent use
“Deserving” sellers compensation to journalists, field reporting
Trials, sampling, coupons, specials limited offers
Distinct branding separate from conventional offering 59

Changing Consumer Behavior
Initial Sweet Spots
Back to the Future
– rebuild win-win social/communal norms and values
• Partial steps up the ladder (post-bundling, reverse ad meter)
• FairPay: small segments / value-focused tiers – low cost/risk
• High generosity users
– Superfans – loyal, perceive value
– Deserving providers
– High service / value-add – justify appreciation
• High cooperation users
– Thrilled to share price responsibility
– Willing to bear burdens to do it right
…The thin end of the wedge of behavior change
60

Concerns?
• Too much cognitive load for users?
– Analogous to tipping
– Easy, intuitive, with rich multi-dimensional nuance
– Happily pay more than you “need,” often generously
– Can shift to autopilot once value patterns are learned
• “Why should they get it for less than me?”
– Apples vs. oranges – very different usage, value, ability to pay
– Statistics can show that (multivariate)
61

Platform and Database Opportunities
• Single vendor – internal process solutions
• Cross-vendor – added leverage, info
– Shared infrastructure and processes
= “Pricing as a Service” (PaaS)
– New: FairPay Fairness Reputation Database
• Across vendors and contexts (fairness ratings + details)
• Use like credit rating database (“FairPay credit line”)
• Detailed data on value perceptions and willingness to pay
Database asset / “Data moat” -- first mover advantage
• Interest by established platform vendors (Zuora, …)
– Plug-ins / SaaS
• Entrepreneurial startups???
62

A New Cloud of Value
• Implicit signals of value
– Traditional + new IoT data (“E-Books are Reading You” example)
• New: Explicit expressions of value
– New, generate from FairPay “dialogs about value”
– Validate consistency with implicit signals
Adaptively win-win customer journeys
• Focused, flexible value propositions
– Match to customer perceptions, contexts, times
– Sell value: a positive experience (not focus on price)
– Build a relationship (not just customers, but patrons)
63

A Flexible, Extensible Architecture
Subsumes major alternatives
• Coexist with conventional pricing (segment by fairness)
• Tunable parameters (choice architectures)
– Gating, nudging, warning, dispute-resolution
– Up-selling, down-grading
– Find sweet spot between liberal or tight control
very tight = conventional <-------(FairPay)-------> very liberal = PWYW
• Analogs of conventional methods, plus new ones,
in any combination
– Advertising (reverse meter)
– Freemium, Paywalls (metered/soft)
– Tiers, segments, dynamic/usage pricing
– Customized mix of customer revenue and advertising
– …
64

Business Contexts
• Ongoing relationships
– Subscriptions (ongoing services)
– Item Aggregation (iTunes, Amazon, App stores, …)
• Experience goods
• Low marginal cost, perishable, promotions
(Also, costly goods, using a minimum price floor)
• “Deserving” sellers/producers
(For profit … and non-profit)
65

Product / Service Category Examples
• Anything with low marginal cost
– Long-tail / low-demand products (expand market / gain revenue)
– Short-head / high-demand products (expand market / gain revenue)
• Digital content / products /services (by item or by subscription)
– Social media /communications
– News / information / magazines
– Music / audio / podcasts
– Video
– Games
– E-Books
– Apps / Software
– Other Digital Services
• Real products /services (especially experience goods)
– Low marginal cost (primary product or extras/support)
– Sampling / trials /coupons (eg: Groupon)
– Perishable excess (eg: hotels, transport, museums, events)
– Costly goods with a minimum price floor + FairPay bonus
66

Alternative Paths
Theory X or Y?* / make the shift
X. Zero-sum – one shot games
exploitation, alienation
Y. Win-win – repeated games
 cooperation
– Empowerment, Dialog, Reputation
– Trust, Transparency, Loyalty
– More customers + more profit
– Single, real bottom line that is value-based
(*Analogous to Theory X and Y management)
67

“What Lies Beyond Paywalls” (Theory X)
vs. “Patron-izing Journalism” (Theory Y)
• Opaque, one-sided dynamic pricing (current direction)
– Transaction focus
– Psych out “propensity to buy”
– Secretly seek to hog value surplus for seller
– Breed distrust, zero-sum  risk CLV and VLV
• Transparent dynamic pricing (FairPay)
– Relationship focus
– Dialogs about value
– Transparently share value surplus
– Breed trust, win-win  nurture value: VLV and CLV
68

“Price Discrimination” - Buyer-accepted
Economic optimum: price tracks to value
• Buyer “self-discrimination”  Legitimacy
(not imposed or hidden)
• Engages buyers – a rewarding process,
centered on personalized value propositions
• Infinite segmentation, in all dimensions
– Context, ability-to-pay, usage, time, devices, users, …
…Price discrimination can be good!
when it is “value discrimination”
69
Advanced Economics:

Usage/Value Pricing - Buyer-friendly
• Deadweight loss of “all you can eat”
unlimited subscriptions
• Soften the “ticking meter” / no shocking usage bill
• Price considering usage, but…
– Buyer decides, factors in:
• Usage history
• Volume discounts
(…with seller guidance)
– Soften the extremes – average out
– Suggest price caps
Price tracks to value (with affordability)
(Reduce risk of not getting your money’s worth)
Warm and fuzzy, good feelings
70
Advanced Economics:

Change the Game with FairPay
From invisible hand to invisible handshake
71
• From: set prices
 shop for “bargains”  commoditization
• To: FairPay participative value exchange
 shop for value, relationship  engagement, loyalty
• Delight your customers
– give pricing freedom, focus on value, gain loyalty
• Start with those who will be delighted and fair
 Emergent strategy
 Pricing “legitimacy”
 Higher profits + deeper market penetration (+ad $)
(See Handshake post)

Some Rungs on the Ladder
The FairPay Demon Challenge
(Why can’t our model be more like FairPay?)
• FairPay
• “Risk-free” post-pricing
Soft values as pricing factors
• Subscription access
– Value / Performance / Outcomes Pricing
– Bundled (pre-bundled, post-bundled)
– Usage-related (metered, tiered)
– Freemium
– All you can eat (AYCE) / Membership
– Advertising
• Ownership of items (& micropayments)
72

Ad Models and Reverse Meters
“Original sin of the Internet” – Facebook, Google, …
• Attention/Data/Value (vs “Engagement”)
• Ad-blocking/Hostility, Disinformation
“If you’re not the customer you’re the product”
• Reverse meter, quantify value
• Consumer ”the customer”
Incentives for ads to be valuable, non-intrusive
• Self-reinforcing
…for both advertiser and platform/publisher
73

Fixing Facebook
An 80% Solution that is Market-based
• User revenue vs. ad revenue?
Value (=customer) vs. engagement (=product)?
• Affordability?  FairPay (or similar innovation)
• Voluntary?
• Regulatory?
– Auto fuel efficiency model:
set target, let firms determine how
– 5% of Facebook revenue from users (or taxed)
– Then 10%, 25%, 50%, …
74

Ownership of items
(A la carte, Pay Per View/Article, Downloads)
• Base case
(“own” articles, music, videos, e-books, …)
• Simple, easy
• Value (one price fits few)
– Of owned item – for predicted, average user
– “Your mileage may vary”
– Favors heavy use – prohibitive for light use
– High consumer pricing risk
(how much will I use/want/like?)
– More risk if time-limited (Pay Per View/Article)
75

Subscription access
All you can eat (AYCE)
• Time-limited access – to many items
(“rent” articles, music, video, e-books, …)
• Simple, easy
• Value (one price fits few)
– Of access – for predicted, average user
– “Your mileage may vary”
– Favors heavy use – prohibitive for light use
(how much will I use/want/like?)
76

Subscription access
Freemium (All you can eat)
• Time-limited access – to many items
(“rent” articles, music, video, e-books, …)
• Really two tiers at fixed price: free + premium
• Value (two prices fit few)
– What cutover – to single non-zero price?
– Still significant consumer pricing risk
How much will I use/want/like? – for paid level
Disappointment/frustration? – for free level
77

Subscription access
Membership
• Like subscription (and/or crowdfunding)
• More cooperative, participative
– In value prop, including reverse value
– Sometimes in price
• Value (one price fits few?)
– Set price favors heavy use, prohibitive for light use
– May be voluntary payment, sometimes customer-set
– May add perks, merch (gimmicky distraction)
– High consumer pricing risk if set price
(how much will I use, want, like?)
78

Subscription access
Metered Usage
• Almost as simple, easy
• Value (usage-base)
– No volume discount
– Ticking usage meter
(usage shock?)
79

Subscription access
Tiered Usage
• Almost as simple, easy
– Feature tiers (Bronze, Silver, Gold,…)
– Usage tiers
• Value – a few prices fit better
– Gain from volume discounts
– Bumpy jumps, disappointments/frustrations
– Still a ticking usage meter?
– Moderate consumer pricing risk
(will tier fit, will I bump to next tier?)
80

[Pre-] Bundled Subscriptions
(Basic+premium TV channels, News brands+categories)
• Moderate complexity
– Need to choose bundle or categories
– Depends on usage pattern, categories
• Value
– Gain from volume discounts (vs. PPV/a la carte)
• Pre-selection risk
• Non-usage risk
81

Subscription Hell
Trending for New, Magazines, TV/video
• Proliferations of AYCE publisher subscriptions
• Desire to graze many offerings, gorge on few
• Share of wallet
82

“Risk-Free” Post-Bundled Subscriptions (new)
Run of house access, post-priced
• Moderate complexity
– No need to choose bundle
– Depends on usage pattern+amount, categories
• Value
– Gain from volume discounts (vs. PPV/a la carte)
– Low consumer pricing risk
– No pre-selection risk
– Moderate usage risk (especially if price-capped)
– Can offer instant item refund
83

Performance / Outcomes Pricing
(=Experiences)
• Improved value tracking – quality, results
• Common in B2B
– Average predicted outcomes (drugs: efficacy studies)
– Individual outcomes (ad-sales: pay per click, lead)
• Limited in B2C
– Instant refund – why not??? (eg: Blendle news articles)
84

+Soft values as pricing factors
• Broader values
– Creative input, investigative journalism, design, …
– Triple bottom line – People, Planet, Profit (or ESG)
• Now indirectly in conventional methods
(some premium factored into price)
85

Participative alternatives
Pay What You Want (PWYW)
Crowdfunding / Patronship / Tipjars
• Spectrum of how voluntary
• PWYW as one-shot game
• Pre-pricing vs. post-pricing
• Tiers and soft nudging
• Value-based
• 100’s of research papers on behavioral factors
• But usually not:
– Post-priced
– Adaptive nudging
– Disincentives for unfairness (carrot + stick)
High pricing risk to seller
86

Blockchain and Cryptocurrency
Transformative? or not?
• Micropayments
• Smart Contracts
• Distributed Ledgers
• Fundamental change to relationships?
– Trust/reputation/stake?
– Data/privacy?
– Operational efficiencies?
• Micropayments
• Ledgers
87

Interesting New Models…
• Crowdfunding: Patreon, Kickstarter-Drip, IndieGogo-InDemand
• HumbleBundle
• BitTorrent Bundles
• Flatter (Soundcloud), Kachingle
• Gumroad
• PressPatron
• PledgeMusic
• PayTime
• Blendle
• LaterPay
• Scroll
• Medium
• …
88

FairPay
Coexist with and/or mimic others
• Remove customer pricing risk
• Adaptive management of business pricing risk
• Dialogs on value can explicitly include key value factors
– Usage – with volume discounts
– Outcomes / experiences
– Soft values
– Variations over time
– Ability to pay
– History / reputation
•  Value discrimination
89

Thank You
Call to Action
• Questions?
• Strategic cooperation? Trials?
• Spread the word…
(leads to vendors, platforms)
• FairPayZone.com -- Overview, Details
• Book, Journal paper
• E-mail Reisman:
fairpay [at] teleshuttle [dot] com
----------------------
Additional Commentary Follows…
90

Just one simplified example
91

• Now, standard: Set-Price paywall (metered >10 articles) = $10*
+premium Gold +$10*
+premium Platinum (FairPay perk)
• Add: selective FairPay subscription offers – “patrons” (=“members”)
1. Patron uses service each month
2. Bugle reports actual usage, with suggested price for that
…depending on number, type of articles read, other factors
3. Patron sets price as he wants, gives reasons for higher/lower as “fair”
4. Bugle rates fairness of price (specific to that patron)
5. Bugle selectively continues offers to that patron based on fairness
• Basic access if low-fair
• Premium access if high-fair (Gold or Platinum)
• No FairPay privilege (paywall-only), if unfair
6. Patron seeks desired level of offers, as “nudged” by Bugle
*Just one example: Set-Price Paywall retained as option, with price raised from $8 after introduction of FairPay,
FairPair suggested price “discounted” as $8 for typical user, matching old price (as anchor).
92

See How FairPay Pricing Adapts
in Some Sample Customer Situations…
• Adapting for different users:
– User attributes
– Usage levels and contexts
– Value propositions/perceptions
– Criteria for “fair” pricing
• As determined by the seller,
…in dialog with the user
93

FairPay Value Discovery Engine
Continuous journey of adaptation – Frame/nudge/track
Seller-
gated
Premium
FairPay
Offer
Seller-
gated Basic
FairPay
Offer
Buyer
Accepts
FairPay
Offer
?
Buyer
Tries
Product
/Service
Buyer
Sets
FairPay
Price
Seller
Tracks
Fairness
of Price
High
-Fair
Low-
Fair
Un-
Fair
Buyer
Seller Sets Price
(take or leave it)
Buyer Accepts
Set-Price Offer ?
Buyer Uses
Product /Service
FairPay Zone (revocable privilege)
Conventional Set-Price Zone (Paywall)
94
Value/FairnessOffers
*
* Can relax criteria in Voluntary Payment Mode – no paywall (positive nudges only)
(Also a repeated game, but less cooperative and win-win)
**

Preview: How the Pricing Adapts
in different customer situations…
1. Joe Average [Low-Fair] $12 Premium (probation)
2. Willy Wonky [High Fair] $24 Premium
3. Sam Student [Low-Fair] $3 Premium (probation)
4. Ron Retiree [High-Fair] $5 Premium
5. Mr. Big [High-Fair] $30 Super-Premium
6. Lou Lowball[Un-Fair] $6.40 Basic (probation)
not shown in detail:
7. Bob Basic [Fair] $8 Basic
8. Izzy Difficult [Un-Fair] Flat $10 Set-price paywall (Basic)
9. Speedy Flyby [n/a] $0* No sub, <10 articles/mo.
______________
*all plus ad revenue
95

Patron 1 - Pricing Request
sent to Joe Average after use
• You read 300 articles this month (vs avg. 300)
• 40 were premium features (vs. avg. 40)
• Your demographics are much like our typical patrons
• Recap recent pricing history…
• Suggested price for you = $16 (vs. paywall $10+10)*
----------
• Set your price as: __% above(↑)/below(↓) $16 (= $ ).
• Your reasons for pricing above (↑)/below (↓) suggested price:
↑ ↓ Coverage
↑ ↓ Quality
↑ ↓ Technical features/problems
↑ ↓ Investigative journalism
↑ ↓ Premium features/privileges
__________________
*Loyalty discount to FairPay patrons
96

Patron 1 - Pricing Response
from Joe Average
----------
• Set your price as: 25% above(↑)/below(↓)$16 (= $12).
↑ ↓ Coverage
↑ ↓ Quality
↑ ↓ Technical features/problems – 10-15 times
__________________
97

Patron 1 – Seller Response
to Joe Average
• Fairness rating
(subject to framing strategies on how this is communicated)
– Low fair this cycle
– Low fair prior cycles
• Bugle Action
– Continue basic and premium offers, but
– Warn premium access trial may be subject to probation;
must increase future payments or risk losing premium?
(Depending on overall patterns and context, may accept
$12 rate as still profitable for premium, or not.)
98

Patron 2- Pricing Response
from Willy Wonky [High-Fair]
• You read 600 articles this month (vs avg. 300) = Heavy use
• 80 were premium features (vs. avg. 40) = Heavy use
----------
• Set your price as: 20% above(↑)/below(↓) $20 (= $24).
↑ ↓ Coverage
↑ ↓ Quality
__________________
99

Patron 2 - Seller Response
to Willy Wonky [High-Fair]
• Fairness rating
– High fair this cycle
– High fair prior cycles
• Bugle Action
– Continue premium offers
– Provide recognition/perks as Gold Patron
100

from Sam Student [Low-Fair]
• You are a college student at Podunk State
(includes student-rate discount)
----------
• Set your price as: 25% above(↑)/below(↓)$4 (= $3).
↑ ↓ Coverage
↑ ↓ Quality
__________________
101

to Sam Student [Low-Fair]
(Just like Joe Average, but at student rate)
• Fairness rating
– Low fair this cycle
– Low fair prior cycles
• Bugle Action
– Continue basic and premium offers, but
– Warn premium access trial may be subject to probation; must
increase future payments or risk losing premium?
(Depending on overall patterns and context, may accept $3 rate
as still profitable for premium to light usage student, or not.)
102

Patron 4- Pricing Response
from Ron Retiree [High-Fair]
• You are a retired, otherwise much like our typical patrons
(includes student-rate discount)
----------
↑ ↓ Coverage
↑ ↓ Quality
__________________
103

to Ron Retiree [High-Fair]
• Fairness rating
• Bugle Action
– Provide recognition (/perks?) as Gold Patron
104

from Mr. Big
• You got 3 Platinum Patron Circle features (vs avg. 5)
• You are a VP Finance at BigCorp – news/analysis is very valuable to you.
• Suggested price for you = $25 (vs. paywall $10+10+n/a)*
----------
↑ ↓ Coverage
↑ ↓ Quality
__________________
105

to Mr. Big
• Fairness rating
• Bugle Action
– Continue super-premium access level
– Provide recognition/perks as “Platinum Patron”
106

from Lou Lowball
• (0 were premium features – basic level service only)
• Recap recent pricing history… = “un-fair”
• You are now on final warning for pricing we consider not fair enough. To
continue FairPair patron offers you must set a price closer to our suggestion or
give better reasons to justify low pricing. (If you think we are not being fair,
please contact customer service.)
----------
• Set your price as: 20% above(↑)/below(↓) $8 (= $6.40).
↑ ↓ Coverage
↑ ↓ Quality
__________________
107

to Lou Lowball
• Fairness rating
– Low fair this cycle (slight improvement)
– Un-fair prior cycles
• Bugle Action
– Extend probation (for basic offers only), but
– Warn that basic access remains on probation,
must maintain higher fairness or lose FairPay privilege
(revert to <10 articles, or fixed-price paywall).
108

Recap: How the Pricing Adapts
in different customer situations…
1. Joe Average [Low-Fair] $12 Premium (probation)
2. Willy Wonky [High Fair] $24 Premium
3. Larry Student [Low-Fair] $3 Premium (probation)
4. Ron Retiree [High-Fair] $5 Premium
5. Mr. Big [High-Fair] $30 Super-Premium
6. Lou Lowball [Un-Fair] $6.40 Basic (probation)
not shown in detail:
7. Bob Basic [Fair] $8 Basic
8. Izzy Difficult [Un-Fair] Flat $10 Set-price paywall (Basic)
9. Speedy Flyby [n/a] $0* No sub, <10 articles/mo.
 Average rate may drop a bit, but number of customers should be much higher
 More profit, more total value
______________
*all plus ad revenue
109

Rethinking Revenue Models for Digital Services - 3/28/19 - NY Angels

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