Using FairPay to shift from isolated transactions to cooperative pricing in ecommerce Original research published in the Journal of Revenue and Pricing Management (Richard Reisman and Marco Bertini, "A novel architecture to monetize digital offerings", 2018). The digital economy is forcing businesses to shift their approach to creating value for customers, yet the way they convert anything into cash still obeys rules and practices that made sense for physical goods but make far less sense today. Recent findings by ESADE Associate Professor Marco Bertini and Richard Reisman, President of Teleshuttle Corporation, reveal why digital businesses seem to be stuck in time and need to rethink their current pricing strategies to adapt to the new rules of ecommerce. The rapid growth of on-demand access with little to no cost has prompted businesses to market innovative subscription or membership models that leverage the appeal of "freemium" - a combination of "free" and "premium" where users get basic features for free but additional features or services cost money. But are these models the best way to monetize a business? "Many players face a deepening crisis: even recognized success stories such as the New York Times, Netflix and Spotify are probably leaving good money on the table or foregoing sales that would still be profitable at some lower price," says Prof. Bertini. "We believe that earning revenue in the digital age requires a fresh approach. Recently, we have noticed organizations using crowdfunding platforms or rather extreme mechanisms such as "pay-what-you-want" and voluntary memberships. We believe companies can do better." New revenue model In their article, the authors propose a new revenue architecture that aims to move the exchange between company and customer from the confrontational, impersonal and transactional to the collaborative, personal and relational. "We want to nudge the conversation away from price to value-for-money by championing three building blocks: empowerment, dialog and reputation." Prices should mirror the individual situations of customers Today's technologies make it possible to achieve personalization and dialog at scale, yet businesses are stuck in the "arm's length" logic that they set prices and the market accepts or rejects them. "Prices should mirror the individual situations of customers. Dynamic pricing is a booming field, but there is no real consensus on how to make this happen in a way that is palatable to customers," write the authors. The three building blocks In their findings, the authors suggest three building blocks that would allow companies to reap the economic benefit of price discrimination - charging customers different prices for the same product or service - while retaining the efficiency of institutionalized commerce. 1. Empowerment Should companies involve customers in their process of determining prices? After all, the authors argue, the "right" price from a company's perspective is contingent on the buyer's perceived value. Asking customers to participate in pricing decisions is empowering, and empowerment is known to foster engagement and satisfaction "The thought of yielding any pricing power to customers is often frightening to managers. However, a growing body of academic research and business experience shows that the selling context can be managed creatively to prime customers to pay fairly, and even generously," says Prof. Bertini. "Asking customers to participate in pricing decisions is empowering, and empowerment is known to foster engagement and satisfaction." 2. Dialog The ideal pricing process is one where the company gradually discovers what each customer values and why. By opening a dialog, the customer perceives a willingness from the company to reciprocate with increasingly tailored offerings. "Modern ecommerce platforms can enable this sort of rich, automated and personalized discussion. The technology is there, but it is currently underused," the authors warn. "We suggest that pricing processes should integrate dialogs with customers about all things of value, such as needs, wants, features, services, pain points and price levels." The ideal pricing process is one where the company gradually discovers what each customer values and why 3. Reputation Customer participation in pricing needs to be counterbalanced by feedback about results, a control mechanism for the company to decide when and how much discretion to grant. That is, the customers' power to set prices cannot be absolute; it must depend explicitly on their behavior. "We propose giving customers pricing privileges and establishing a 'fairness rating' for each customer, one that updates automatically over time." The fairness rating would reward customers who price generously with additional features and premium product offers, while customers who repeatedly price unfairly could be put on 'warning' and eventually their pricing privilege could be revoked. FairPay: a new logic for ecommerce How can businesses combine these three building blocks in practice to shift commerce from isolated transactions to cooperative exchange relationships? The authors suggest using FairPay, a new value-based revenue strategy that involves rethinking how businesses and consumers conduct business with one another. 1. FairPay and empowerment With FairPay, customers could be given the opportunity to experience the product or service and then set the price themselves. In this scenario, customers would have the freedom to pay whatever they think is fair, but companies would make this right revocable. By putting experience first and price later, this order would eliminate the customer's tendency to discount for possible disappointment and would signal trust, which fosters reciprocity. 2. FairPay and dialog In this scenario, the company would suggest a personalized price to guide the customer's decision. If the customer chooses a price that differs from this suggestion, she would be encouraged to justify her decision (especially in the case of a reduction). The dialog within FairPay would continue as long as the company accepts the customer's prices and the customer's fairness rating justifies extending her privilege to set prices unilaterally. 3. FairPay and reputation In FairPay, a customer's fairness rating would combine 4 elements: 1) the difference between the personalized price suggested by the company and the price paid by the customer, 2) the customer's explanation for this difference, 3) relevant details of the transaction and 4) the customer's history. This information would be updated at every purchase occasion and fed into future suggested prices. Companies could then make decisions at each customer-pricing cycle and extend rewards (additional product tiers, perks, etc.) to customers with excellent fairness ratings. Firms could also enforce penalties (such as the threat to discontinue the ability to set the price) to customers with poor fairness ratings. The invisible handshake FairPay is like an invisible handshake between a company and a customer. It is an agreement to cooperate: the firm gives its customers discretion over prices at each stage of the game, but this privilege can be revoked going forward if certain minimum acceptable conditions are not met. "Finding the right balance will certainly require experimentation and adaptation, which may diverge from the specifics that we propose, but the essential direction seems sound: to create a more open, adaptive marketplace that lets sellers and buyers interact and learn about each other in lasting relationships, while seeking outcomes that are mutually satisfactory," the authors conclude.

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Three building blocks to monetize a digital business

04/2018

Using FairPay to shift from isolated transactions to cooperative pricing in ecommerce


Original research published in the Journal of Revenue and Pricing Management (Richard Reisman and Marco Bertini, "A novel architecture to monetize digital offerings", 2018).


The digital economy is forcing businesses to shift their approach to creating value for customers, yet the way they convert anything into cash still obeys rules and practices that made sense for physical goods but make far less sense today.


Recent findings by ESADE Associate Professor Marco Bertini and Richard Reisman, President of Teleshuttle Corporation, reveal why digital businesses seem to be stuck in time and need to rethink their current pricing strategies to adapt to the new rules of ecommerce.


The rapid growth of on-demand access with little to no cost has prompted businesses to market innovative subscription or membership models that leverage the appeal of "freemium" - a combination of "free" and "premium" where users get basic features for free but additional features or services cost money. But are these models the best way to monetize a business?


"Many players face a deepening crisis: even recognized success stories such as the New York Times, Netflix and Spotify are probably leaving good money on the table or foregoing sales that would still be profitable at some lower price," says Prof. Bertini. "We believe that earning revenue in the digital age requires a fresh approach. Recently, we have noticed organizations using crowdfunding platforms or rather extreme mechanisms such as "pay-what-you-want" and voluntary memberships. We believe companies can do better."


New revenue model


In their article, the authors propose a new revenue architecture that aims to move the exchange between company and customer from the confrontational, impersonal and transactional to the collaborative, personal and relational. "We want to nudge the conversation away from price to value-for-money by championing three building blocks: empowerment, dialog and reputation."


Prices should mirror the individual situations of customers


Today's technologies make it possible to achieve personalization and dialog at scale, yet businesses are stuck in the "arm's length" logic that they set prices and the market accepts or rejects them. "Prices should mirror the individual situations of customers. Dynamic pricing is a booming field, but there is no real consensus on how to make this happen in a way that is palatable to customers," write the authors.


The three building blocks


In their findings, the authors suggest three building blocks that would allow companies to reap the economic benefit of price discrimination - charging customers different prices for the same product or service - while retaining the efficiency of institutionalized commerce.



1. Empowerment


Should companies involve customers in their process of determining prices? After all, the authors argue, the "right" price from a company's perspective is contingent on the buyer's perceived value.


Asking customers to participate in pricing decisions is empowering, and empowerment is known to foster engagement and satisfaction


"The thought of yielding any pricing power to customers is often frightening to managers. However, a growing body of academic research and business experience shows that the selling context can be managed creatively to prime customers to pay fairly, and even generously," says Prof. Bertini. "Asking customers to participate in pricing decisions is empowering, and empowerment is known to foster engagement and satisfaction."


2. Dialog


The ideal pricing process is one where the company gradually discovers what each customer values and why. By opening a dialog, the customer perceives a willingness from the company to reciprocate with increasingly tailored offerings.


"Modern ecommerce platforms can enable this sort of rich, automated and personalized discussion. The technology is there, but it is currently underused," the authors warn. "We suggest that pricing processes should integrate dialogs with customers about all things of value, such as needs, wants, features, services, pain points and price levels."


The ideal pricing process is one where the company gradually discovers what each customer values and why


3. Reputation


Customer participation in pricing needs to be counterbalanced by feedback about results, a control mechanism for the company to decide when and how much discretion to grant. That is, the customers' power to set prices cannot be absolute; it must depend explicitly on their behavior.


"We propose giving customers pricing privileges and establishing a 'fairness rating' for each customer, one that updates automatically over time." The fairness rating would reward customers who price generously with additional features and premium product offers, while customers who repeatedly price unfairly could be put on 'warning' and eventually their pricing privilege could be revoked.


FairPay: a new logic for ecommerce


How can businesses combine these three building blocks in practice to shift commerce from isolated transactions to cooperative exchange relationships? The authors suggest using FairPay, a new value-based revenue strategy that involves rethinking how businesses and consumers conduct business with one another.


1. FairPay and empowerment


With FairPay, customers could be given the opportunity to experience the product or service and then set the price themselves. In this scenario, customers would have the freedom to pay whatever they think is fair, but companies would make this right revocable. By putting experience first and price later, this order would eliminate the customer's tendency to discount for possible disappointment and would signal trust, which fosters reciprocity.


2. FairPay and dialog


In this scenario, the company would suggest a personalized price to guide the customer's decision. If the customer chooses a price that differs from this suggestion, she would be encouraged to justify her decision (especially in the case of a reduction). The dialog within FairPay would continue as long as the company accepts the customer's prices and the customer's fairness rating justifies extending her privilege to set prices unilaterally.


3. FairPay and reputation


In FairPay, a customer's fairness rating would combine 4 elements: 1) the difference between the personalized price suggested by the company and the price paid by the customer, 2) the customer's explanation for this difference, 3) relevant details of the transaction and 4) the customer's history. This information would be updated at every purchase occasion and fed into future suggested prices.


Companies could then make decisions at each customer-pricing cycle and extend rewards (additional product tiers, perks, etc.) to customers with excellent fairness ratings. Firms could also enforce penalties (such as the threat to discontinue the ability to set the price) to customers with poor fairness ratings.


The invisible handshake


FairPay is like an invisible handshake between a company and a customer. It is an agreement to cooperate: the firm gives its customers discretion over prices at each stage of the game, but this privilege can be revoked going forward if certain minimum acceptable conditions are not met.


"Finding the right balance will certainly require experimentation and adaptation, which may diverge from the specifics that we propose, but the essential direction seems sound: to create a more open, adaptive marketplace that lets sellers and buyers interact and learn about each other in lasting relationships, while seeking outcomes that are mutually satisfactory," the authors conclude.


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