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We believe that earning revenue in the digital age needs a fresh approach. But can we do better? We think so, and use this article to lay the foundations. In particular, we present a revenue architecture that aims to move the exchange between company and customer from the confrontational, impersonal, and transactional to the collaborative, personal, and relational.

Critically, we want to nudge the conversation away from price to value-for-money by championing three building blocks: empowerment, dialog, and reputation. The hope is that businesspeople embrace our recommendations and mold them to fit their unique goals and contexts.

The key to success is realizing that price is not an end in itself, but an instrument to balance perceptions of value and fairness in an ongoing relationship. Early experience and ingenuity will certainly dictate which specific configurations of our general architecture prove most successful.

To kick-start the debate, we introduce FairPay as one promising alternative. Throughout most of the history of commerce, price was the outcome of a barter, haggle, or negotiation between sellers and buyers, typically in the context of an ongoing relationship. Different buyers achieved different prices depending on their current situation, needs, and bargaining power. In other words, prices were participative and personal.

However, starting in around the s, the shift to mass retail shoved this protocol to the side. Shoppers no longer purchased from individuals, but from organizations preoccupied by economic efficiency. The company dictated terms, with prices set to achieve some financial objective and offered to the whole market on a take-it-or-leave-it basis.

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Indeed, the price tag gained popularity in those years with the arrival of the department store. Businesses may appreciate that prices should mirror the individual situations of customers as they once did , and indeed 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. Our suggestion seeks to reap the economic benefit of price discrimination while retaining the efficiency inherent to institutionalized commerce. The goal is to create an environment where company and customer explore different pricing rationales over time, searching for a balance that both sides perceive as fair.

To achieve this, we emphasize three building blocks for a similar rationale, see Bertini and Gourville Companies are embracing the idea of delegating activities to customers. We see it in product development and advertising, among others. But what about pricing? Moreover, asking customers to participate in pricing decisions is empowering, and empowerment is known to foster engagement and satisfaction for more on the relationship between pricing and engagement, see Bertini and Wathieu Customer participation of course need not be an all-or-nothing proposition, as different pricing mechanisms involve customers to different extents Bertini and Koenigsberg ; Spann et al.

Irrespective, consider for a second the extreme case of pay-what-you-want, which has gained a foothold in some commercial contexts. Intuition suggests that letting customers dictate prices is foolhardy, practical only as a cute promotional stunt. Indeed, the thought of yielding any pricing power 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—even generously Kim et al. Few customers take a purely self-interested economic perspective on exchanges.

Rather, people are often driven by social values and norms of fairness, reciprocity, altruism, etc. Tapping the market for insight and feedback is sound, intuitive advice. But how often does a company work to create a true dialog with its customers? In addition, even if there is a structure in place to communicate, how often does this structure inform the challenging task of putting a price on value? The ideal pricing process is one where there is plenty of learning, one where the company gradually discovers what each customer or, at least, different customer segment values and why, and in return, the customer perceives a willingness from the company to reciprocate with increasingly tailored offerings.

Modern e-commerce platforms can enable this sort of rich, automated, and personalized discussion.

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  • The technology is there, but it is currently underused. Two good examples are customer relationship management and social media systems, typically employed to manage interactions and build loyalty, not to engage customers into meaningful conversations. Our suggestion is that pricing processes formalize and integrate dialogs about all things of value—needs, wants, features, services, pain points, price levels, current and future transactions, etc.

    As a result, prices become emergent and better attuned to dynamic and complex market environments Smith We propose a practical form of this concept. Relationships depend on 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.

    We propose to anchor this feedback control on perceptions of fairness, as the overall objective is to focus both parties to an exchange on the need for outcomes that are mutually beneficial. This suggestion is a logical extension of the more familiar rating systems we see in reward programs, sharing services, credit scoring, and the like. Similarly, the fairness rating serves to reward customers who price generously with additional features, premium product offers, etc. FairPay is one vision, our vision, of how these building blocks combine in practice to shift commerce from isolated transactions to cooperative exchange relations.

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    This is how it works. Here, we take what may appear an extreme view: customers experience the product or service and then set the price unilaterally. However, we also make the privilege revocable. That is, customers have the freedom to pay whatever they think is fair, including zero, but retaining it going forward is conditional on the company perceiving that the relationship is converging to a price level that is acceptable for that particular individual.

    A variety of reference points can be provided to help customers and anchor their decisions. One of these references can be the standard fixed price, which also serves as the fallback alternative when customers are excluded from participating in the price-setting process because of freeriding or ineligibility.

    Indeed, the company may decide to limit the pay-what-you-think-is-fair privilege to certain customer profiles. This setup frames the exchange as a repeated game, in the hope of applying a certain balance of power between buyer and seller across iterations Greiff and Egbert Note the sequencing of experience first, price later.

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    The timing matters because it can be beneficial to take pricing risk off the shoulders of the customer especially when the marginal cost of supplying the product or service is negligible. A dialog structure is applied and managed in pursuit of a fair and agreeable balance of power between business and customer. If the customer chooses a price that differs from this suggestion, she is encouraged to justify her decision especially in the case of a reduction. This happens by means of simple choice templates, suited for automation and personalization.

    This may include—but is certainly not limited to—data on usage levels and patterns, costs, financial imperatives and objectives, social values supported by the company, and social benchmarks a table listing typical payments, ranking relative standings, etc. Ahead of the next transaction, the company recaps this evidence, as well as counterarguments as appropriate, to ensure that the conversation progresses. At the same time, the customer has the power to adjust the price to pay, and give reasons for any such movement a different perception of value, a change in the ability to pay, etc.

    Over time, this dialog gains richness and nuance since each party to the exchange is free to raise whatever argument or metric of value appears relevant to the relationship. Instead of bargaining over the price at single point in time, the bargaining is over these arguments and the value of the relationship as it evolves. This information is updated at every purchase occasion and feeds into future suggested prices.

    Not For Free: Revenue Strategies for a New World

    Decisions can then be made at each customer-pricing cycle—extending rewards additional product tiers, perks, etc. Decision rules for each segment of customers can be as liberal or stringent as the company desires, granting more or less freedom. The business retains control of the interaction and can engineer it to optimize customer lifetime value the total value received from that customer , profit, and market reach—and pricing risk.

    Balancing that on the side of customers is a shift in the focus of competition from price to perceptions of value received from the vendor, trust, and fairness. At the broadest level, this architecture subsumes the traditional company-imposed fixed price as the lowest-freedom case and pay-what-you-want as the highest-freedom case. FairPay is one of many possible applications of the principles outlined above.

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    Yet we see it is a lightweight and, importantly, scalable process for setting the right price to each customer at each stage of the relationship. Building the necessary infrastructure to support FairPay may seem daunting at first, but it is possible to start simple. Moreover, the fairness data gain value when aggregated across organizations. A company such as Amazon, or alternatively a payment processor, can aggregate fairness ratings across the merchants it serves and use the information much like credit scores help determine credit limits.

    Not for Free : Revenue Strategies for a New World

    One doubt that comes to mind is whether customers can cope with the added cognitive load of participating in the process of setting a price. Here, it is important to note that motivating customers to think about value is not necessarily a bad thing especially for a business that provides good value : there is considerable research in decision making showing that mental effort can stimulate the type of engagement that staves commoditization in a sector Bertini and Wathieu Moreover, one can manage the demand placed on customers by paying attention to depth, frequency, and structure of the dialog.

    Again, it need not be an all-or-nothing proposition. The first interactions with a customer are likely to be the most challenging. With familiarity, however, the pricing process updates in larger and less-frequent batches, and with less effort. These can be revisited periodically or on demand. Designed properly, an interactive pricing architecture need not be more difficult for customers than deciding on a tip after a pleasant meal at a restaurant. Notwithstanding, FairPay is new. Eager organizations need some time to apply it effectively.