Subscriptions are a disruptive force in many industries. When researching and writing Subscription Marketing, I was hard-pressed to find an industry that wasn’t being affected by subscription-based entrants.
Subscriptions fundamentally change the customer relationship from a one-time transactional engagement to an ongoing interaction and relationship. That shift changes nearly everything:
- How you deliver goods and services
- How you market to customers
- How you support customers
- What people are looking for from vendors
How about pricing? Is it time to rethink the traditional model of vendors unilaterally setting prices that apply for all customers?
Richard Reisman, president and founder of Teleshuttle, thinks so. He lays out his vision in the book FairPay: Adaptively Win-Win Customer Relationships.
Value-based Pricing for the Subscription Economy
Reisman proposes an adaptive, interactive pricing process, based on the value the customer experiences. Described in his own words: “FairPay is a new logic for conducting ongoing business relationships that adaptively seek win–win value propositions in which price reflects value.”
Hidden in this definition is a radical shift: price isn’t determined by the vendor alone, but by the vendor in a one-on-one collaboration with each customer.
Here’s how it might work, as described in the book.
To begin, a business might invite a subset of customers to participate in the FairPay pricing process, such as loyal customers or prospects for a new service offering.
The customer is invited to use the service for a fixed period of time, and then set a price based on what they feel the service is worth, after the fact. The vendor must accept the price for the cycle that has completed, but can decide whether to extend the FairPay offer for future cycles based on the pricing logic established by the first iteration.
If the vendor and subscriber agree that the price is fair enough, then the relationship continues based on these terms. If not, the subscriber could revert to a traditional pricing scheme. Each subscription cycle essentially serves as a trial of the pricing process.
By understanding the factors that contribute to the customer’s perceived value, businesses can make better suggestions about price points. (Cognitive science geeks should realize that the framing effect comes into play here.)
If the subscriber’s usage changes, their perception of value (and hence negotiated price) may adapt as well. When businesses add features that increase the value of the solution to customers, their revenues can grow.
Over time, the aggregate effect to business revenues can be powerful: pricing that accurately reflects the value realized by customers. Writes Reisman, “What matters is not any one cycle, but how the cycles motivate and converge on cumulative fairness over the relationship.” The repetition of the pricing process “gives the buyer the incentive to be fair and cooperative enough to satisfy the seller.”
Because the pricing process must repeat over time, it’s a natural fit for the evolving Subscription Economy.
The book describes different scenarios and economic models in more detail. I’m interested in the ongoing, human relationship part of this process.
The Value Nurturing Perspective
FairPay is an intriguing proposal. The cognitive science aspect alone is fascinating. If it catches on, FairPay will spawn many graduate school theses in game theory.
The model brings the business much closer to its customers. Business revenues depend on individual negotiations (albeit automated) with customers. Instead of running “voice of the customer” surveys, you can see how people vote with their actual dollars.
The pricing model itself is based on both trust and value: the two core components of a successful subscription marketing practice. Price reflects the customer’s experience of value, and both vendor and subscriber must trust each other to participate in this interactive price negotiation.
In many ways, the FairPay pricing model is the perfect complement to the practice of value nurturing outlined in Subscription Marketing. Organizations that adopt a FairPay pricing must work hard to nurture the customer’s perception of value, both within the solution and beyond.
What Do You Think?
What do you think?
As soon as you start picturing this in your head, questions will pop up. What about my high-value customers? How would this affect revenues? What if everyone buys and no one pays? Reisman addresses these issues in his book, so I won’t do it here.
But before you start thinking of the objections, ask yourself this:
How would FairPay change the way you do business?
How would your business operate today if your revenues were directly tied to the customer’s perception of value? What would you do differently in marketing, product development, or support? How would it change the way you think of customers, and of pricing?