we must now rewrite the algorithms that shape our economy if we want our society to prosper in the age of the brilliant technologies of the 21st century, and use them to create a more human-centered future
WTF? What’s the Future and Why It’s Up To Us
Tim O'Reilly
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I look forward to reading more — you point in an important direction! In the spirit of seeking “tools for understanding how all the parts of modern digital businesses work together to create marketplace advantage and customer value, and why…they cannot succeed unless their ecosystem succeeds along with them,” I suggest some simple re-thinking of “the unexamined rules we use to guide our economy” can point the way to some very fundamental improvements very quickly, with deep and far-reaching effects on how our economy operates to create both individual and social value.

  • Some management scholars and businesses are beginning to re-examine the “goods-dominant logic” of the past and understand the “service-dominant logic” that we really need. This meshes with recognition that value is not created by “producers” and purchased by “consumers,” but that “actors” in ecosystems work together to co-create value, which flows in multiple directions.
  • My work, outlined on my blog, and in my recent book, FairPay: Adaptively Win-Win Customer Relationships, builds on that and extends it based on a further (and even simpler) shift in “the unexamined rules we use to guide our economy,” relating to a fundamental component of our “fitness functions” — pricing. FairPay provides a new logic for the relationship between price and value. Through most of history, prices were set cooperatively by both buyers and sellers, but in the mid 1850’s we shifted to a logic of price tags— where institutional seller set prices unilaterally, to be imposed on customers, take it or leave it. Much of what has gone wrong with modern business devolves from that shift: zero-sum games of bargain hunting and a race to the bottom, with lack of trust and transparency on both sides.
  • FairPay provides a new cooperative logic that goes beyond currently emerging realizations that businesses must be relationship-oriented, and customer-centric. It is not enough to be customer-first (how do we maximally exploit the customer?) — businesses must become customer-value-first (how do we work with each customer to maximize the value they perceive, and get the most from them in return?).
  • The digital world has cut adrift the invisible hand of Adam Smith — with no scarcity of supply to allocate in the case of digital products/services, there is no basis for pricing them). But, at the same time, it has enabled us to shift our logic to new forms of cooperative price setting that are based on co-creative relationships.

Already people are beginning to recognize that when we buy a digital subscription, we are not buying current content, but agreeing to sustain the creation of new content going forward(this is especially clear in the age of “fake news,” as readers suddenly recognize their public duty to pay to support real news). FairPay points to how to build on this new social contract, as an invisible handshake, in which creators and their patrons agree to build an adaptive relationship in which the creators are fairly compensated for the creation of new content/services. That contract can provide for purely voluntary patronship — or can give selected levels of balancing power to the creators if they wish to make continuing to provide their content to a given consumer contingent on whether that consumer is reasonably fair in their level of support (measured not in absolute prices, but in share of wallet). The latter would be more suited to profit-driven businesses.

At whatever level of discretion the business chooses to allow (as long as it is not too limited), the customer can be permitted to participate in pricing, and it becomes a win-win game. This works not at the level of individual transactions, but at the level of a relationship. It structures the relationship as a repeated game that builds cooperation and converges toward fair pricing levels that vary from person to person and from time to time. Similar to the narrow economic concept of ideal price discrimination, this converges toward ideal “value discrimination” in which each party seeks to maximize the co-creation of value in a broader sense, including all forms of value that matter to them.

This personalized, one-to-one, value discrimination can factor in all of the soft, personal, and societal values that matter to each consumer, and can factor in both willingness and ability to pay. That can expand markets to all who value a service, and can help reverse the current patterns of income inequality — by selling services at low prices to those who use less or who can’t afford to pay more, and higher prices to those who get, and can pay for, more value.

An illuminating proof-point is in the value-based pricing that is becoming best practice in some large scale B2B markets, where it is proving transformative, and able to increase CLV. Such efforts have been complex and are not readily scalable, but FairPay shows how a “good enough,” lightweight, emergent approach can be made simple and scalable enough for mass B2C markets.

FairPay is new and unconventional, and will involve a learning curve — so, at first, it may be best applied in narrow business sectors and for small segments of the market, but it makes sense to start there now, and then learn how to expand this thin end of the wedge. Initial markets include journalism, music, e-books, and many other forms of content, and segments to start with are news junkies and superfans, and the socially-conscious. The successes of membership models in journalism and similar patronship crowdfunding models in other content areas already are beginning to show how this can work. FairPay shows how that can be made far more powerful, for broader market segments. It can even extend to costly, real products.

In time we will look back at our current presumption that sellers should set our prices unilaterally and wonder why we let that prevail for so long! As that sinks in, many other aspects of zero-sum business thinking will also fall by the wayside. The result will be a market commerce that is more cooperative, fair, and human.

And that can provide a more positive context, and a powerful economic basis, for revisiting the many other “unexamined rules we use to guide our economy.” Many of the problems we now face relate to “market externalities” that are not reflected in our business models (or our GNPs). With prices that more fully and accurately reflect all the values that matter to us (on a case by case basis), those externalities will be internalized and resolved in the course of our normal business operations.