Economics
Price, Markets and Technology

When Selling Digital Content, Let the Customer Set the Price

Burgess COMMENTARY

Peter Burgess

When Selling Digital Content, Let the Customer Set the Price

The newspaper industry is a good example of just how difficult it can be to thrive when business goes digital, especially if that business is chronically resistant to change. David Carr, at The New York Times, summarized the industry’s precarious position as follows:

“Producing serious news is an expensive enterprise with a beleaguered business model, one that remains tied to the tracks as a locomotive of splintered audiences and declining advertising hurtles toward it.” (The New York Times; October 20, 2013)

Yet, there may well be a light at the end of this tunnel, and it comes in the form of Jeff Bezos, founder of Amazon, who recently purchased The Washington Post, and Pierre Omidyar, founder of eBay, who shortly after pledged $250 million to create a new general-interest news site. The surprising investments of these giants of the digital age have certainly made disbelievers sit up and take notice. But Bezos was quick to pinpoint the key challenge ahead:

“The Post is famous for its investigative journalism. It pours energy and investment and sweat and dollars into uncovering important stories. And then a bunch of Web sites summarize that [work] in about four minutes and readers can access that news for free. One question is: How do you make a living in that kind of environment?” (The Washington Post; September 3, 2013)

Bezos’ question certainly resonates with us, as it embodies a fundamental problem that many businesses—sellers of newspapers, music, movies, videogames, software, etc.—are struggling to deal with. It is also a question that the two of us have studied closely, independently or together, for some time. Indeed, the shift of content to the digital domain has forced organizations to rethink their attitude to value creation, at times backtracking to the very issue of what “value” actually means. Despite this, the way companies convert digital anything into cash seems to be stuck in time, obeying rules that may have worked in the context of a physical product but make far less sense today. To be sure, some visionaries spotted this inconsistency and posited that “free” (and the hybrid “freemium”) is the clever way forward. Unfortunately, the idea of giving stuff away today in the hope of a hefty payday tomorrow has caused new problems that are not straightforward to solve. Meanwhile, other visionaries preach hard lines of “pay walls” or softer versions with metering. The goal here is to set one or few rigid prices. This tends to be favored approach of traditional content providers. But if you consider the possibility of infinite variety that comes with a digital platform, not to mention the low or non-existent marginal costs, this model is probably leaving good money on the table. How can business make money from digital content, then? We believe that monetizing digital needs a fresh approach. In particular, we propose an architecture for pricing digital goods that is intended to move the exchange between seller and buyer from the transactional to the relational. This architecture reflects three key ingredients of today’s social marketplaces:

Empowerment. Companies are embracing the idea of delegating activities to their customers. We see this in marketing with product development and advertising, mostly. But what about monetization? How about letting customers participate—at least to some controlled extent—in price setting to raise their level of engagement?

Dialog. Gaining customer feedback is intuitive. But how often does the seller get involved and create a true dialog? And, even if there is discussion, how often is it tied directly to the pricing process? Modern e-commerce systems can enable rich automated value-focused interactions, but this capability is underused.

Reputation. Integrate the idea of social capital in the monetization approach. You can do this by creating a reputation score that relates directly to customers’ conscious use of the pricing power granted in point 1 above. Importantly, this score evolves over the course of multiple transactions.

We see these as general, flexible building blocks. One specific configuration is something we call FairPay. Here is how it plays out:

Empowerment. We take an extreme view: buyers first experience the product and then have the power to pay whatever they wish, including zero. The timing matters because (a) customers should know the product they are asked to sacrifice money for, and (b) it fosters reciprocity, a strong social norm. Moreover, there is a constraint in place to avoid freeriding: companies retain the right to make future FairPay offers (i.e., they can take away a customer’s price-setting privilege).

Dialog. Firms suggest reference prices to anchor a customer’s price offer and can provide reports to remind people of the value received. Customers are asked to justify the prices paid by indicating their reasons. Firms respond with counterarguments. Importantly, this dialog is structured for scalability and personalization through the use of modern choice architectures. The technology is there.

Reputation. Customers have a fairness rating. Choice architectures are then applied to segment customers in terms of fairness (and other attributes) and apply “carrots” (relating to product tiers, perks, etc.) to improve profitability or “sticks” (the threat to remove a customer’s price-setting privilege) to at least sustain it.

Our FairPay approach is only one application of the principles outlined above. No doubt different organizations can leverage this framework in different ways, not all of which will go so far as to allow users to pay what they want. Indeed, such experimentation is necessary to overcome the challenges businesses face in monetizing digital content. The key, however, is to move beyond the debate over free vs. fee to focus on empowering and communicating with customers, and finding ways to reward those who opt to pay.

Marco Bertini is an associate professor of marketing management at ESADE Business and Law School. Richard Reisman is founder of Teleshuttle Corporation, a media technology R&D boutique, and has developed a variety of pioneering digital services. His blog on FairPay is at FairPayZone.org.