3 building blocks to monetise a digital business

This article is based on research by Marco Bertini & Richard Reisman

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.

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 monetise a business?

"Many players face a deepening crisis: even recognised 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 Bertini.

"We believe that earning revenue in the digital age requires a fresh approach. Recently, we have noticed organisations 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, dialogue and reputation."

Prices should mirror the individual situations of customers

Today's technologies make it possible to achieve personalisation and dialogue 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 3 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 institutionalised 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 fosters 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 Bertini. "Asking customers to participate in pricing decisions is empowering, and empowerment is known to foster engagement and satisfaction."

2. Dialogue

The ideal pricing process is one where the company gradually discovers what each customer values and why. By opening a dialogue, 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 personalised discussion. The technology is there, but it is currently underused," the authors warn. "We suggest that pricing processes should integrate dialogues 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 behaviour.

"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 dialogue

In this scenario, the company would suggest a personalised 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 dialogue 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 four elements:

1. The difference between the personalised 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.
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.

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