Value is not the same as price.
Value is not the same as price.

A Disruptive New Pricing Model

Allowing users to appreciate value

If, 10 years ago, someone would have proposed a business model where employees are charged, as apposed to being paid, higher than average prices in exchange to travel at their own expense to do work most people don’t want to do, most people would have said you’re crazy. It will never work.

Yet, volunteering took the world by storm and continues to be one of the best business models around. People are literally standing in queues to pay more than they would for a much more luxurious holiday to work in a developing country at their own expense while contributing to the project on top of covering all their costs. There’s no sign that volunteering is decreasing and it remains as popular as it was when it was initially launched. Why? Because it is meaningful. It is real. It makes a tangible impact compared to the average day-job where most people have never met their customers or sometimes even their CEO.

If, 5 years ago someone would propose a business model where your profit would be as a result of selling something that you don’t own, people would say you’re crazy. It’s impossible!

Yet, AirBnB quickly became the biggest holiday accommodation provider worldwide while owning no property and Uber remains the biggest taxi service, owning no taxis. Why? Because it provides a more affordable, more personalized, human and homely travel experience compared to the overpriced hotels where you’re isolated, disconnected and lonely in a room designed by people who have never lived there. It’s the difference between being treated as just another customer and being treated as a valued friend.

If, 20 years ago someone said that people would be willing to pay more in exchange for less functionality, most people would have said you’re crazy. Yet, Apple proved that usability and intuitive design is more important to the average user than the sheer volume of functions available in an application. Compared to Microsoft, they offered a fraction of the functionality for more than double the price tag. Why did it work? Because Apple understood that it’s not about giving more, but giving what is useful. Having a plethora of options that doesn’t solve the problem you have, you can’t find or don’t know how to use it, it is as useless as not having it at all. Actually, worse.

If, a few years ago someone would propose to give away all their products for free, people would have said you’re crazy. It can never work! Yet, Google and Facebook remain two of the largest and most profitable tech companies with most of their products for free. Why? Because they understood that it’s not only about trying to sell something, it’s about having access to the network and meeting a need.

Allowing Over Demanding

In my teal manifesto, an article proposing a set of four values defining the future of organizations, the first value proposed is purpose over profit, where the meaning behind why you are doing what you are doing should be more important than simply focusing on making more money.

To expand on this vision, I propose another value to help guide the choice of business model. The value being** allowing customers to appreciate value over demanding a set price**.

Seems crazy? Maybe.

But it’s been around in more subtle forms for years and all I’ve seen is growth in popularity. Examples include a book publishing platform called LeanPub, which allows the author to set the price range and the user to choose how much they pay within this range.

Another example includes the tourism industry with the concept of Free Walking Tours, where people are asked for donations at the end of the tour. A few years ago I joined one of these tours and ended up paying more than the guideline price they suggested simply because it was such an amazing experience. Today, there are more tours on offer in more locations, which indicates that this model is working.

Firefox, a web browser, is another example how such a model can work. The browser is offered free of charge and each time you open the browser you’re given the option to donate money.

In retrospect, it seems crazy to expect customers to pay for something they don’t even know they will like, or charge the same for good quality and bad quality based on the category of product. Why should a bad tour guide be paid as much as a good one? Why should a good quality book cost the same as a bad quality one? Why should you as user take 100% of the risk paying for a product or service before you’ve even tried it? It seems unrealistic to me to expect the user to pay the same price for a crappy movie and an excellent one, when most people won’t accept paying the same for a crappy meal vs a really good one.

The Art Of Allowing

The most inspiring example of how well this works is how a goal of $100 000 exceeded expectations resulting in $1.2 million in funding. Such a return on investment could never be possible only by cutting costs or increasing sales. Watch the video below to find out how asking for support rather than demanding a fee resulted in this crowdfunding goal to be exceeded exponentially above expectations.

In Amanda Palmer’s TED Talk called “The art of asking”, she explains why she supports torrenting, illegal downloads and giving away her music for free.

Amanda Palmer: The art of asking

This famous musician started her career as a street performer, offering a flower and intense eye-contact to by-passers in exchange for coins as she stood still, painted white and dressed as a bride, on a box in the street.

At the end of the TED talk she mentions how a fan gave her money at the end of a live performance for a CD he downloaded illegally years ago. It struck me how much sense this made. Allowing people to become a fan and give you money based on their perceived value of your offering. This guy burned one CD illegally. The loss in revenue probably only being a few dollars (or even cents) at the time. He loved the music so much though that he not only paid her for the full cost of the CD directly to her, but also a much more expensive ticket to a live performance. Most likely, he continues to pay for her music and performances years later and shares it with friends who probably do the same.

Currency For Success

I decided to try the model out, offering to work for free the last couple of years. The results were unexpected, with some failures and some successes, but it allowed me to refine a model which I truly believe can work in the mainstream business environment and give startups an unfair advantage over their competitors using more traditional models.

Here are the principles I have found needs to be in place for it to work:

  1. Give before you ask for something in return.

Traditionally, the price of a project is negotiated and set before work starts. In most cases, being per hour. This sounds good in principle, yet in practice I can’t think of a worse approach.

From science and research we know that people always underestimate effort. We are guaranteed that something unexpected will happen which will force a change in the plan, no matter how good the plan is. We know that at the start of the project we know the least. We also know that what gets measured gets done, so if you measure time, time is what you will get, while results is what you actually want.

Deciding how much to pay per hour at the onset of a project when you most probably don’t even understand the need yet thus makes little sense. What makes much more sense is doing the work and then asking for remuneration based on the value provided, not the hours spent.

For that to work however, you need something else.

2. Clarify expectations and boundaries.

Customer service is as easy as setting realistic expectations and meeting those expectations consistently. Being happy as a service provider requires exactly the same. On the onset of the project clarify the expectations and boundaries, leaving out the details.

Unstated needs only breed resentment and content.

Explicitly specify success criteria and expected reward. Explicitly define failure criteria and when you are not willing or when it becomes unreasonable to collaborate.

As opposed to setting the hourly rate or the duration of the project, however, rather specify the expected outcomes and define a reward process. For example, your basic costs are covered and when you meet a specific and quantified target (such as doubling the sales), regardless of how long it takes, you are paid x% commission and for above average performance open up the possibility for a voluntary increase or bonus payout.

Make sure you know what the industry averages are and provide that as baseline to aid the decision making process, similar to knowing that 10% tip at a restaurant indicates average service. Tipping less indicates the service did not meet expectations, tipping more indicates that service exceeded expectations.

3. Shorten feedback loops and define a feedback process.

Similar to the previous point, agree on a feedback process with as short as possible feedback loops, especially in the beginning when there are still a lot of unknowns.

Contrary to traditional projects where the contract is negotiated fully before work commences, focus on alignment between the customer and the service provider. Initiate feedback sessions first daily, then weekly, then fortnightly as you get to know the customer better and build trust. Never, however leave speaking to each other for longer than 2 weeks at a time. Talking to each other once a month is simply not enough and a weekly check-in is advised. Just because you were aligned next week doesn’t guarantee you will remain in alignment. Remaining in alignment is like driving a car, you need to keep your eyes on the road even if you know the road.

Agree on a conflict resolution process and identify an objective external mediator who can be called in when needed.

Don’t try to avoid conflict, try to find a safe space to engage in conflict, as conflict is what is necessary to push through the boundaries that’s held you back in the past.

The focus is to allow as little deviation from reaching the mutual goal as possible by ensuring continuous feedback to re-evaluate the progress.

4. Treat everyone as a VIP.

In a traditional organization there is a clearly defined hierarchy. The CEO is at the top, the directors directly beneath him or her and so forth. Your importance is reflected on the label in front of your name. The norm, sadly, has become to sacrifice the needs of the people lower down the food chain in an attempt to please those higher up the food chain. Those at the top are treated as if nothing they can do or say is wrong, while everything those at the bottom say that contradicts or questions the top is wrong.

The flaw in this model is that the hierarchy is defined and followed only partly by the organization. There is a more subtle, more powerful influence layer beneath this consisting out of true influencers, not necessarily with the label to go with it though. True influencers are driven by passion, not power. They truly care about their domain, not about being right.

In practice, people in an organization will abide by the rules of the authorities with the labels associated with the role — like manager or director — but they more respect and look for answer to the influencers. Mostly, these influencers are also the advisors of the directors and managers, thus it is more important to identify and respect these influencers than the ones with the labels appointing them as authority figures.

The influencing, however, mostly happens very subtly, without people being aware of it. Often the influencers themselves aren’t even aware of their level of influence.

Assuming that you don’t know who is truly influential in an organization, or who someone is to become later in their career, treat everyone as a VIP. The difficult customers as well as the easy ones. The important and rich as well as the bootstrapping startup which might turn out to become a unicorn.

5. Focus on value and results.

Already touched on in point number 2 above, focus on solving a problem and delivering value fast and continuously rather than doing what the customer told you to do.

In most cases I’ve seen to date, people don’t know what they need. They know they have a problem and they articulate this problem by providing a possible solution. However, you can’t solve a problem on the same level as where it was created so 99.9% of the time this proposed solution is ineffective or only addresses part of the problem.

Rather than blindly doing as the customer asked, ask what the problem is that needs to be solved and why they need this proposed solution. What are they trying to achieve? Even better, quietly observe and identify the problem.

For example, someone might say that they need a good sales person to increase sales, yet on deeper investigation it is noticed that it is the product that needs changing and the skills of a good product owner, not more sales is what is needed. Or that the logistics are inhibiting growth or distribution and that a supply chain specialist might solve the deeper problem.

Don’t do what you are asked to do, understand why you are asked to do it and focus on solving the problem, not checking a list of to-do’s.

Closing Thoughts

If you want your business to grow exponentially, increasing price and decreasing costs are very old and restrictive ways to solve the problem. Money is merely a neutral medium for value exchange and when you cut costs usually the quality declines and with that the value. When you increase price without also increasing the value proposition, the perceived value of the exchange inherently declines and with that your long-term growth.

Rather than focusing on profit, it is thus a much more effective approach to focus on value and view payment as feedback, as a waiter would looking at his tip. When people are not willing to pay for a service, it allows you to analyze why and improve your value proposition. When customers are paying more than you asked for, it allows you to do more of the same and increase your wealth exponentially, far more than you could ever do with a set yearly increase.

Allowing people to pay does however require a change in infrastructure, which I’ll address in the next post, so be sure to keep reading.

Interesting read? Read more about disruptive pricing models and reverse auctions here.

Originally published in The Startup on Medium: