In this article, we try to unpick the thorny issue of who pays for a VRM service. We argue that the strength of VRM comes from aggregating customer buying power – the implication being that, regardless of who pays the fees, it is the customer that ‘buys’ a VRM service.
Everyone is a user
VRM, by definition, is a tool that enables customers to better manage their vendor relationships. It is notable then that most permutations of the model also benefit vendors. For example, while customers can save time and effort by updating all their relationships in a single instant, vendors can save time and money by having their customer data quickly and accurately updated. The efficiency gains are shared. In effect, both customers and vendors are users of VRM.
So which user should pay?
While both vendors and customers may benefit from VRM, it is often argued that the customer should pay for its implementation. This will ensure alignment of interests between the VRM provider and the customer.
The logic is that a business will always be accountable to whoever pays their bills, particularly where that business has a return on equity motive. If a VRM provider were to have the vendors pay, then their interests must ultimately be aligned to vendors. This runs counter to the objectives of VRM. Doc Searls convincingly argues this perspective here.
The challenge is that customers have consistently shown a strong preference to not pay for services. This preference is evident in the success of vendor-pays models such as Facebook and Google. It is also inferred in the newspaper industry’s ongoing battle to shift to a customer-pays model. Most disturbingly, it has been demonstrated time and again in relation to research into financial products, where customers would most benefit from maximising alignment and yet the customer-pays model has struggled to take root.
The point is that customers don’t really like paying for much at all. Perhaps the most successful fee-for-service model is the one where a provider can add their fees to a bigger ticket. Travel booking companies take their fees out of the price paid to the airline or hotel. Stock brokers add their clip to the purchase price of the shares. It is hard to come up with examples where customers are willing to pay for some service on a direct and stand alone basis.
This experience suggests that a customer-pays VRM model will be swimming against the current unless it can find ways to clip the ticket. The alternative is to structure a vendor-pays solution that remains faithful to the objectives of VRM.
The vendor pays the cash, but the customer buys the service
We believe that a vendor-pays model can work. The solution is based on the principal that the VRM provider competes for customers based on their terms of service.
Let me take you through the logic:
- For VRM to have value to vendors, customers must use it. For example, without plenty of customers using a VRM process to share their personal data, there is no point in vendors connecting to that process.
- If VRM does not deliver value to customers they won’t use it. It is no different to any customer oriented business, the customer is the final arbiter of value.
- The value to a customer is determined by its utility – and for a VRM process, the terms of service are a critical part of this. In effect, the customer ‘buys’ into those terms and it is on those terms that a VRM provider competes for customers.
- The cost to a customer of using a ‘free’ VRM is an opportunity cost – whether in time or in choosing one service over another.
The critical part of this thinking is that the power of the VRM model comes from the aggregation of customer buying power. VRM leverages that buying power into a Terms of Service that vendors are willing to accept in order to access the benefits on offer. If a VRM provider were to change its terms to better suit vendors, then customers are likely to find another provider with terms that better suit their needs. In short, VRM providers compete on the terms of service – as these are key to the value proposition to customers.
We believe this dynamic that can deliver a vendor-pays model that is compatible with a customer-centric VRM process.
Ramifications for a VRM provider
The model that we are developing at Geddup is aimed at delivering customer’s more choice by aggregating their buying power. We believe that having vendors pay for a VRM process is an efficient way for customers to access the resultant efficiency gains. From our market testing it is also likely to be the most attractive implementation path to customers and vendors alike.
But this structure does raise some further questions. For example:
- Does a vendor-pays model impact the type of VRM services that can be offered? For example, does it preclude a single VRM provider from offering personal data stores and search, discovery or advisory type services?
- Does a vendor-pays model impact the return on equity motive of a VRM provider? For example, is it preferable to adopt a non-profit charter?
We will return to these questions later…