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:

  1. 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.
  2. 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.
  3. 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.
  4. 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…

Enhanced by Zemanta

This article explores the emergence of 4th parties as a ecommerce force to be reckoned with – what they are and how they benefit the customer, plus some of the challenges they face and how Geddup fits into the picture.

What is a 4th party?

Doc Searls, the undisputed godfather of VRM, defines 4th parties in his book “The Intention Economy: When customers take charge” as those:

“whose interests are aligned with those of the customer or user or that act as an agent or fiduciary for the customer or user.”

So where we once had three parties to a transaction – the customer, the vendor, and a party acting on behalf of the vendor – we have added a fourth, a party to act on behalf of the customer.

How does this work? Doc paints a scenario (here) where a 4th party enables a customer to say to the car rental market:

…“I’ll be skiing in Park City from March 20-25. I want to rent a 4-wheel drive SUV. I belong to Avis Wizard, Budget FastBreak and Hertz 1 Club. I don’t want to pay up front for gas or get any insurance. What can any of you companies do for me?” — and have the sellers compete for the buyer’s business.

Sounds ideal. And in a perfect world it would be this clear-cut. A 4th party would always be totally aligned to the customer, just as a 3rd party is wholly aligned to the vendor.

The broker’s challenge

But reality is blessed with many shades of grey and the distinction between 3rd and 4th parties is not always straight-forward.

Consider for example, the difference between two online travel specialists. Wotif, is a “booking site that allows you to easily compare flights and accommodation online”. It is paid a fixed booking fee on each transaction it completes. On the other hand, Zuji is an “online travel agent”, an aggregator of travel industry deals – in effect it promotes those deals that are front of mind for its clients: the airlines, resorts and car companies with which it works. Wotif finds deals that suit the customer. Zuji advertises deals that suit the vendor.

At face value then, Wotif is a 4th party and Zuji is a 3rd party. But looking deeper into their respective sites, it is easy to find examples that blur the lines of distinction. Booking a flight on Zuji delivers a very similar process and outcome as found on Wotif. Conversely, Wotif is not immune from advertising ‘specials’ on behalf of vendors. Perhaps it is better to view these companies as sitting somewhere along an alignment spectrum that runs from customer to vendor.

This issue of alignment is often defined by how choice is presented to the customer. Given the apparent ease with which customers can compare products and services in an online context, this is not so surprising. It is for good reason that getting to the top of the search queue is a widely held ambition of vendors globally.

At its worst, commercial agreements around this aspect can lead to market distortions like the EnergyWatch seraglio. But there do not need to be explicit arrangements for choice to be compromised. Other circumstances, such as resources, can limit the choices offered to customers by 4th parties.

The point is that alignment of interests is rarely a simple proposition. Even the most honest of brokers must be alive to the competing demands of vendor and customer.

Geddup and the 4th party revolution

A good part of this issue is that a 4th party’s economies of scale is typically as much a function of vendor aggregation as customer aggregation. For example, a company like LoadMax that offers to find the cheapest costs for moving goods must have relationships with couriers and logistics companies across the country. While customers can then enjoy the scale benefits of vendor aggregation that LoadMax is able to deliver, this is clearly a specialist service. Their offer is limited to shipping goods and LoadMax is unable to access any further scale benefits from aggregating the customers themselves.

This is where Geddup can play a role. Given our objective is to drive scale efficiencies across all industries, Geddup is perfectly positioned to bridge the gap between 4th party specialists and customers.

In practice this means that customers can use Geddup to find 4th parties and then manage their interaction with them. For example, customers can avoid having multiple passwords and logins. They can maintain the security of their personal data while keeping a 4th party up-to-date with that data. They can expect standardisation of privacy agreements. And they can easily file and retrieve information relating to those relationships.

In short, Geddup enables customers and specialist 4th parties to share the scale benefits of aggregating the ‘buy side’ regardless of product. This is one of the ways that we aim to promote the customer and the emergence of 4th parties.

Vive le révolution

Technologies are enabling companies to align themselves more closely to the customer. It is in their interest to do so because the customer is the final arbiter of demand. This is the business model of the 4th party – companies that operate on the finest of margins because they have the required scale and leanest of cost bases.

The recent growth in the number of 4th parties is ample evidence of the success of this model. The decline of the traditional media industry confirms it – advertising based business models are difficult when customers can go direct. If Searls is right, and we think he is, then we can expect these trends to accelerate as the intention economy takes root.

Athens may have been getting a rough press of late but today we turn to her for inspiration as the birthplace of democracy – that ideal that invests power in the individual.

Around 500 BC, a canny Attic politician by the name of Cleisthenes foresaw that the only way to beat off those muscular Spartans was to break down the petty factions that were undermining Athenian society. For too long the infighting of the ruling elite had been bickering over who would rule the Acropolis. Cleisthenes called on the people to back him. Every tanner, blacksmith and street urchin would have a voice. This was investing kratos – power – in the demos – people. Surprisingly, even to Cleithenes who cleared out before the Spartans made their move, it worked. The masses rallied to protect their Athens and a new super power was born.

There is a message here for all of us – that our civilisation works best when each individual has choice – where they have control over their destiny. As Einstein argued;

“The really valuable thing in the pageant of human life seems to me not the political state, but the creative, sentient individual, the personality; it alone creates the noble and the sublime, while the herd as such remains dull in thought and dull in feeling.”