Markets, prices and VRM
There has been a fascinating exchange of thoughts about markets, prices and VRM/buyer-centric information processes.
It started off with a comment by Doc Searls at the last VRM Hub meeting in London about markets being conversations – and a question from someone in the group basically asking ‘why do we need conversations because markets tell us all the information we need to know?’. Over the next few weeks, this triggered a really rich exchange of thoughts.
I have collected some of the comments below, if you are interested. The nub of the discussion seems to be as follows:
a) VRM will provide us with the potential to tease out the ‘right’ price to a much finer degree of detail, far more efficiently
b) ‘price’ doesn’t capture all value, by any means. The ability to exchange more, richer information opens up all sorts of possibilities for much richer exchanges between buyers and sellers (and other parties).
c) ‘Markets’ where ‘consumers’ exercise ‘choice’ throw up an awful lot of useful information. But they also destroy an awful lot of information. By preserving and unleashing the information destroyed and ignored by traditional markets, VRM opens up all sorts of new opportunities for increased and improved value creation.
Alan Patrick (http://broadstuff.com/) started it off with this comment:
If you recall we were talking about the difference between "conversations" and "pricing". In the example, the chap from Ghana has a much more rewarding experience having a discussion about a shirt than he would just paying for it, and there followed a more involved discussion re the emotional poverty of pricing, and how pricing "destroys information".
I was uncomfortable at this, because market theory argues the opposite, ie that clear pricing actually offers a huge amount of information that in a "haggle" based market is hidden, and it is arguably far more efficient *for the buyer* as it is faster, I can rapidly compare it etc. I also felt the brand had something to do with it.
Anyway, I think I’ve come to a form of conclusion, which is this:
Firstly, ANY transaction needs a certain amount of information to be completed by both sides. The question is more how do you get that information.
In the oldest form in the world, you have a "conversation". I the buyer, knowing nothing, have a conversation with the seller until I feel the information asymmetry has reduced enough for me to buy.
However, this approach is unsatisfactory to me as a buyer as it is inefficient for the speed and comparison reasons noted above.
So, over time we have evolved a number of other mechanisms where the "conversation" can be had *before* the transaction.
One is the "wisdom of crowds / friends advice" approach – if everyone else is wearing the shirt, and/or my friend says its great, and I know what they paid, I don’t need so much of a conversation.
Another is (theoretically) independent evaluation – reviews in newspapers etc.
A third is commoditisation – I know what X is and roughly what it costs as it is a well known "thing" in the market, so all I need do is go and get a "thing" I like from someone I want to deal with.
A fourth is marketing / advertising – the supplier attempts to have "the conversation" with me before I buy, via ads etc (and some would argue paid advocacy via the above 2 channels) so that when I arrive at said sop, we have already "spoken" and all I need do is hand over the dosh.
So – to how this impacts VRM.
If we assume that VRM is going to be a transaction based system, ie it is about me finding the best combination of whatever factors I feel I want in order to buy from the suppliers who have got an X, then I think it will have to be:
(i) A market
(ii) A price based system
i) A market
As I understand it, VRM /in implementio/ is a pull based market – instead of me going down to the "silicon soukh" (thats a pre eBay term for e-markets btw and being assailed by cries from all the merchants, I put a request out there into the market, and suppliers line up to supply me. I then select on the best fit to my criteria, and off we go.
ii) A price based system.
In essence, I don’t want a "conversation" unless I can see a price pretty damn fast. The conversation as such is about giving me the information I sought, and allowing me to ascertain the further facts I need to reduce the information assymmetry to the point where I want to buy Y, not Z.
What will drive the amount of conversation I need/will get is the transaction cost. If I am buying a $1 piece of music, say, I may want to discuss at length the joy of this recording over that one, but the seller will be looking at a ticking meter of his time (= money) and will soon make a "Fish or cut bait" call. If it is a $10,000 car, different matter (in theory – actually I’m more interested in music than cars, but you get my drift….). In other words, if VRM helps the seller to put up more information than todays systems, then you get more conversation. If not, you won’t.
Which brings us on to brands and transparency, translucency etc etc.
In the previous inefficient (ie non-online) market you could get away with "probably the best lager in the world" as the mocking was unheard since it had no access to the media. But over time our generic cynicism increases so more and more "sponsoring" of the message by ever more authoritative 3rd parties was employed – or, as has been noed elsewhere, the "conversation" (ad etc) was turned into an art form, so you bought into the art form, not the product.
We are now in the interim period – blogs etc mean that translucency is emerging – marketeers know that they get pushback and it is visible online, so they are having to expose more of the fact base – or it is being exposed for them. But as I noted in a psot on my blog last night, social media is now being used as much to obfuscate as to inform, and its far from clear whether increasing tranparency will win – there is more money and focus going into obfuscation than illumination.
VRM’s opportunity is to re-establish the move to transparency by re-creating markets where the direct customer requirements can cut through the obfuscation attempts, and thus to this extent I think it will be less about "conversations" which can be perverted – and more about price discovery to a series of specified datapoints (Focussed conversations), which cannot.
I replied to Alan’s musings with this:
That is really interesting stuff.
I share your discomfort with harking back to the largely mythical good old days of street style markets. The idea of going back to ‘market conversations’ of this sort is a fantasy for most situations. The reason why we have fixed, open pricing coupled with the exercise of choice by buyers is that it massively reduces transaction costs. Even with modern technology that is not going to change, except at the margins.
There are also all sorts of emotional/fairness/legal issues with the hidden pricing generated by private conversations.
But my point about markets destroying information still stands.
I made that comment in response to a question from some guy who was implying that the price mechanism solves all market problems. It doesn’t. It’s wonderful at what it does. But it doesn’t do an awful lot more. With VRM we can do this awful lot more.
There are two ways in which price-based markets destroy information.
1) The genius of money price is that it strips out (or more strictly speaking, represents the final outcome) of million upon million subjective assessments of value, by people with different needs and priorities, across a vast range of incommensurate categories (bananas, socks, flights, computers). Money price obviates the need to worry about any of these ‘background’ details. That is why it is so efficient – precisely because of all the information it stops us from having to worry about.
But this efficiency also destroys valuable information. If you really want to understand why one product is more successful than another, or commands a higher price premium than another, or one group of people are doing x and another group are doing y, you need to dig back and uncover all the layers of information the efficient market transaction ignored. New technologies – and especially, VRM – help us capture that information while it is being generated without destroying the efficiency of markets.
2) Market transactions destroy information at another level. Yes, they generate a huge amount of information about supply and demand but this information is fatally flawed in two ways. It provides us information about final outcome of millions of decisions by millions of people, but it tells us nothing about the decision-making processes of these people (the ‘why’) and it tells us nothing about ‘who’ they are. It is therefore unable to to make any connections between the two. Because of this, it turns ‘the buyer’ into an unfathomable black box which is unable to ‘speak’ to the market except after the event – after a choice has been made. This is incredibly inefficient.
Black box information destruction happens in two ways.
First, it tells us the result of people’s decisions only after they have made these decisions – when the price has finally been ‘discovered’ in the marketplace. It does not provide us with any information about what the individual considered, looked for, etc during the decision making process, before making their decision. For the purposes of successful exchange of value – for really learning about the dynamics that are driving demand – this is the real gold. This is information that can change what both sides do to get a better result – but it is information that is lost under our current system.
Second, it only tells us about supply and demand in the aggregate: the net result of the actions of ‘the market’ as a whole. It tells us nothing about what the individuals Mark, Mary or Michael did, wanted to do but couldn’t, etc. It doesn’t allow us to ‘drill down’ into any meaningful detail.
VRM opens up the opportunity to unleash both these rich new veins of information: it allows the real conversation about value to begin. By doing so it will change the way markets themselves work.
By liberating the information price-based markets destroy, VRM has the potential to become an engine of a massive new spurt of social and economic growth.
Doc Searls (http://blogs.law.harvard.edu/doc/) added:
One additional thought…
It’s important for us to enlarge the meaning of markets to include more, and to be defined by more, than transactions alone. The efficiencies of reductionism apply to the concept of the market as well. From places where people meet to do business and make culture, markets have been reduced to a mechanism for arriving at exclusively price-based decisions — and a raft of conclusions have been based on that mechanism alone. This has put blinders on our view not just of markets, but of economics, sociology, politics and much else.
We began to visit this in Markets are Conversations chapter of Cluetrain <http://www.cluetrain.com/book/markets.html>, where we wrote,
”The first markets were markets. Not bulls, bears, or invisible hands. Not battlefields, targets, or arenas. Not demographics, eyeballs, or seats. Most of all, not consumers.”
”The first markets were filled with people, not abstractions or statistical aggregates; they were the places where supply met demand with a firm handshake. Buyers and sellers looked each other in the eye, met, and connected. The first markets were places for exchange, where people came to buy what others had to sell — and to talk.”
We need to finish unpacking that. And to take the concept of markets beyond transaction and conversation into the realm of relationship. Some of those are momentary, some are enduring; but all contain far more information than what one finds in transaction alone.
Joe Andrieu (http://blog.joeandrieu.com/) chipped in:
I think there is a few misconceptions about markets and pricing in this recent conversation.
Economists often talk of markets as price discovery mechanisms, and the freer the market, the more efficiently those prices can be discovered. In fact, in the absence of all transaction costs, free markets assure the efficient allocation of resources, regardless of initial distribution—that’s the core tenet of Law & Economics as proven by Coase ’60 . Of course, we can’t ever actually get rid of transaction costs completely, but that’s ok. The lower they go, the more efficient the market, the better the overall utility of the economy
But let’s not confuse making markets more efficient with making everything about pricing. Only in the simplest commodity markets is pricing ever the sole factor. Whether you focus on relationships and conversations or the 20th century model of brand-driven differentiation, there are lots of factors that influence a transaction at least as much, if not more, than price.
I think it makes more sense to think of markets as “value” discovery mechanisms. It just happens that the industrial age conflated price and value, so the distinction was often ignored. When we have efficient markets, everyone has the simplest, fastest way to find the highest value we can, including price, quality, aspirational expressions, relationships, and moral or ethical congruence (such as being “green” or animal friendly).
So, there are at least two distinct ways VRM can help reinvent the market. First is providing a more efficient value discovery mechanism, in part by reducing transaction costs. That is, helping us find the good stuff more easily, more quickly, and more cheaply. Second is by helping to define new avenues for creating value, through richer, more meaningful relationships, better service, and greater customization in product and service offerings.
One particular false hope for VRM that I don’t want us to get distracted by is the illusion that by moving power from Vendors to Customers we can force better prices. That’s a win-lose game that is actually wasting resources trying to shift the line of marginal value towards the individual. It doesn’t result in any new value in the system and yet it increases transaction costs. This is clearly a net loss for the overall economy.
A related architecture with a much more satisfying win-win outcome is aggregating users to define & document demand in order to encourage vendors to fulfill that demand. This isn’t about market power, it is about market validation. Eventful’s Demand service  does this by letting people state their interest in having a particular event in their neighborhood. Like a petition, this demand is aggregated and presented to the event organizer to get them to actually bring the event to locations with the most demand. This not only helps bring the product to the individual, it helps the performers understand and meet market demand. This type of demand discovery actually creates value. There is more profit for the performers—or they wouldn’t bother doing the extra show—and end users get to go to an event they otherwise may have missed. This is such a VRM-style win-win that I have asked the founder of Eventful to join the conversation
I’m looking forward to seeing how we might build on Eventful’s approach.
Other people chipped in with other comments, but the point is this: this debate has opened the door to a massive, and rich, new set of opportunities.