The Rule of the Burden of Value

When revising working systems, it is important to increase value for everyone involved. I think this goes to the heart of how we can make VRM work. Maxim: Everyone wins.

One of the exciting things is that there are lots of areas open to VRM where changes with minimal cost for one party create signficant value which can be shared across the chain. And that, I think is the key to unlocking the potential of VRM.

There’s a princple in law & economics regarding financial liability: that the risk should be born by the entity most capable of mitigating it.

That is, if the manufacturer is most able to fix a bad design (say, that causes gas tanks to explode when rear-ended), then the manufacturer is liable for that risk: either fix it or pay for damages if something bad goes wrong. In contrast, only users can actually control the day-to-day risks of usage, such as causing a car accident by driving too fast. In those cases, the liability lies clearly with the driver, and not the manufacturer.

For VRM, it would seem that the burden of creating value goes to those most able to do so at the lowest cost. Or more formally:

The burden of creating value lies with the party who can do so at the lowest cost.

For example, with good user data silos and a user-centric Identity system for moderating access to those silos, we could, at incredibly low marginal cost, coordinate a large amount of data and make it seamlessly available to every vendor we desire. What they can do cost-effectively is open their data silos.

This is still an unsolved problem–moderating access to such a silo is a non-trivial issue. However, the natural , i.e., most cost effective, location for such information is clearly on the user’s machine (or at least in the user’s control through a standardized, aggregatable interface), a la the Attention Trust. The marginal cost for Amazon, Netflix, Rhapsody, etc., to open up their data silos is fairly low on a per-user basis, although non-zero. It’s much lower than the cost of each user manually copy & pasting or screen-scraping that same data from every silo into the user-controlled silo. So, the first form of the rule of the burden of value says that those services should have open data silos because there is low burden for Amazon and incredible value for users. However, the first form doesn’t provide any incentives for Amazon to do so. As such, the first form is incomplete.

So, the question is how can we create a reciprocal system that will reward those services in proportion to the value users receive? If we can do that, their value would exceed their cost, and we have a chance to convince them it makes economic and business sense. I think the answer is probably in aggregating the data back to the service providers in a way that addresses privacy concerns without burdening the service unduly.

Although Amazon likes its current advantage in owning your purchase history, they can’t cost-effectively track all of your behavior. Similarly for Google. And yet, both of these vendors could create and receive significant value in terms of customized search results, product recommendations, even more appropriate advertising, if they had a cost effective way to integrate your entire attention and transaction data into their search/recommendation/advertising systems. But code running on the Amazon website is simply not the efficient place to do it, it is too hard to start from there and track your external behavior.  So, if they can access a user-centric data silo–which can efficiently track extended user behavior–they could benefit enough to support user-centric data silos by opening their data silos, which is the most efficient way to get access to that data.

Thus, the second form of the rule of the burden of value is that participants with the lowest cost burden will be the natural source of value creation, when enough of that value is reciprocated to more than offset the cost of the burden. In fact, the entity that has the greatest difference between costs and value is the one most likely to drive the change.

The burden of creating value lies with the party who can do so with the greatest profit.

This is intriguing. It is also, I believe the underlying rule for why intermediaries appear in markets and why Shopatron is so successful. And yet, it provides no incentive for those who aren’t going to make the most money. In fact, everyone in the chain should be at least as profitable as before, and preferably more profitable. That brings us to the third and final form of the rule of the burden of value:

The burden of creating value lies with every party who can do so profitably.

In other words, when it makes sense from a profit perspective, the value will be created, must be created, and those who would profit from it have the responsibility to create it. The guidance we can take from this is that if we can assure that everyone in the value chain receives more value than it costs them to participate, then we will see adoption of VRM Protocols.

There are natural places in our relationships where the right tools can enable a disproportionate amount of value. By enabling everyone to benefit from that value, we can assure that the costs are born in the least expensive way, by the most appropriate parties.

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3 Responses to The Rule of the Burden of Value

  1. christopher carfi says:

    just brainstorming here…you state:

    >The burden of creating value lies with the party who can do so with the greatest profit.

    is that always the case (i don’t know the answer, am thinking out loud here). profit as measured by whom? and over what timeframe? is it “lifetime” value of the relationship? what if the two parties measure “value” differently (e.g. one is solely focused on financials, the other on ease-of-use?)

    again, just thinking out loud here…don’t purport to have answers…

  2. Joe says:

    It may not be the best phrasing, but I do think that the entity that stands to make the most money is typically the one who usually has the motivation and wherewithal to make it happen.

    I was using profit in terms of the value realized by that party being greater than the cost to that party. “Value” for a business should be measured in dollars, long term, including such reputational effects of being a good corporate citizen, etc. “Value” for an individual could be much more subjective, hence profit may not equate to dollars. “Value” for a government is harder to evaluate, as it could be related to power accumulation or dominated by the influence of a particular politician or administrator.

    As for the timeframe, that’s a tricky one. We all have different planning horizons. Some companies (and people) end up focusing too much on the near term and losing site of lifetime value. Others play the long game and are happy sacrificing today for risky or uncertain potential value in the future. Ultimately it is a personal value judgment.

    By the time we look at the third form of the rule of the burden of value, I think these issues end up washing out. As long as each entity involved can see a profit (including transactional costs and opportunity costs), then everyone will play along, no matter how they see profit or what timeframe they are evaluating.

    On the other hand, If one party sees it as purely a burden, and doesn’t get enough value out of it to make it worthwhile, that’s a problem. We might be able to route around it, but it is also quite possible that this obstacle could halt the effort for that Protocol. In this framework, profit is in the eye of the beholder. From a design/development perspective, the goal is to help everyone realize a profit so that everyone can support VRM Protocols.

  3. Alan Mitchell says:

    I’m not too sure about those ‘laws’ either, but I agree basically with what Joe is saying: it’s about creating win-wins.

    However, when it comes to creating new types of win-win between buyers and sellers – mew win-wins based on the personal control and release of personal information for example – I think there are barriers Joe hasn’t mentioned.

    One barrier is that many companies think in terms of ‘knowledge is power’ and see customer data as a means of exercising control (or at least beneficial influence) over customer attitudes and behaviours. They fear that handing over control of information to individuals means handing over control, period.

    There’s also a lot of politics (with a small ‘p’) in win-wins. If the cake has 100 incrmental units, and I get 99 while you get 1, it is still a win-win. We are both better off than we were. If we then move to a situation where I get 98 while you get 2, I see myself as a ‘loser’ even though I am still getting the lion’s share of the benefits.

    For these reasons, when it comes to VRM I think we should appeal to corporates on the basis of win-win, but I think there will be sustained resistance, especially from those involved in customer data, CRM, direct marketing etc.

    Oh, and another thing … Legacy systems and the fear of liquidating sunk costs.

    For these reasons, I think that even though VRM is the obvious next step and a huge potential win-win, it’s going to be a slow burn development, not a big bang.

    Alan Mitchell

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