“The profit system follows the path of least resistance, and the path of least resistance is what makes a river crooked.” — Utah Phillips
It is no secret that late stage capitalism has its issues, and they are not going away. From the often invisible yet the ravaging effects of negative externalities, to the inequity inherent in limited investment opportunities for everyday people, to the US tax structure that makes it more expensive to be poor than rich, it is clear that the capitalist model as it has stood for the last century has many fissures that show themselves at scale.
The current global capitalist system operates within a traditional model of priced based economics. It is well understood that within this model the price of a market offer is determined by supply and demand. Rising disgruntlement amidst the working classes is one historically repeated and often feared result of economic inequality, and the band aids for staving it off are losing their adhesion. These issues make it clear that cost based economic models create access for the masses and have a place in future capitalist economies.
In a Cost Based Economic Model the price for a product or service is tied directly to the cost of that product or service, which is reflected as either the hard costs of creation and maintenance of the product, or in the total annual budget for providing the ongoing service. While this does not totally eliminate the effect of intermediation on the cost (and therefore price) of something, it does address each touch point of markup at the outset, adjusting for it and including it as a line item in the total cost of the market offer.
Use Case
A simple illustrative example would be a digital product, an app. In this instance, the user’s access to the app (price paid) is radically altered by using a cost based economic model. In this example, this app has a fixed cost of $1000 to create it, and is sold as a downloadable product for one dollar per download. By traditional standards, the owner/creator of this app is taking a risk until the first 1000 users have bought it, and after that they are making profit, and they are considered to be progressively more successful as they amass more users and make more money, ad infinitum. Think of this model as the shape of pyramid or a funnel, with the owner at the apex point, receiving the wealth created by their invention and the wealth flowing into them.
In the cost based economic model, we will use the same app with the same fixed cost of $1000, and same initial price to the consumer of one dollar. After 1000 users, the app has now paid for itself, but within a cost based economic model, things now start to shift. With the next 1000 users, the total number of users increases to 2000. At this point, the app now refunds all of the users 50 cents upon download, as the cost burden to the user base is now fifty cents at 2000 users, not one dollar at 1000 users. This continues on and on until the cost is driven down to nearly nothing at scale. Think of this shape as a torus, folding in on itself and growing in a wholistic fashion.
Expression in Terms
The equation for this economic model is expressed:
P=(k + i) / n
P= price, k=break even/ cost, n=number of users, and i=incentive.
In this instance, the incentive structure can be addressed if either i= a flat amount or i= an incremental percentage that adjusts as the scale of the user base increases. Either incentive structure can be used to address the needs of the innovator, ongoing contracted maintenance provider, or early investor.
From Early Investors to Enablers
There are still a multitude of ways to maintain incentives for the creators of products and services, and with this model the compensation is very transparent to all participants, including the end user. Each user knows exactly how much of their purchase price is going to what, and the integrity and content of the cost structure of each item they may refer their friends to use as well.
From Early Adopters to Referrers
With the refund to the user going up with each additional user, this effectively makes the price of the offering go down with each additional purchase. The 10,000th user that downloads the app for $1 will automatically get a refund of $0.90, and only have paid $0.10 for this app. At 100,000 users, all users will have been refunded to the point of paying one penny, and to get to that number of users, all users are incentivized (by the effect of their refund) to refer their friends.
Why This, Why Now
Currently we have an all time high of anti-corporate sentiment. This model addresses that by providing a socially responsible, eco-friendly label that can distinguish the participating business as a better corporate citizen.
Due to recent innovations, we have the technology to enable a rapid, scalable refund mechanism, the process inherent in this cost based economic system functioning. This makes it easy to engage users in a perpetual price reducing model and thereby enables the business to have better user acquisition through activity and incentivized engagement. Within a cost based economic ecosystem, the participating corporations can extend the life of the customer engagement, outperform against the (traditionally structured) competition, while gaining enduring loyalty and bringing lifelong value to that customer.
Operational Considerations
The use case must have a predetermined, fixed price for a specific period of time (either a one time cost or an annual budget including fixed hard costs and costs for ongoing improvements), clear parameters for incentive to the innovators, initial investors and creators, it must operate within direct consumer access, meaning it has a B to C model at scale, and it must be very scalable. This is why a digital app was selected as the example. Other use cases to explore are a transportation system, healthcare system, energy (especially renewable energy), Software as a Service model, and membership model.
The refund/rebate system can be implemented in several practical ways. These include refunding a user’s credit card, a credit for future fees, payments in kind, issuing of gift certificate or transferring funds to a user’s digital wallet (for crypto applications).
This project is currently under development. To get involved please email for further details and discussion. To put this model into use, please submit your project here.