Pricing is a challenging thing to get right. It is in fact the entire
reason the stock market is so complex; if we knew the actual price of
a piece of a company, there would be no reason to use a market to
determine that price.
At Fraction we adopt a pricing philosophy that is motivated by similar
economic / game theory ideas that are used in things exactly like the
stock market. Generally speaking, our pricing model attempts to find
an equilibrium at which all parties are rewarded for "playing the
When everyone plays the game correctly, the best outcome for the
players is reached. This is why cheating in sports is a big deal. It
hurts all the players at the end of the day. For businesses, it can be
even worse. A cheating player could cause a business to fail
At Fraction we setup a pricing "game" that ensures our winning
strategy aligns exactly with our businesses' strategies. We call this
strategy the Discounted Price Success Model.
Discounted Price Success Model
Ultimately we want businesses to succeed. If they succeed, we succeed,
and everyone is happy. The first part of our pricing model takes this
into account. Businesses only pay us when one of our offers is
Aside: Success of an offer is itself hard to pin down. At the moment,
we define it as "an offer has been redeemed", although there is
another mathematically-stable model that actually defines success as
the moment when an offer is put into a customer's phone. More on that
another time perhaps, especially if we choose to adopt it.
The other part of our pricing model relates to the "discounted price"
of the good that is being sold. We make money as a percentage of the
amount of money a consumer spends at a business, but only for the
specific item we are running the offer for. Why does that make sense?
Imagine the scenario where Fraction is evil (we are not). In that
case we would want to make as much money as possible, without regard
for the business. Since we make money based on the amount the customer
spends on the item that is being discounted, we actually would make
the most money if the good had no discount.
As an example, if the good in question were an ice cream cone, it
normally costs $4, and we charge 15% of the discounted cost (which we
call the success cost), then we make the most money if the ice cream
cone remains at $4. Imagine the case where a person buys two
cones. Then the total amount they are spending is $8, and we would
make $8 * 0.15 = $1.20. If the discount were buy-one-get-one free,
then the amount the customer spends is $4 instead of $8, so we would
make $4 * 0.15 = $0.60. This is obviously less money for us than if we
hadn't offered a discount in the first place.
So theoretically if we were evil (we are not), we actually want to use
the least-valuable offers. But that's crazy. It's crazy because the
entire point of a deal is to drive traffic to businesses and help them
find and retain great customers. No one is going to use an offer that
provides no discount, so Fraction makes no money in that case. Thus,
our best strategy even if we were evil (we are not), is still to
want to provide the best discount possible.
That is why we price our platform this way. It ensures our goals are
exactly aligned with businesses' goals so that we are successful
together. It is a strategy we've set up so that businesses don't have
to just trust our word that we are on their side. They can look at our
strategy and know that we must be on their side.
Related to this pricing model, we often find ourselves in a
conversation about how Fraction's pricing affects a business's
bottomline. That is a very great question! It matters, because once
again we want businesses to succeed so that we can succeed too.
As it turns out, the Discounted Price Success Model is very
straightforward about how it affects the bottomline. The short answer
is that it simple scales the revenue of the specific good down by the
Imagine again two ice cream cones, each of which is $4. A customer
normally would pay $8 for these. For a BOGO deal, they pay $4, and
Fraction charges 15% or $4 * 0.15 = $0.60. So the amount this
business makes is scaled down by this same rate: $4 - $0.60 = $3.40 or
$4 * (1 - 0.15) = $4 * 0.85 = $3.40. And this is the maximum the
revenue can be affected. If the customer adds sprinkles for say $0.50,
the businesses makes $3.40 + $0.50 = $3.90, which is not ($4.00 +
$0.50) * 0.85 = $4.50 * 0.85 = $3.83. We are only charging
specifically on the success of the ice cream cone offer, not the total
We are in the business of making businesses successful in a meaningful
way that helps them. We firmly believe that if we focus on success of
offers, businesses will be successful and thus we too will be
successful. That is why our pricing is the way it is, and that is why
we only ever charge success costs on the specific items being