The Hidden Costs Of Micropayments Go Beyond The Penny Gap
from the thinking-this-through dept
For as far back as I can remember, there have always been folks who insist that micropayments are the solution to the "free" content question. That is, they believe that the solution to "free" content is to set up a system where content can be accessed for such a low price that it's "close enough" to free and people don't mind. However, as Clay Shirky pointed out many years ago, it's not that easy at all. As soon as you add in some cost, even a small one, it creates mental transaction costs that go beyond the payment itself. Basically, just the fact that you need to think about whether or not it's worth it, creates a disincentive to consume that content. And, indeed, most micropayment schemes haven't gone very far. Last year, VC Josh Koppelman named this phenomenon "the penny gap" to explain how the "gap" in getting someone to go from $0 to $0.01 is much bigger than the gap from getting someone to go from $0.01 to $0.02 (in some ways, it's the same as the difference from going from 0 mph to 1 mph -- inertia is a powerful force).However, Andrew Parker is questioning whether the real problem isn't an economics issue, but a usability issue. That is, if it were really easy to pay that $0.01, people wouldn't mind so much. In other words, a big part of that "mental transaction cost" that Shirky talks about is (according to Parker) the effort needed to establish that payment (a login, supplying payment info, etc.). As proof that this may be the case, Parker points to the early distribution numbers for the iPhone App Store which show more $0.99 apps sold than free apps downloaded. His point: since the iPhone makes it so easy to get an app and pay for it, the "penny gap" or the mental transaction costs really aren't that high.
This is a really good point -- and it is a testament to what a good job Apple did with the App Store to make it so seamless to the user. You absolutely can reduce the mental transaction costs, and that shrinks the penny gap significantly. However, I wouldn't be so quick to jump to the conclusion that micropayment solutions will become that big a deal. First off, these are only the initial results from App Store sales, when you're dealing with early adopters. I'll be interested to see if the results remain this way over a longer period of time.
Even more importantly, though, there may be other hidden costs that should deter certain publishers from focusing on micropayments. Mainly, you are driving away the ability of your users to share and promote your content for you. In other words, you're shutting off one of the best tools to get your app more widely used and recognized. So, even removing the transaction costs from the equation, going to a micropayment solution over a free one doesn't always make the most sense.
Thank you for reading this Techdirt post. With so many things competing for everyone’s attention these days, we really appreciate you giving us your time. We work hard every day to put quality content out there for our community.
Techdirt is one of the few remaining truly independent media outlets. We do not have a giant corporation behind us, and we rely heavily on our community to support us, in an age when advertisers are increasingly uninterested in sponsoring small, independent sites — especially a site like ours that is unwilling to pull punches in its reporting and analysis.
While other websites have resorted to paywalls, registration requirements, and increasingly annoying/intrusive advertising, we have always kept Techdirt open and available to anyone. But in order to continue doing so, we need your support. We offer a variety of ways for our readers to support us, from direct donations to special subscriptions and cool merchandise — and every little bit helps. Thank you.
–The Techdirt Team
Filed Under: iphones, mental transaction costs, micropayments, penny gap, software
Reader Comments
Subscribe: RSS
View by: Time | Thread
I'd like to see real stats considered, such as how many users modified their iPhones to "jailbreak" them and allow downloads from anywhere they chose vs those who stuck with the Apple lock-in. Maybe like-for-like comparisons with the official ones; e.g. if the 99c app does something extremely useful while the free app makes a small cosmetic change, yeah the 99c app will be more popular. That doesn't prove anything regarding price, though.
For what it's worth, I do agree with the "penny gap" theory to an extent. it's much easier to get someone to pay a slightly higher price once you have them willing to pay *something* (as long as the higher price is still reasonable, of course). In a truly competitive market, where free and paid-for content compete on an equal footing (i.e. no artificial lock-in), that's tricky. Not impossible, but it'll take more than an artificially restricted market to prove it.
[ link to this | view in chronology ]
From 1 to 2, 200% gain. From 2 to 3, 50% gain. From 3 to 4 is 33%.
But from 0 to 1--infinite percentage gain...
[ link to this | view in chronology ]
Re: Math
[ link to this | view in chronology ]
[ link to this | view in chronology ]
Physics
[ link to this | view in chronology ]
Re: Physics...actually applied mechanics
FWIW, when a force is applied to a static object, the force overcomes friction, and any remaining force accelerates the object. The object will be constantly slowed by friction until it comes to rest, unless another force is applied.
For the layman, if you say that an impulse force causes the cue ball to begin moving toward the racked billiard balls, but that the speed curve for the cue ball is basically a declining speed curve, declining from an initial velocity which is equal to the initial impact force minus the force required to overcome friction with that quotient divided by the mass of the cue ball, with the rate of decline from this maximum being caused by friction. If you say that, they're gonna look at you like you're crazy. (Much easier to explain with pictures and equations).
Basically, I think it's easier to say that the damn cue ball overcomes inertia and smacks into the balls.
[ link to this | view in chronology ]
I suspect ease of payments is key, not how much something costs.
[ link to this | view in chronology ]
Benefits
One could also set a threshold to bypass annoying popups or questions, like anything under two cents just pay it. After all, I clicked on the link to the article, didn't I, so the headline and summary must have appeared to have at least some value. Burn me, and I'll simply flag the site as junk and I won't go back.
But seriously, just how bad does an article have to be that's not even worth paying a penny? Read a wopping 300 articles a month, ten per day, and you're out three whole bucks.
You can't even get a decent loaf of bread for that these days...
[ link to this | view in chronology ]
Physics, revisited
Um, it takes EXACTLY the same amount of force to go from 0 to 1 KPH as it takes to go from 1 to 2 KPH. If you propose some soft goopy surface, I'll counter-example you with a non-newtonian fluid.
Well, EXACTLY, that is, if you're not at relativistic speeds. Going from 1079252847.8 to 1079252848.8 KPH does take way more force.
That last infinitesimally small mmPH to get to 1079252848.8 KPH, Joe, is where a near-infinite amount of force is required. At least from the point of view of the outside observer.
[ link to this | view in chronology ]
Micropayments should be mandatory for email
I wish there were a way to pay people who create good content on the web (like news reporters and musicians), but I'm not giving each one of them my credit card number and shelling out $19.99 a month or whatever exorbitant price they all want. Of course they all want that price because they have to cover the transactions costs.
[ link to this | view in chronology ]
Re: Micropayments should be mandatory for email
"Of course they all want that price because they have to cover the transactions costs."
No, transaction costs have nothing to do with it.
[ link to this | view in chronology ]
Re: Micropayments should be mandatory for email
[ link to this | view in chronology ]
DRM is the problem . . .
[ link to this | view in chronology ]
[ link to this | view in chronology ]
[ link to this | view in chronology ]
[ link to this | view in chronology ]