The Hidden Costs Of Micropayments Go Beyond The Penny Gap

from the thinking-this-through dept

Thu, Jul 31st 2008 2:12pm — Mike Masnick

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.

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Filed Under: iphones, mental transaction costs, micropayments, penny gap, software

16 Comments

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PaulT (profile), 31 Jul 2008 @ 3:10pm

I don't know much about the iPhone apps - I have no interest in jumping on that particular bandwagon for various reasons - but weren't the apps highly restricted in both who could make them and how they could be obtained?

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.
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Anonymous Coward, 31 Jul 2008 @ 3:20pm

Isn't a move from 0 to 1 something like an infinite percentage?

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...
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Joe, 31 Jul 2008 @ 3:47pm

Re: Math
Yes, going from 0 to 1 is an infinite increase. But going from 1 to 2 is only a 100% increase. But still a good point overall.
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Totoro, 31 Jul 2008 @ 4:13pm

Another interesting aspect of the Apps Store-the prices are being adjusted (both upwards and downwards) as the Store picks up speed. Units was free, now its .99. Cro Magnon Racing has dropped their price. The whole idea of value and price is a constantly shifting target in that environment-pretty fascinating to see in the software world.
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Noah, 31 Jul 2008 @ 4:17pm

Physics
in some ways, it's the same as the difference from going from 0 mph to 1 mph -- inertia is a powerful force
FWIW, that'd be static friction that accounts for the "stickiness" of getting something moving, not inertia. And inertia isn't a force. I wish everyone had to take physics...
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scott, 31 Jul 2008 @ 5:02pm

It would be interesting to compare Amazon's regular sales with Kindle sales. Every review I read about the Kindle mentioned how easy it was to buy a book. Some people even mentioned getting carried away and from what I can tell, the average Kindle version costs $7-10.

I suspect ease of payments is key, not how much something costs.
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Michael Long, 31 Jul 2008 @ 5:12pm

Benefits
Another way to reduce the intertia would be to provide additional benefits for those willing to participate. One could, for example, drop most or all advertising from a page if they user is willing to pay a penny for an article. Or drop the semi-common practice of splitting an article into 15 pages displaying a paragraph apiece.

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...
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Paul, 31 Jul 2008 @ 5:18pm

Physics, revisited
"(in some ways, it's the same as the difference from going from 0 mph to 1 mph -- inertia is a powerful force)."

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.
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Biz Modl, 31 Jul 2008 @ 7:59pm

Micropayments should be mandatory for email
I wish there were a minimum charge per email, say 0.01 cents. I send a few hundred or maybe 1000 emails per month, so that would work out to ten cents a month. Legitimate businesses might send 100 times as much, which would work out to ten bucks. A spammer, however, who sends millions, would immediately be bankrupted.

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.
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PaulT (profile), 1 Aug 2008 @ 1:14am

Re: Micropayments should be mandatory for email
Spammers would be "bankrupted"? Really? I think you underestimate the number of idiots out there who are replying to spam...

"Of course they all want that price because they have to cover the transactions costs."

No, transaction costs have nothing to do with it.
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Scott, 1 Aug 2008 @ 5:34am

Re: Physics...actually applied mechanics
Inertia is a state of motion, velocity and direction for a moving object, or the state of rest for a nonmoving object, and force is required to overcome inertia. Oh and starting a ball moving does require you to overcome inertia. Static friction causes resistance to that change. For an object in motion, friction reduces inertia.

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.
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EAisEvil, 1 Aug 2008 @ 6:02am

DRM is the problem . . .
Its DRM problems that make most of these purchases tough choices (again content publishers have scared themselves to death). Since we know the DRM will likely not work the way we want and may not even work as "advertised" (and almost certainly will provide the user with something substantially less then "ownership"), these purchases begin to feel like "sucker bait" and so we are less likely to make the purchase, not becuase we are afraid of losing 2 or 3 bucks, but because we hate feeling like suckers.
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Crosbie Fitch (profile), 1 Aug 2008 @ 8:39am

Re: Micropayments should be mandatory for email
I'm working on 1p2U.com which aims to enable readers to pay bloggers a penny for each article they post. This will charge no commission. Every penny out of each dollar received goes to a blogger.
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Benjamin Wright, 1 Aug 2008 @ 10:54am

Also, when you use an e-payment system, your adversaries (such as tax authorities or divorce lawyers) might get your e-transaction records by subpoena. --Ben http://hack-igations.blogspot.com/2007/09/endless-investigations.html
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Scott, 1 Aug 2008 @ 12:14pm

There's already a lot of understanding regarding the psychology of micropayments, especially in telecom. Voice minutes, text message charges, and such are all microcharges. With ticket sales, the "courtesy" and "convenience" fees (geez, I loathe those labels) are microcharges. And the willingness of customers to accept them depends entirely on how they are transacted and managed.
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دردشه, 11 Jul 2009 @ 9:03am

There's already a lot of understanding regarding the psychology of micropayments, especially in telecom. Voice minutes, text message charges, and such are all microcharges. With ticket sa
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