Charging Is Good... But Only If You Charge For The Right Thing
from the otherwise,-it's-a-disaster dept
With various companies trying to rush to put in place better business models thanks to the financial crash, Farhad Manjoo over at Slate has written an article suggesting that various free online services just start charging. Much of the article is based on the beliefs of the guys who run 37Signals, the online software company, who are strong believers in charging a reasonable price for simple software. To some extent, they're correct, but in many ways, it's exactly the wrong message.For example, Manjoo suggests that Facebook should just start charging users who have over 200 friends something like $5/month. His admits that there will be revolts and anger, but some percentage will pay, and that will create a nice revenue stream. Manjoo is a smart guy, and I usually agree with him on stuff, but on this, he's way off. The problem is that this analysis is a static one, not taking into account what happens next. And, when it comes to social networks like Facebook, we know exactly what happens next. That's because a few years back, when Friendster was the biggest social network on the planet (during another "down" time in the economy), there were rumors that it was going to start charging, and those rumors fueled the growth of MySpace. I still remember getting Friendster messages over and over again, telling people to sign up with MySpace because Friendster was about to start charging.
Sure, Facebook might be able to retain some users who would pay, but many others would flock to the next big thing, which would remain free... and Facebook would look something like Friendster today. Perhaps it would be making money, but most of the users will have moved on to something else.
So while it's important to come up with real business models that bring in actual revenue, you can't do so by charging for things that no one expects to pay for (or that they've been trained not to pay for). Instead, you have to focus on real scarcities, not artificial ones, or your business model is going to go nowhere. Saying that you should "charge" is nothing revolutionary. But it's misleading. The real trick is in understanding what to charge for -- which is what we've been discussing here for years. It's too bad Manjoo didn't explore that angle, because that's where the really interesting business models of tomorrow will be found.
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Filed Under: business models, charging, economics, free
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idea
It might be an interesting way to deal with DRM, monopolies, proprietary nature of things, etc.
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Re: idea
Matt wrote:
Does prohibition work? Or does it simply drive up the price?
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Not artificial scarcity
The right way to look at is that the transaction is already fair today - give the users something for free, they pay with with a rich dynamic community full of eyeballs that look at ads (among other things). The people with 200 friends are the cornerstones of that community, and decreasing their demand by raising the price decreases the overall value of the product as a whole.
There are ways to charge money of your users without devaluing the existing product. For example, you could charge extra to host high quality videos and images to share with your friends while still giving away the low quality resampled media that you already have. It might be worth $5 to publish HD videos to Facebook's audience, for example, because the bandwidth is expensive, you can't exactly get that elsewhere for free.
But right now, unless the price of bandwidth skyrockets due to the economy (which won't happen), the current price for the current product is fair.
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Do you feel that these particular scarcities cover the scarcities of the company? To name a few:
electricity
bandwidth and networking
servers and storage space
employees
licensing
lawyers
You can spend a lot of time telling people what not to do, but that's no substitute for telling them what TO do.
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maybe
As for charging for popular accounts:
I think if facebook had started out with a cap on profiles with more than 200 friends (or some other reasonably large number), then no existing users would be effected. Then they could offer a 'premium' account that allowed you add more users, and that might catch on. But since the cap wasn't in place from the beginning, they'd have a real hard time forcing one on the community.
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Re: maybe
However (and this may be what Mike was getting at), the marginal cost of adding a new friend is really zero, and limiting that to 200 is an artificial scarcity. You're assuming that the people with a lot of friends are the high-bandwidth users. Regardless of whether the cap is new or old, creating an artificial scarcity based on number of friends is precisely what would be wrong. (Sorry to Mike if that's what he meant in the first place and I didn't catch on)
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answear
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Re: answear
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Revolution
"Real scarcity" isn't the issue. Offering something perceived to be new and improved (higher bandwidth, faster processing speeds, smaller form factors, greater convergence) is the hardware industry's core business model. Content should be the same.
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I know something they could charge for
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The gifts used to be entirely free, now they're $1, with the exception of special promos from companies etc (who definitely pay). I think we'll see more developments like this. An account should remain free, but its reasonable to charge users if they want extra services and customized features from the site. What's interesting is the idea that users are willing to pay for pixels based entirely on emotion.
Oh, and the friend capping idea, thats just a lame duck. None of the cool kids pay for their friends. We learned that in college.
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