Charging Is Good... But Only If You Charge For The Right Thing

from the otherwise,-it's-a-disaster dept

Wed, Nov 5th 2008 12:33pm — Mike Masnick

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

12 Comments

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Matt, 5 Nov 2008 @ 1:10pm

idea
Hmm, this gives me an idea Mike. What if we started making it illegal to create artificial scarcity?

It might be an interesting way to deal with DRM, monopolies, proprietary nature of things, etc.
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jonnyq, 5 Nov 2008 @ 1:23pm

Not artificial scarcity
Bandwidth and storage are real scarcities, so I don't know where "artificial scarcities" are coming into this, and I don't see how that's the right way to look at it.

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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Anonymous Coward, 5 Nov 2008 @ 1:27pm

So, what precisely should they charge for? What particular scarcities did you have in mind?

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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Joel Coehoorn, 5 Nov 2008 @ 1:45pm

maybe
For those complaining that bandwidth/storage/electricity isn't free: he's talking about marginal cost. The cost of those resources for one user per month probably runs well under a dollar, when you spread it over all the users. Not free, but cheap enough that it may as well be.

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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jonnyq, 5 Nov 2008 @ 1:58pm

Re: maybe
Even if the marginal cost per user is low, it's still not artificial. For example, the reason (following my previous example) networks don't allow really large images and the reason they resample your videos is because the bandwidth adds up. So, they give that away for free, but they limit what they give away because of the real scarcity of bandwidth (and the get something valuable in return).

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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mike allen, 5 Nov 2008 @ 2:07pm

answear
if say facebook set free acc at 200 friends just stop adding at 199 if you want new ones ditch an old one simple
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an0m0ly, 5 Nov 2008 @ 3:26pm

Revolution
History shows that the quickest way to start a revolution is to take away something that people already have: force women to leave the jobs they held during WWII: women's liberation; force african-americans, who proved they could serve at the front lines in WWII, back into Jim Crow society: civil rights movement. But people don't miss what they don't have: in Europe incoming cell calls aren't charged to the receiver, but in America they always have been; revolt? No.
"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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Anonymous Coward, 5 Nov 2008 @ 6:32pm

I know something they could charge for
Facebook could just charge people who want their profile to be the old format again. Look at all the groups of people who want it changed back. I would probably pay a few bucks a month for that, and maybe a little more customization on my facebook profile page.
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Lawrence D'Oliveiro, 6 Nov 2008 @ 12:06am

Re: idea
Matt wrote:

What if we started making it illegal to create artificial scarcity?

Does prohibition work? Or does it simply drive up the price?
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leroy, 6 Nov 2008 @ 4:20am

They've already found some ways to start charging users.
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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Anonymous Coward #42, 6 Nov 2008 @ 6:11am

I don't agree with the "over 200 friends" idea, because that's like charging per node for network monitoring/scanning software, which I despise. The basic service should remain free, but it might be a good idea to start charging small fees for add-on features (and "friends" are NOT features).
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mcescher, 3 Dec 2008 @ 8:46am

Re: answear
Or stop adding at 199 and then create another accout with a free email account and add more friends to that second, third or fourth FB account.
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