Freemium - Shmeemium (or why micro-billing is better) | Hacker News Reader

Freemium - Shmeemium (or why micro-billing is better)

lmframework.com

23 pointshymanroth21 comments

In implying the penny gap can be eliminated, this article fails to account for mental transaction costs. No matter how simple a microbilling service is, there is still a mental transaction cost for deciding whether to pay or not. If my time is worth $20/hour (US average wage), and it takes me 3 seconds to read your microbilling screen and understand what you are charging, it has already cost me a penny. 3 seconds is enough time for the average reader to read 5 words. I would estimate you have about a minute to explain your service and charge for it, if you want the customer to spend a quarter on something that is worth fifty cents (or more) to them. (See http://szabo.best.vwh.net/micropayments.html or http://en.wikipedia.org/wiki/Micropayment#Theory.2Fcriticism for more background on mental transaction costs.)

If the price of your freemium service is artificially high, then you are doing it wrong. The freemium model is for services where the price of supporting free users is less than the price of other ways of informing your paying customers that you exist. (Including cases where free users contribute value.)

The best way to structure the freemium model is such that you only charge for things that are natural scarcities, not things that can be freely replicated. For example, charging for support (human time to solve your problem) is better than charging for features. (Existing features aren't scarce, it costs nothing to roll them out to all users. Implementing new features is scarce.)

The mental transaction cost is certainly an issue with content. I wouldn't want to have to decide every time I start reading a news article whether I want to pay to get to the end.

However, the one-off mental cost of deciding whether to allow a web service to bill me for future usage is not a big deal, and, anyway, it applies even more to the choice of upgrading from a free to premium version.

In fact, it applies to any instance where the user is faced with having to pay for something.

What do you propose? Everything should always be free?

As for the scarcity argument, charging for support is a horrible business model. Look at Red Hat's revenues per user vs MSFT's. The key is to leverage the negligible marginal distribution costs of digital content.

In implying the penny gap can be eliminated, this article fails to account for mental transaction costs.

Seriously. Clay Shirky explained this 9 years ago: http://www.openp2p.com/pub/a/p2p/2000/12/19/micropayments.ht...

I can't believe someone is writing this in 2009. There's so much wrong with it I don't even know where to begin, but this paragraph stuck me as particularly wrong:

"Fair enough. But here’s one thing freemium fans can’t deny: in their model, a tiny minority of paid users subsidizes the service for everybody. It is this simple fact that makes the freemium model self-defeating, because, for the numbers to work, the price of the paid service must be set artificially high."

That's just pure mental confusion and abuse of language by the author.

Try this thought experiment: github launched as a micropayment service. It would already be dead. How do you calculate the "fair" price of something that doesn't exist?

Shirky was talking about micropayments for content in that article. An endless stream of little decisions. I agree with him.

However, as I pointed out in a comment above. The one-off mental transaction cost for agreeing to be micro-billed for a continuous service is less than that required to sign-up for a premium version of a service.

As to my supposed abuse of language, I don't understand what you mean.

As to my supposed abuse of language, I don't understand what you mean.

Correct me if I'm misunderstanding you on this part: If your claim is that the paying users of github are subsidizing the free users, that's simply not true and is a misuse of the word subsidize.

Calling a price "artificially high" on the other hand is meaningless. The correct price is the price that create the most value. There's no such thing as an artificially high price in an open marketplace. Or, more specifically, it's impossible for the producer of a good or service to set a price that is artificially high.

If you use a service without charge which entails a non-zero cost to produce and supply it, then I'm afraid somebody, somewhere is subsiding it. So that's my first abuse of language sorted.

As to the price of premium services being 'artificially high' - as I make clear in the post - this refers to paying for a benefit that is necessarily incremental (if it wasn't, nobody would use the free service). The price of that benefit is generally excessive when compared to what can be had for nothing.

You many not agree with those words, but I don't think they, too, represent an abuse of language.

There's no such thing as an artificially high price in an open marketplace. Or, more specifically, it's impossible for the producer of a good or service to set a price that is artificially high.

That's not true. The real world is not the same as an idealized economic model. It is quite possible for a business to set an artificially high price, at least in the short term. In a competitive market, it results in the business getting less revenue, and quite possibly going out of business, but that is not instantaneous. If the price is merely sub-optimal, but not outrageous, it is quite possible that the overcharging business will make enough money to stay around for years.

Even John Maynard Keynes commented on those trying to profit by shorting irrational bubbles, "Markets can remain irrational longer than you can remain solvent." -- if you're a company benefiting from the current irrationality, that means you can stay around until the market returns to rationality. (For example, see Citibank, Lehman brothers, etc....)

This is without even accounting for the fact that these services are usually not pure commodity markets. They are in monopolistic competition (http://en.wikipedia.org/wiki/Monopolistic_competition), sometimes with only very distant substitutes, giving closer to monopoly control over their market.

One aspect of freemium models that you are giving seriously short shrift to is that they often have an element of value exchange to them. Additional users free or pro, make the service as a whole more valuable, if the cost of subsidizing a freegan is less than the value they contribute, it's a perfectly rational exchange. This is why craigslist, flickr and myspace were able to sustain that model, the marginal cost of an additional user is usually much less than the utility they provide to the rest of the users.

And that isn't even considering the value of peer production, from mutual support to people building tools within the ecosystem that is hosting them. In your spreadsheet example, the use who posts a widely used rent/own evaluation worksheet is still charged when she uses the site, even though you should be compensating her for the value she adds to the site.

While I like the idea of microbilling, I think it's somewhat orthogonal to freemium models.

Good point. But not every web service benefits from the network effect. The spreadsheet example was not chosen at random. As long as you can save you spreadsheet in a common format, would you really choose a service with a higher user base over one that offered much better functionality but with fewer users?

There is space for both models. But for web applications I think microbilling has significant advantages

I don't understand the logic flow of this article. First it seems to place to place freemium & micro billing in opposition. I don't see why.

Then it goes on to describe all sorts of problems that might affect a freemium model. They can be annoying. There's a race to the bottom. There's the penny gap. paid subsidises free. All true. None universally applicable. Certainly none universally deal breakers.

To pick on the last one I could give this analogy that applies to many kinds of freemium businesses. Whenever you buy your brand of toothpaste (that you have been buying for 20 years) you are subsidising advertising to new markets in countries you don't care abut. In other cases even that analogy doesn't hold because free customers do not raise costs.

When finally getting back to microbilling, the solution appears to be some sort of universal easy micro billing service & a cultural shift away from subscriptions towards pay-as-you-go. Fine. Good. Works for iphone apps & mobile phone trivia, why not web apps?

What relevance does this have for business models that rely on freemium? None. No such service exists at this point. The fact that the proposed solution is a universal one, points to the fact that WebApp companies shouldn't roll their own.

I agree that micro billing is a good idea. I don't see what it has to do with freemium.

I can see the potential for micro-billing in B2B services, but I'm quite certain micro-billing will never be successful in the consumer market. The problem as I see it is that most potential customers will see micro-billing as the very embodiment of "nickle and dimed to death". Which is not very surprising. Usage based billing is seldom ever popular with consumers, who have historically chosen flat-fee options in overwhelming numbers whenever given the choice.

Actually, the ads often help to keep the price of freemium not as high as was mentioned in the article.

Also the Micro-Payments are good for sellers because the customer have less control over what he is consuming, because it's a pain in the %$# check every time how is your consume.

So having less control over your consume the pop up comes faster :D

i don't necessarily disagree, there just needs to be a powerful, useful, efficient, central microbilling service before it actually catches on.

i also don't necessarily agree with the assumption that the paid versions are artificially higher. the point of the free version is for the ads to more or less cover the costs.

The cost of the paid versions are artificially high wrt to the additional benefit they provide and to what they would cost if all the users paid up.

As web apps become more prevalent, people will be less willing to giving up their acreage to ads.

Agree that microbilling needs critical mass before catching on.

He just "assumes" the step of a clearinghouse for payment information exists and stores the users payment information. Unfortunately, nothing of the sort exists, and would be quite a big hurdle to get over.

Isn't the model this article describes exactly what Amazon does with AWS?

Yup. The trick is to get consumers to embrace it.

Isn't the model this article describes exactly what Amazon does with AWS?

Metered usage is not the same thing as micropayments. I may have skimmed the OP too quickly, but if metered usage was the proposal then the title is misleading. The use case for metered billing is rapid scaling in the face of unpredictable usage patterns.

Excellent article. Freemium is much better for both consumers and producers:

Consumers avoid annoying ads, and they get something they don't mind paying for (one reason being that it costs so little).

Producers just win all around. :)

I hope you meant 'micro-billing is much better'....

To a certain extent, yes, I did. Thanks.

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