In his book Free, Chris Anderson talks about micropayments -- paying pennies (or fractions of pennies) for content.
As I read this, I was reminded of the current discussions concerning the online news business model. Proponents of micropayments suggest that newspapers can return to their previous glory (or at least solvency) by charging small amounts for articles. In theory, this model sounds promising -- we throw pennies away; why not throw those pennies at the newspapers? From a purely financial standpoint, I agree that this makes some sense.
But do consumers really make decisions using only rational, financial information? According to Anderson, decisions are heavily influenced by transaction costs that include “the cognitive load of having to process information.” With micropayments, clicks to new content are now burdened with the constant, nagging thought of “do I really want to pay for this?” The relatively cheap price has now become expensive.
What’s more, micropayment proponents miss an even more basic point. Consider what will happen when the first previously free newspaper decides to start charging. Consumers, faced with these new cognitive costs and the plethora of free alternatives, will flock to other sites. With the reduced traffic, the advertising revenue will in turn decrease. A bad situation has now become much worse.
When a company’s revenue model is based on a two sided network, pricing decisions should not be made without first understanding the consequences for the overall platform.
