From Coinstar to Bitcoin: How Tech is Shifting Revenue Models
Does anyone remember Coinstar, the friendly little vending machine that would turn two years of dropping pennies into an old Jack Daniels bottle into spendable cash, for only a mere 8.9% cut? As we rely less and less on physical cash to operate in our daily lives this machines have slowly started to disappear, or at least become much less relevant.
It's a little bit funny, but at least in the United States the idea that change is essentially worthless has penetrated the minds of the many for some time. I think because of this we think about almost all pricing in terms of dollars - not cents. The $x.99 and $x.95 were lovely pricing tricks aimed at duping our subconscious minds a bit for this exact reason. And in a world where it was a pain in the ass to complete a monetary transaction - get your wallet out, count out the bills, hand them to a stranger, and awkwardly cup your hands waiting for change - it made a lot of sense to price all products high enough to warrant going through all of those steps.
Then digital forms of payment (debit/credit cards) came along, and coupled with the internet started greatly reducing transaction costs. Today these have enabled companies like Amazon to thrive, making it viable to sell a relatively low cost product because you can hit a very wide market and the transaction costs are fairly low (payment processing fees generally hover around 3%, which is much cheaper than paying a person to manually handle the transaction).
However, there is still a world of goods and services, particularly of the B2C type, in which the revenue model is still hampered by transaction costs. In other words, there are still goods and services where it is not profitable to try to charge the customer directly for each individual unit, so these companies have come up with a variety of different models instead. Let's take YouTube as an example. For most of YouTube's history, it has been a completely free service for consumers, but it is costing Google monstrous amounts of money to provide that service; how could they possibly afford to do that (last time I checked Google wasn't a charity)?
Their answer is great, because it represents a common shift we're seeing with these goods today. Originally their revenue was based on advertisements. The idea here is that if you give something away for free and enough people come to see, you can then charge advertisers a fee in order to get their product/service in front of all of those eyeballs. This is why almost every YouTube video now starts with an advertisement (ever notice that the more popular the video, the less likely you are to be able to "skip" the ad?).
More recently, YouTube has begun offering a subscription service which is akin to a buffet. It's a recurring monthly cost that's relatively low which gets you access to everything they have ad-free and opens up some premium features. Because the monthly cost is relatively low and people are a bit short sighted, $9.99/month sounds cheap, so many people make the purchase decision without much thought ($9.99/month is similar in price to getting a new video game console every 3 years). This model also brilliantly takes advantage of a truth the fitness world discovered years ago: once people commit to a recurring payment they often are too lazy to cancel until a while after they've actually stopped using the service (bonus points if you lock them into a 2-year contract; looking at you 24-Hour Fitness!).
Ultimately though, neither of these models are ideal. As a consumer I don't want to be blasted with ads in order to receive the good but I also don't want to lock myself into a recurring monthly fee for a service that I may barely use.
What I want is to be able to pay exactly what a specific piece of content is worth to me, like everything else. When I want a shirt for $20, I buy it, I don't subscribe to a $200/month shirt subscription (though admittedly a few companies are currently trying this). When I want to watch a YouTube video, or an episode of Game of Thrones, I want to pay the $0.03 or $5.00 that the individual unit is worth. Unfortunately, what we refer to as "micropayments" are prohibitively difficult to process today. To take 3% of a $0.03 transaction simply rounds to zero, and we don't have a way of exchanging value at the micro level.
So that's a lot of background to essentially say this - I think Bitcoin, or more generically, the technology known as cryptocurrency, could change all of that. If you could exchange monetary value at a millionths of a cent level, effortlessly and securely, what might change in the way you purchase and creators price goods and services?
This of course also has applications in the realm of micro-finance which could be particularly impactful in areas of the world with little access to capital. What if your investment portfolio one day was partially comprised of thousands of $500 loans to small business owners across the globe? It's coming...
It's a little bit funny, but at least in the United States the idea that change is essentially worthless has penetrated the minds of the many for some time. I think because of this we think about almost all pricing in terms of dollars - not cents. The $x.99 and $x.95 were lovely pricing tricks aimed at duping our subconscious minds a bit for this exact reason. And in a world where it was a pain in the ass to complete a monetary transaction - get your wallet out, count out the bills, hand them to a stranger, and awkwardly cup your hands waiting for change - it made a lot of sense to price all products high enough to warrant going through all of those steps.
Then digital forms of payment (debit/credit cards) came along, and coupled with the internet started greatly reducing transaction costs. Today these have enabled companies like Amazon to thrive, making it viable to sell a relatively low cost product because you can hit a very wide market and the transaction costs are fairly low (payment processing fees generally hover around 3%, which is much cheaper than paying a person to manually handle the transaction).
However, there is still a world of goods and services, particularly of the B2C type, in which the revenue model is still hampered by transaction costs. In other words, there are still goods and services where it is not profitable to try to charge the customer directly for each individual unit, so these companies have come up with a variety of different models instead. Let's take YouTube as an example. For most of YouTube's history, it has been a completely free service for consumers, but it is costing Google monstrous amounts of money to provide that service; how could they possibly afford to do that (last time I checked Google wasn't a charity)?
Their answer is great, because it represents a common shift we're seeing with these goods today. Originally their revenue was based on advertisements. The idea here is that if you give something away for free and enough people come to see, you can then charge advertisers a fee in order to get their product/service in front of all of those eyeballs. This is why almost every YouTube video now starts with an advertisement (ever notice that the more popular the video, the less likely you are to be able to "skip" the ad?).
More recently, YouTube has begun offering a subscription service which is akin to a buffet. It's a recurring monthly cost that's relatively low which gets you access to everything they have ad-free and opens up some premium features. Because the monthly cost is relatively low and people are a bit short sighted, $9.99/month sounds cheap, so many people make the purchase decision without much thought ($9.99/month is similar in price to getting a new video game console every 3 years). This model also brilliantly takes advantage of a truth the fitness world discovered years ago: once people commit to a recurring payment they often are too lazy to cancel until a while after they've actually stopped using the service (bonus points if you lock them into a 2-year contract; looking at you 24-Hour Fitness!).
Ultimately though, neither of these models are ideal. As a consumer I don't want to be blasted with ads in order to receive the good but I also don't want to lock myself into a recurring monthly fee for a service that I may barely use.
What I want is to be able to pay exactly what a specific piece of content is worth to me, like everything else. When I want a shirt for $20, I buy it, I don't subscribe to a $200/month shirt subscription (though admittedly a few companies are currently trying this). When I want to watch a YouTube video, or an episode of Game of Thrones, I want to pay the $0.03 or $5.00 that the individual unit is worth. Unfortunately, what we refer to as "micropayments" are prohibitively difficult to process today. To take 3% of a $0.03 transaction simply rounds to zero, and we don't have a way of exchanging value at the micro level.
So that's a lot of background to essentially say this - I think Bitcoin, or more generically, the technology known as cryptocurrency, could change all of that. If you could exchange monetary value at a millionths of a cent level, effortlessly and securely, what might change in the way you purchase and creators price goods and services?
- Would you pay a cent to post that to Instagram?
- Or ten to alert a portion of your followers that it went up?
- Would you pay 40 cents for directions?
- Or 60 cents to know a speed trap (police officer) was coming up?
- Or receive 10 cents from others on the network as a tip for notifying you of it?
This of course also has applications in the realm of micro-finance which could be particularly impactful in areas of the world with little access to capital. What if your investment portfolio one day was partially comprised of thousands of $500 loans to small business owners across the globe? It's coming...
