Micropayments reconsidered

by on April 7, 2008 · 37 comments

I have generally agreed with Clay Shirky (and Tim) that micropayments either don’t work very well or just aren’t needed given other pricing options / business models. But my eBay activity over the past few years has made me reconsider. I was going back through some of my past eBay purchases tonight and leaving feedback and I realized that I have made dozens of micropayments in recent months for all sorts of nonsense (stickers, posters, small car parts, Legos for my kids, magazines, and much more). Most of these items are just a few bucks, and many don’t even break the 99-cent threshold. I think that qualifies as micropayment material. And certainly I am not the only one engaged in such micro-transactions because there are countless items on eBay for a couple of bucks or less.

Of course, just because micropayments and PayPal work marvelously in the context of the used junk and trinkets we find on eBay, that does not necessarily mean they will work as effectively for many forms of media content. Advertising or flat user fees are probably still preferable since consumers don’t like the hassles associated with micropayments. Still, they seem to be working fine on eBay, so it would be wrong to claim that they never work online.

  • Tim Lee

    Is that less than a dollar including S&H?

  • Adam Thierer

    No, there are very, very few items that would be less than 99 cents after S&H. But even with S&H, many items don’t break 2 or 3 bucks. For example, do a search for “stickers” on eBay and you will find about 60,000+ items, many of which will be just 99 cents with S&H ranging from 39 cents to a couple of bucks. But isn’t that still a “micro-payment”? Is there a technical definition of the term that limits it to less than a buck? (I’m just asking; I really don’t know).

  • http://www.tc.umn.edu/~leex1008 Tim Lee

    Is that less than a dollar including S&H?

  • http://www.techliberation.com Adam Thierer

    No, there are very, very few items that would be less than 99 cents after S&H. But even with S&H, many items don’t break 2 or 3 bucks. For example, do a search for “stickers” on eBay and you will find about 60,000+ items, many of which will be just 99 cents with S&H ranging from 39 cents to a couple of bucks. But isn’t that still a “micro-payment”? Is there a technical definition of the term that limits it to less than a buck? (I’m just asking; I really don’t know).

  • http://lippard.blogspot.com/ Jim Lippard

    Aren’t there huge numbers of micropayments when you look at purchases by cell phone in Africa and Asia (and to a lesser extent in the U.S. and Europe)?

  • Tim Lee

    Micro-payment is obviously a somewhat subjective term, and it doesn’t have an exact boundary in terms of exact dollar figures. I would say that anything under 25 cents is clearly a micro-payment, while anything over $2 is clearly not a micropayment. Reasonable people could disagree about whether Apple’s 99 cent iTunes purchases are micro-payments, but it’s clearly close to the high end of the range that’s normally regarded as micro-payments.

    Shirky’s fundamental point, which I think is absolutely right, is that there’s a minimum transaction cost associated with any monetary transaction, no matter how small, and that as the price drops, the overhead becomes a larger and larger fraction of the transaction. With iTunes, for example, I’ve read that about 25 cents out of every dollar Apple gets goes to the credit card company, and thats not counting the mental and logistical overhead faced by the consumer (deciding whether to buy, making sure the site is legit, getting out the credit card, typing the number in, verifying the transaction at the end of the month). So buying a 99 cent iTunes purchase might cost the customer $1.25 ($1 plus 25 cents of time and irritation), while Apple and the labels might only see 75 cents of revenue. Obviously, as you get much lower than a dollar, things get even worse, to the point where almost all of the transaction is overhead and there’s no money left over for the seller. At that point, it makes more sense to find a business model, such as advertising, where transaction costs don’t eat up so much of the value.

    The original vision for micropayments was that people would pay a nickel or a dime to read an article, listen to a song, etc. I think that’s clearly not going to happen. It’s an open question is where the line is—whether you can build a sustainable business charging 50 cents, a dollar, or two dollars per transaction. But I think it’s pretty clear that there is a floor below which micropayments are doomed to failure.

  • http://lippard.blogspot.com/ Jim Lippard

    Aren’t there huge numbers of micropayments when you look at purchases by cell phone in Africa and Asia (and to a lesser extent in the U.S. and Europe)?

  • http://www.tc.umn.edu/~leex1008 Tim Lee

    Micro-payment is obviously a somewhat subjective term, and it doesn’t have an exact boundary in terms of exact dollar figures. I would say that anything under 25 cents is clearly a micro-payment, while anything over $2 is clearly not a micropayment. Reasonable people could disagree about whether Apple’s 99 cent iTunes purchases are micro-payments, but it’s clearly close to the high end of the range that’s normally regarded as micro-payments.

    Shirky’s fundamental point, which I think is absolutely right, is that there’s a minimum transaction cost associated with any monetary transaction, no matter how small, and that as the price drops, the overhead becomes a larger and larger fraction of the transaction. With iTunes, for example, I’ve read that about 25 cents out of every dollar Apple gets goes to the credit card company, and thats not counting the mental and logistical overhead faced by the consumer (deciding whether to buy, making sure the site is legit, getting out the credit card, typing the number in, verifying the transaction at the end of the month). So buying a 99 cent iTunes purchase might cost the customer $1.25 ($1 plus 25 cents of time and irritation), while Apple and the labels might only see 75 cents of revenue. Obviously, as you get much lower than a dollar, things get even worse, to the point where almost all of the transaction is overhead and there’s no money left over for the seller. At that point, it makes more sense to find a business model, such as advertising, where transaction costs don’t eat up so much of the value.

    The original vision for micropayments was that people would pay a nickel or a dime to read an article, listen to a song, etc. I think that’s clearly not going to happen. It’s an open question is where the line is—whether you can build a sustainable business charging 50 cents, a dollar, or two dollars per transaction. But I think it’s pretty clear that there is a floor below which micropayments are doomed to failure.

  • Adam Thierer

    Tim… I agree with your last statement about there being some floor below which micropayments will likely fail, or at least not be widely utilized. Nonetheless, I think I am fairly close to that floor when I spent $1.39 for a sticker on eBay like I did this week. That being said, I only engage in micro-transactions of that sort on an *occasional* basis, and therein lies the key difference. If I was asked to go through the Pay Pay micropayment process *every* time I wanted to consume a single news article, that’s where the transaction costs would grow large and annoying. At that point, simple, flat-rate pricing (or ad-supported models) become preferable.

    Of course, I haven’t thought through the “one-click” micro-payment models that I have heard some people suggest in the past. We have something close to that at work on Amazon today. If we had a comparable “BUY NOW” button at the top of our browser that we could easily click any time we wanted to immediately and effortlessly purchase anything on the open webpage, that might be interesting. However, it would obviously open the door to a whole host of security and privacy issues. God only knows what my kids might buy if such a button was embedded in my browser. (My daughter once accidentally hit “But it Now” when I was looking at a fancy car on eBay that I couldn’t afford. Luckily, it takes more than a few clicks to make the actual transaction happen!)

  • http://www.techliberation.com Adam Thierer

    Tim… I agree with your last statement about there being some floor below which micropayments will likely fail, or at least not be widely utilized. Nonetheless, I think I am fairly close to that floor when I spent $1.39 for a sticker on eBay like I did this week. That being said, I only engage in micro-transactions of that sort on an *occasional* basis, and therein lies the key difference. If I was asked to go through the Pay Pay micropayment process *every* time I wanted to consume a single news article, that’s where the transaction costs would grow large and annoying. At that point, simple, flat-rate pricing (or ad-supported models) become preferable.

    Of course, I haven’t thought through the “one-click” micro-payment models that I have heard some people suggest in the past. We have something close to that at work on Amazon today. If we had a comparable “BUY NOW” button at the top of our browser that we could easily click any time we wanted to immediately and effortlessly purchase anything on the open webpage, that might be interesting. However, it would obviously open the door to a whole host of security and privacy issues. God only knows what my kids might buy if such a button was embedded in my browser. (My daughter once accidentally hit “But it Now” when I was looking at a fancy car on eBay that I couldn’t afford. Luckily, it takes more than a few clicks to make the actual transaction happen!)

  • http://ipradical.org Dallas

    I personally find micropayments extremely annoying. The cost-to-value ratio of the products associated with them is, more often than not, enough to compel me not to purchase the product.

    In my experience, this is especially a problem in virtual world economies, where the products in question are often only marginally useful.

  • http://ipradical.org Dallas

    I personally find micropayments extremely annoying. The cost-to-value ratio of the products associated with them is, more often than not, enough to compel me not to purchase the product.

    In my experience, this is especially a problem in virtual world economies, where the products in question are often only marginally useful.

  • http://lippard.blogspot.com/ Jim Lippard

    The transaction cost overhead issue looks to me to be surmountable. Hasn’t the PayPal peer-to-peer payment model already addressed that issue? The funds are either in your PayPal account, or get deducted from a bank account, usually with no transaction charges. Similarly, using cell phones for micropayments, you either have pre-paid funds available for use for micropayments, or the micropayments get totaled up at the end of the month and appear on your phone bill.

  • http://lippard.blogspot.com/ Jim Lippard

    The transaction cost overhead issue looks to me to be surmountable. Hasn’t the PayPal peer-to-peer payment model already addressed that issue? The funds are either in your PayPal account, or get deducted from a bank account, usually with no transaction charges. Similarly, using cell phones for micropayments, you either have pre-paid funds available for use for micropayments, or the micropayments get totaled up at the end of the month and appear on your phone bill.

  • Tim Lee

    Gene, that’s an interesting point. I personally find Paypal annoying enough that I wouldn’t use it for small transactions. As for cell phones, I think the difference is that your cell phone company already has an established billing relationship with you, so they can easily tack on extra charges to your bill. It’s harder for someone who’s not already a service provider to convince a large number of people to sign up for a service whose principal purpose is to allow you to make small payments.

  • Tim Lee

    Oops, that’s a response to Jim. Doing too many things at once.

  • http://www.tc.umn.edu/~leex1008 Tim Lee

    Gene, that’s an interesting point. I personally find Paypal annoying enough that I wouldn’t use it for small transactions. As for cell phones, I think the difference is that your cell phone company already has an established billing relationship with you, so they can easily tack on extra charges to your bill. It’s harder for someone who’s not already a service provider to convince a large number of people to sign up for a service whose principal purpose is to allow you to make small payments.

  • http://www.tc.umn.edu/~leex1008 Tim Lee

    Oops, that’s a response to Jim. Doing too many things at once.

  • Adam Thierer

    Jim… that’s a good point about cell phone transactions, and another model like that is XBOX Live Marketplace, where I routinely make transactions for a couple of bucks a pop. I just buy a bucket of “Microsoft Points” ever month or so and then buy individual TV shows, music videos or extra game content. For example, I just downloaded a few new cars for my “Forza Motorsports” racing game last night. I don’t even know how much it cost. I just clicked on it and bought it right away. Seems to me that is another good example of how micropayments can work.

  • http://www.techliberation.com Adam Thierer

    Jim… that’s a good point about cell phone transactions, and another model like that is XBOX Live Marketplace, where I routinely make transactions for a couple of bucks a pop. I just buy a bucket of “Microsoft Points” ever month or so and then buy individual TV shows, music videos or extra game content. For example, I just downloaded a few new cars for my “Forza Motorsports” racing game last night. I don’t even know how much it cost. I just clicked on it and bought it right away. Seems to me that is another good example of how micropayments can work.

  • Pingback: The Progress & Freedom Foundation Blog

  • Pingback: Who Said Micropayments Can’t Work?

  • Pingback: The Progress & Freedom Foundation Blog

  • Pingback: wRDwgC1HqM wRDwgC1HqM

  • Pingback: the glades

  • Pingback: adipex coupons

  • Pingback: devenir rentier

  • Pingback: Learn More

  • Pingback: vine followers

  • Pingback: 1300 phone number cost

  • Pingback: https://www.youtube.com/watch?v=KzcwbO9XfRo

  • Pingback: pikalainat

  • Pingback: book of ra

  • Pingback: vlt book of ra

  • Pingback: english premier league

  • Pingback: Cleaners Services

  • Pingback: Breaking Bad Stream

Previous post:

Next post: