The Penny Gap - In-Depth
In a recent post by Josh Kopelman over at Redeye VC, he talks about The Penny Gap in consumer facing Internet services. At first, I didn’t think too much about the particular posting (to be honest) but I pondered it while I was at the gym and after much deliberation, I think it’s a fantastic posting (opposite to what I originally thought).
Nothing that Josh spoke about is rocket-science, but what he did very well in his post is illustrate his entire thought. Thanks to the power of the Internet, I have ‘borrowed” Josh’s chart below, but you can fully read his entire post at the link above. It can be summed up into this:
When framing a business model within the consumer Internet space, we tend to hear about advertising supported, freemium, subscription, or a hybrid model. Putting an advertising supported [model] aside, we have to utilize a subscription or freemium model to generate revenue. An advertising supported model generally has a higher consumer demand as consumers do not pay for the content out of their wallets but rather, out of their attention (pre-roll video, banner ads, email promotions, etc). Josh argues that the demand at the 1 cent level (Penny) [subscription] is far less than at the free level, which I wholeheartedly agree because not everyone wants to pay for something.
When we launched MyPhotoAlbum, it was a freemium model: allow everyone to create their own galleries for free, and pay a fair price when you wanted additional features. We noticed that the demand was extremely high for the free version, but even at extremely modest pricing for freemium features, the demand dropped off in a non-linear progression. Seth Godin would say that our product wasn’t remarkable enough, but that’s for another post at another time.
So while Josh and I aren’t proposing a new theorem or business model, he outlined what many of us never have put down on paper. I am working with a few entrepreneurs now who are finding that the demand curve is not linear and have had to adjust their models in ways unexpected. Great insight Josh!