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!
If you enjoyed this post, make sure you subscribe to the RSS feed!
Digg
Del.icio.us
Stumble
Sphere It
Category: Advertising & Marketing
Tags: 
March 12th, 2007 at 12:04 pm
Yes. It is definitely tough to get the same uptake from consumers when you charge- even if it’s just a little. We’ll have to see if that changes over time with more widespread adoption of micropayments and the like.
Now on the SMB side, small business owners are much more willing to pay a reasonable monthly fee for a service or application that helps to make them more productive. We are seeing “a hundred flowers bloom” as it becomes easier for small startups to grow revenues through productivity & marketing tools (37signals, wufoo, shopify…).
-Matt
March 13th, 2007 at 10:49 pm
Darren,
Here is my take on the First Penny Problem.
It makes me nervous that the vast majority of Web 2.0 companies have a business model relying on ad revenue. The first reason is that according to valleywag (I think) Google, Yahoo, MSN and AOL own 92% of the ad revenue. That’s tough competition.
Also, I get asked to buy banner ads (I sell a unique digital media). The big problem is the company selling space hasn’t solved the first penny problem. A site builds traffic by giving something away for free and then wants to sell that traffic?
Who is willing to pay money to talk to people that only want free?
January 2nd, 2008 at 10:38 am
Mike, glad to see the advertiser view represented. Advertisers want proof of engagement — not just warm bodies. As the saying goes, The worth of a thing is the price it will bring. Show me who is engaged enough to pony up and I’ll pay for those warm leads.