Giving something a price – on doughnuts and Internet revenue models

Just listened to an awesome Planet Money podcast on reference pricing, and more specifically, the dangers of initially giving things away for free if you’ll later need to charge for them.

Their main example in the podcast is a sad, but funny story of how veterans are still upset that the Red Cross started charging for doughnuts in 1942 (!) It might say more about the strangeness of war than psychological effects of pricing. But the problem is more relevant than ever, since most Internet businesses we use and love all started out free, and of course at some point run out of angel funding and need to start generating some money.

One example is Amazon, who I love and use all the time, but fear will only become more monopolistic. Now that they have their quasi-monopoly established, they seem to feel more secure in raising some prices. Not in new areas, like tablets, where they haven’t suffocated the competition yet, but in the original areas of e.g. books and non-perishables. It was very interesting to see how Amazon suddenly realized they were on the side of adding a sales tax, and it was the smaller guys who now were against it. For all we know, they might just buy Barnes and Noble and just use it as a storefront.

The other classic example is paywalls for newspapers. This is an interesting one, since consumers paid for their newspapers for a century, then had 10 years of getting them for free online, and then suddenly had to pay for them again. Which one will win out? The deeply-rooted belief that newspapers is a payable product, or the Internet’s mantra that information wants to be free? It will be interesting to see how it plays out. The only thing for sure is that print no longer is worth anything. Just see the prices for Boston Globe and Newsweek, just the past week. And dear old International Herald Tribune. A most wonderful brand, that evokes wonderful collective memories of Paris in the 60’s and Jean Seberg in Godard’s Breathless, now thrown away for the undeniably plebeian New York Times Global.

The only thing the media companies can do is continuously experiment with developing new types of content, developing new ways for the consumers to more easily pay for content and, perhaps the easiest one,¬†structuring content in new ways that the consumers aren’t used to getting for free. See this post for some interesting new examples.

For more information and thoughts on this topic, follow me on Twitter @malcmur.


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