Reducing (pricing) friction March 12, 2007Posted by jeremyliew in Consumer internet, Digital Media, Ecommerce, Internet, start-up, startups, VC, Venture Capital, web 2.0.
Josh Kopelman has a good post this weekend about the friction between free and one penny when charging consumers for goods that can be delivered digitally (e.g. articles, video, music, information etc). As he points out, price elasticity is not constant as price changes, but rather there is a huge step function (downward) in demand between prices of free and one penny.
A good example of this is the downloadable casual gaming space. The industry has standardized to a price point of around $20 for the unlimited version of a downloadable game. On average the industry realizes conversion rates of about 1% between the free (limited play) version and the pay version. Why do they not charge less and make it up in volume – after all variable costs are close to zero? Emperical testing has shown that price elasticity is relatively low once someone has decided to pay to play a game. The key friction point is between free and one penny.
Josh provides some different examples in his post which I recommend reading.