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Reducing (pricing) friction March 12, 2007

Posted 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.


1. Jim Greer - March 12, 2007

Good example – and of course downloadable games are now starting to include ads to make money off the 99% that don’t convert.

2. Doctor Louis Bouloumié - March 13, 2007

“In theory, if one were to approach a VC and say “we’re going to do {type in any free service product that is out there} for $XX or $XXX p/mo or p/year, one would get laughed out of the room. The obvious retort would be “people will never pay for that service when {type in any free site} and other sites offer it for free”.
I just want to point out that what would intuitively seem obvious (no one wants to pay for a service they can get for free) can easily be wrong with the right type of execution.
I think people (investors, et al) are too quick to write off ideas and assume they know how a user population will react. The best way to test ideas to is to just go to market.”

3. Jason Alba » JibberJobber - A Case Study In Freemium Models - April 6, 2007

[…] include this week’s special) – so the penny gap has been smaller than what others said it would be. Based on percentages alone, the revenue from upgrades will be enough to sustain the company moving […]

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