Josh Kopelman’s post entitled “The Penny Gap” has turned into a meme. The debate on his post largely misinterprets his point, but it’s interesting nonetheless. I commented on the post, but by the time I was done commenting, I realized that I had written a comment the size of an individual blog post, so I’m cross-posting here:

The graphical explainations above are taken from Josh’s post. I hope attribution and respect for his insightful idea is enough to satisfy copyright :)

“The Penny Gap” is not an problem of economics, it’s a usability problem. The act of paying for something online (regardless of the cost) requires collecting so much more information (CC#, Paypal Acct, Exp Date, etc) which is subject to data entry errors and form fatigue. Plus, users still don’t have a means of paying for things on the internet that they can trust unconditionally. (In user testing at Homestead, I constantly heard the complaint that they don’t like giving their CC# out on the internet because they are worried about identity theft).

If paying $0.01 for a service had the same barriers to entry as paying nothing for a service, then I think the cliff on your graph above would almost completely vanish. There would still be a tiny cliff to account for no being able to use “FREE” in branding, plus the mental block involved in assessing value. But, if we could solve the usability problems associated with paying for services on the internet, then the cliff depicted above would be an order of magnitude smaller than Josh’s graph outlines.

However, this point is largely theoritical because I don’t think it’s possible to make the barriers to entry in both cases completely equal. I am always interested in services (Google Checkout, PayPal features, etc) that try to reduce the barriers involved in payment over the internet.