The Gong Show

There is an over-emphasis on the individual when it comes to responsibility and rationality in decision making. I rarely agree with David Brooks, but I found this paragraph in his op-ed today to hit the nail on the head:

Decision-making — whether it’s taking out a loan or deciding whom to marry — isn’t a coldly rational, self-conscious act. Instead, decision-making is a long chain of processes, most of which happen beneath the level of awareness. We absorb a way of perceiving the world from parents and neighbors. We mimic the behavior around us. Only at the end of the process is there self-conscious oversight.

To be clear, I think David Brooks is correct in his assessment on how we, the general public, make decisions, but that doesn’t mean I like it. I wish the opposite were true; the world would be a better place if decision making were a more rational, logical exercise that happened in higher levels of consciousness. But, using nothing more than my own subjective observations as evidence, it’s not.

When I have a point of view about something in pop culture that can easily be summed up in 140 characters, I like searching for it on search.twitter.com to see how original or unoriginal my point of view is relative to other internet geeks.

For example, after watching The Watchmen trailer today, I was really worried that the movie could suck… it looks like I’m not alone.

However, sometimes these searches fail. For example, I thought The Watchmen was far more funny than either serious or dramatic. I don’t want to spoil any part of the story for anyone that has not read it, but I found myself actually bursting out in laughter in parts, particularly the ending… It’s a humor where I’m laughing WITH the author, not AT the author. Sure, it’s DARK humor, but it’s humor nonetheless. However, a search for “Watchmen funny” or “Watchmen humor” does not unearth any like-minded readers. Am I alone on this one?

Marco quoted the following paragraph from an article on MacUser. The article bemoans users expectations that web services and software be free. See the quote:

Despite the recent advent of ad-supported programs, people have been paying for software for years. And developers put no less time and energy into writing software than a woodworker puts into fashioning a table or a chef puts into cooking a dinner—yet nobody demands that those products be provided on an ad-supported basis.

I’ve heard this analogy used frequently, and it’s time to put it out to pasture.

Users expect software, music, and other digital goods and services to be free because they know it costs zero to copy and distribute the digital goods to them. Users expect to pay the marginal cost of a good, especially when it created for the purpose of being distributed at mass scale. Most users don’t understand what “marginal cost” is, but most rational users will indicate they want to pay the minimum price possible for a good or service, and that minimum price (in any medium or market, not just digital media) is always the marginal cost of production and distribution.

Returning to the faulty analogy which kicked off this post, prices trending towards marginal cost is true in woodworking or culinary disciplines too. If two restaurants offer a comparable cheesecake, all else being equal, a consumer will be drawn to purchase the cheaper one. The two restaurants will compete on price, and the minimum price that either restaurant can afford to offer (while managing to stay in business) will be the marginal price.

Consumers’ demand for free software isn’t novel. It’s as old as trading itself (think: animal furs and crude weaponry in caveman society). It’s the basic desire to receive goods or services in exchange for as little as possible. The reason why the demand for free software deceivingly feels novel is that we have never before had a medium where so many goods and services can be viably offered for zero marginal cost.

So, enough comparing software to bookshelves and desserts. If you want to make an analogy to other industries, choose one where marginal costs are also zero, so you have an increased possibility of pulling off and apples-to-apples comparison.

Greg Yardley recently published the following breakdown of Apple’s iPhone App Store applications listed at various pricing tiers. His insight was that “free” was no longer the most popular application price. Instead, $0.99 was the most popular application price. See below:

Many of the companies in the Union Square Ventures portfolio offer their services for free to end-users and find other ways to monetize usage. A significant part of the reason for this pricing decision is that any price (even one penny) is a significantly greater hurdle to jump when converting a visiting into an active user than giving away a service for free. Josh Koppelman best articulated this hurdle in his post on The Penny Gap.

I’ve talked about The Penny Gap on this blog before, and to summarize my thoughts: The Penny Gap is not an problem of economics, it’s an internet 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… If paying $0.01 for a service had the same barriers to entry as paying nothing for a service, then I think The Penny Gap would almost completely vanish.

Returning to Yardley’s finding that “free” is no longer the most popular application price, the cause of this observation is that Apple has significantly improved the usability of paying for an application. Apple has made it drop dead simple for developers to charge for applications and for consumers to purchase applications. For developers, there’s no need to build a billing system, register for a payment processor, deal with chargebacks, etc; Apple makes charging for an application as easy as deciding on a price. For consumers, there’s no need to find your wallet, enter your CC#, create an account, etc when purchasing an app on the app store; all that info is stored in your Apple Account after your first purchase. That’s why “free” is no longer the most popular price on the App Store, because Apple has solved many of the usability problems that previous caused the friction which created The Penny Gap.