Monday, May 12, 2008
The Value of a Search
What is the value of a Google search? Or an e-mail? How do free services pay for themselves? How does a business model come into existence from the anarchic void of the Internet? A coworker and I had an interesting discussion the other day about micropayments and the values of internet services. How invaluable, for example, are the search engine or the e-mail account? And yet these services are widely available absolutely free.
Virtual products or virtual services typically have extremely low marginal costs, and then pricing becomes a bit, well, weird. Let's say you spend $10 million developing a piece of software. Once it's developed, you can make copies with packaging for $1 apiece. What do you charge for it. Traditional economics principles would tell you to set the price low, because your marginal costs are low. But that becomes impractical. If you charged $2 for a unit, then you would need to sell 10 million units for it to become profitable, but if you charge too much, then there is a high likelihood that people will be turned off by the price and you won't sell many at all. Is it even practical to charge $2 for a product that may cost $5 to ship and be subject to a $.30 fee for credit card processing?
Then consider a company like Google, whose marginal costs per search are probably something like a tenth of a cent. Google is set up with an advertising business model, but what if there had been another option? What if it had been possible to charge a penny, or half a penny per search. For most of us, that would be an extremely reasonable. If you did a thousand searches in a month, that would be $5--that would be extremely profitable for Google and, again, quite reasonable for a consumer.
What if it cost a half a penny to send an e-mail? That would not be a particularly huge amount to your typical net-user, but it would cut down on spam and e-mail forwards tremendously. Unfortunately, there is no infrastructure in place to accept payments of 1/2 a cent.
But maybe there will be someday. The internet is still in its infancy (in many ways), and it's worth taking a look at prominent sites 10 years ago and comparing them to even run-of-the-mill sites today and seeing just how far technology has come. How much more will it grow in the next 10 years?
Virtual products or virtual services typically have extremely low marginal costs, and then pricing becomes a bit, well, weird. Let's say you spend $10 million developing a piece of software. Once it's developed, you can make copies with packaging for $1 apiece. What do you charge for it. Traditional economics principles would tell you to set the price low, because your marginal costs are low. But that becomes impractical. If you charged $2 for a unit, then you would need to sell 10 million units for it to become profitable, but if you charge too much, then there is a high likelihood that people will be turned off by the price and you won't sell many at all. Is it even practical to charge $2 for a product that may cost $5 to ship and be subject to a $.30 fee for credit card processing?
Then consider a company like Google, whose marginal costs per search are probably something like a tenth of a cent. Google is set up with an advertising business model, but what if there had been another option? What if it had been possible to charge a penny, or half a penny per search. For most of us, that would be an extremely reasonable. If you did a thousand searches in a month, that would be $5--that would be extremely profitable for Google and, again, quite reasonable for a consumer.
What if it cost a half a penny to send an e-mail? That would not be a particularly huge amount to your typical net-user, but it would cut down on spam and e-mail forwards tremendously. Unfortunately, there is no infrastructure in place to accept payments of 1/2 a cent.
But maybe there will be someday. The internet is still in its infancy (in many ways), and it's worth taking a look at prominent sites 10 years ago and comparing them to even run-of-the-mill sites today and seeing just how far technology has come. How much more will it grow in the next 10 years?
Labels: technology
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