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Tech Scene: Payment Models for Digital Goods

In the history of the internet, a couple of different payment models have emerged for digital goods. There are various types of digital goods, many of them existed long before the internet: Books, News, Music, Videos, TV-Shows, TV-Channels to name a few. Some goods are inherently digital like virtual goods in computer games.

In the beginning of the internet, there was only one payment model: free digital goods sponsored by advertisement, and we still have that model today. But there were only a couple of digital goods available in the old times, mostly news articles.

Newer models emerged since then. The music and movie industry for instance decided to offer most of their goods by direct payment per item. For virtual goods like in Zynga games, the freemium model disrupted major parts of the gaming industry – you can play the games for free, but once you’re hooked, you have to pay in order to succeed.

The disruption of the direct payment model for music is now driven by services like Spotify or Simfy. Instead of letting you pay for every single item, you have to pay a flat fee per month to listen to any music you want to. You don’t own the titles anymore, you just get the right to listen to them as long as you’re paying for the service.

Which payment model is best depends on the type of goods you offer. I think there are three categories of digital items: collectable, consumable and enabling items. A collectable item has an intrinsic value to people and they want to own it (even after consuming it). Consumable items on the other hand only have value to people before they’ve consumed them. An enabling item allows people to improve on something existing, so they need to have it to get one step further.

Of course, no item falls completely into one category and it also depends on the mindset of the customer where to put an item. To me, books and movies are mostly collectable items which is why we still mainly use direct payment for such goods. TV-Shows and music on the other hand is more of a consumable item – sure, there are some shows and some music that pop-culture aficionados want to watch or to listen to all day long over and over, but most shows are only consumed once or twice. Likewise, we usually listen to a number of songs until we get bored of them and move on. We don’t really care whether we still have them. Hence, flat fee models are on the move for consumable items. It goes without saying that the freemium model is best fitted to enabling items such as virtual goods.

What category is news? Most of the time, it is a consumable good, because news are usually only relevant to you until they’re not new anymore. Because that’s what news is – it’s new. Sure, news portals do contain articles that have long-term value, but mostly it’s only relevant for a short time. So what’s the right payment model? In the old times of the internet, it was free to the consumer and sponsored by advertisement. It was okay for some time that this payment model didn’t produce much revenue, because real news publishing was still happening offline. Nowadays, the digital news portals have to generate more revenue as the offline revenue stream is breaking down.

So what other payment models are there? News publishers transfers their issue-based offline system to the net by offering flat fee subscriptions on a monthly or yearly basis, or per-issue payment like in the offline world. Considering news issues on a fine granular level, you pay a flat fee for reading any number of articles in the issue. So that’s the flat fee model for a consumable item. Makes sense. But there are still not enough people falling for that, as there are still many free news websites.

There is a tendency of news publishers to introduce (soft) paywalls to account for that. A (soft) paywall restricts your access to digital goods – articles in particular – by requiring you to pay a very small fee per article you’re reading or by allowing you a small number of articles to read for free until you either have to pay on a per-article basis or by subscription.

Time will tell whether per-article payment works. Since articles are mostly consumable goods of short relevance with many free competitors, I would rather suggest a different payment model. It should neither be for free, nor be a flat fee, nor be a per-article payment. The problem with the per-article payment is that you can’t really give people a demo of what they’re going to get. Then again people are hesitant to pay for the article as they might regret it in case the article didn’t meet their expectations.

My suggestion therefore would be a model that I call “capped satisfactory payment”. It consists of two rules. You pay on a per-article basis, but if you didn’t like the article after reading, you can get your money back for the article. Obviously, you combine that with a fair-use policy and tracking of rejected articles, so you exclude free-riders. The second rule is to cap the overall payment for read articles per issue. In other words if a reader really digests a lot of articles in an issue, he shouldn’t pay much more than the flat fee for the whole issue in the first place. To my mind, this model communicates clearly that you take the readers’ opinion seriously while reducing the hurdle for the consumer to read and pay for an article dramatically.


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