Small Price = Big Money

13 Jul 2009|Leigh Marinner

Angel investor Ron Conway spoke at TechCrunch’s CrunchUp day about his top 10 monetization opportunities, none of which included micropayments. I’m continually perplexed by why micropayments don’t get more attention. These could be virtual goods priced at $1 or less (e.g. a Facebook heart on Valentine’s day or gifting a sticker to put on a CyWorld page in Korea), or inexpensive apps for the iPhone ($3 versus $39+ on other mobile platforms), or paying $1 to get a copy of a news article a month after it was published or paying $0.99 for an iTunes song rather than having to buy a whole CD or buying a sword on World of Warcraft, or a pair of designer sunglasses on Second Life.

Consumers show much greater willingness to pay for things that cost a little bit, even if multiple purchases in the end it end up costing quite a lot.

A company called Changyou.com Limited, based in China, recently went public on the Nasdaq stock exchange. With annual revenue of around $200 million a year, it is (unlike many well-known Web 2.0 companies in the United States) profitable, and it makes most of its money by selling virtual goods to game players and virtual-world users in China. Facebook’s digital revenue has been estimated at around $35-$40 million a year – not peanuts except to Google. The recession has not slowed sales of virtual goods. Gaia Online, a youth world with seven million monthly visitors, sells more than $1 million a month of virtual goods.

By most estimates, customers spend about $1.5 billion a year on virtual goods worldwide. Tencent Holdings, a publicly traded Internet media company based in China, is the leader, with hundreds of millions in annual revenue from virtual goods in online games and other applications. Internet companies in the United States are behind the curve.

Why do consumers spend money using the micropayments model? Microtransactions remove barriers to entry. It doesn’t feel like a commitment. It enables you to connect with someone else.

Microtransactions are one of the few areas (along with subscription gaming) where consumers have shown a willingness to pay for online content on the PC. On mobile phones, there is no consumer expectation that goods will be free since the telcos have been very careful not to give stuff away. I would love to see more of our clients take this model seriously, as an alternative to online advertising as the revenue generation engine.

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