June 19, 2020
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Microtransactions: A Theoretically Good Idea That is Practically Really Bad

A while back, I had a reader reach out to me asking my opinion about microtransactions. The company they were looking at suggested that it had agreed to a deal with The Wall Street Journal, where users would be able to pay for one-off articles.

I wasn’t going to write about it because it’s a topic that should have been beaten to death by now. However, with many publications trying to go the paywall route coupled with how many of us solo writers there are, the idea of using microtransactions has started popping up in some of my conversations.

Essentially, the belief among some is that people will never pay for a full subscription because it gives them too much content. Instead, readers will pay for one-off articles like they did with iTunes music. Let them pick the individual article they want and pay a small amount of money.

In theory, it actually sounds like a really interesting idea. More people might be encouraged to spend if it didn’t mean they needed to get a $15/month subscription just to read an article or two. The all or nothing attitude of subscriptions does likely keep many people from paying.

With that theoretical discussion, microtransactions would actually increase the amount of revenue to publishers. However, there are plenty of ideas that are theoretically possible that are actually horrible when we attempt to put them into practice.

The big problem with microtransactions is it fails to take into consideration a series of issues. Let me break those down.

For any Substack site, the credit card processor is Stripe. Having used it now for five months, I can say that it is an incredibly user friendly product and provides me with plenty of data.

However, the downside to collecting credit cards is the fees. Stripe charges 2.9% plus $0.30 per transaction. Therefore, if you’re paying a $20/month subscription, Stripe is automatically taking $0.88 of the revenue, which is nearly 4.5% of revenue. What’s interesting is that if you prepaid a full year at $240, the fee would be $7.26, which is only 3%.

By default, this means that no microtransaction can cost $0.30 or less per article. Let’s expand to $0.50. At that rate, I’m left with $0.185 per article. To generate over a dollar in revenue from that reader, I would need them to buy six articles. To be clear, Stripe would be generating more revenue than I would in that scenario.

My background is working for crypto media companies. I remember many early proposed use cases of bitcoin being microtransactions. Proponents argued that bitcoin transactions would be free unlike credit card transactions. The problem? Bitcoin actually does cost money to make transactions when demand kicks in and that resulted in a microtransaction model that simply couldn’t work.

The economics simply don’t work.

The other problem is that it likely takes a similar amount of effort to get a user to pay $1 for an an article as it does to get a user to pay for a subscription. Consider the effort you had to take to sign up… You had to pull out your credit card, punch 16 numbers in, an expiration date and the CSV code. In the 30 seconds it takes to punch that in, you have a chance to decide against spending the money.

There’s a saying that it takes as much work to sell someone a $100 item as it does to sell a $1,000 item. If that’s the case, why wouldn’t we be trying to convince more people to buy the higher priced item—if the effort is equal, that only makes sense.

Therefore, offering a microtransaction option requires the user to take effort every time they want to read a story. They’re more likely to bounce than they are to purchase the article. There’s just too much friction for the user to actually want to read the article. I’d rather spend my effort trying to get a percentage of my users to pay for a subscription than to dangle cheap, low margin articles that would interfere in people ever subscribing.

But we’re blending theoretical with practical applications in this article, so let’s keep going.

We agree that ad hoc microtransactions don’t work. The fees are too high and forcing the user to take their wallet out every time they want to read is just too resistant. What if, instead, I allowed users to load a wallet with A Media Operator and every time they wanted to read an article, it would just deduct from that.

This helps me combat my fee problem, but it doesn’t help the reader. Readers are effectively acquiring a gift card to your site, but don’t experience a time crunch to consume as much as they can before the renewal or expiration. This is a bit closer to the right answer, but it’s still asking a reader to fork over a chunk of cash when the reader only wants to read a single article.

But this does get us closer to how it could potentially work. Rather than funding a gift card of a specific publisher, what if we built wallets right into browsers? Readers would then have a wallet that follows them around from site to site. Every time they hit a website, they would be prompted to pay for an article, but it would be coming right from their browser wallet. Seamless, right?

Not exactly. The only way you could take money from their wallet is if the user said they wanted to pay. That would mean a pop up asking the user if they want to release funds. That’s friction right there and you immediately will have some people falling off.

Before I leave this, some people might argue that microtransactions are a proven model for gaming, so why couldn’t it be replicated for media companies. Gabe Duverge of Touro University Worldwide inadvertently explains why:

The concept of impulse buying may not sound foreign. Free-to-play games truly capitalize on the psychology behind impulse buying. Many of the games place a time limit on opportunities to buy, forcing players to make a decision quickly. Games also use tactics to make players unhappy and suggest that impulse buys can make them happy.

Many games use loss aversion to encourage spending. The idea behind loss aversion is that players would rather enjoy the satisfaction of winning rather than losing. This goes a long way toward leading players to impulse buying. The crux of a player’s decision to pull the trigger on a micropayment centers on not wanting to lose the game. The belief that players can continue to win with the item they acquired drives them to pay.

This psychology doesn’t exist with news articles. There’s no time limit associated with impulse buying and there’s no loss aversion. I don’t win by reading the article; therefore, I also don’t lose. Though, it might be interesting to start the article at $0.25 and every five seconds, increase it by a quarter to encourage people to act quickly.

Beyond that? I’m not really bullish.

Here’s the reality… The user having to choose to pay for any single piece of content adds potentially dozens or hundreds of monthly choices. Not to mention, offering this only cannibalizes your subscription offering, so why any publisher would still be thinking about this baffles me.

There’s sort of a way…

But I wouldn’t be doing my job if I didn’t offer a solution that I believe works and is easily applicable to today’s media companies.

I’ve argued that requiring the user to choose to pay for a piece of content is too much resistance. However, I also understand that users are limited by how many subscriptions they can have, so finding a way to maximize monetization of these users is important.

Two related opportunities come to mind that are worth considering…

The first comes back to my roots in crypto. The Brave browser is an interesting experiment that comes with a wallet baked right into the account. You can fund a wallet that refills every month. The difference is that, rather than asking the user to pay for an article, it simply distributes funds to publishers based on total consumption. So, if you fund a wallet with $10 and then visit 10 sites equally, each site would earn $1.

The downside, of course, is that Brave automatically blocks all ads on any publisher’s site, which we obviously don’t want. Its argument is that its browser is privacy first and programmatic advertising is the farthest from private. Brave delivers its own ad experience and rewards viewers for seeing them, which they can then use to further fund their wallet.

It’s an interesting idea, but forcing me to use a different browser is a step too far.

The second way that is more straightforward and I believe most user friendly is Scroll. This works similarly to Brave, but it integrates with your current browser. Essentially, you pay for a monthly subscription to Scroll. When you go to a publisher within the Scroll network, all the ads go away. At the end of the month, Scroll distributes your payment proportionately to all the publisher websites.

According to the Scroll website, sites that use scroll see 40% more money than they would from their advertising—$0.016 per page view versus $0.011. If Scroll can scale to tens of millions of users, that could actually wind up being some money. Whether it can reach that scale, though, remains to be seen.

I do have one worry, though. If the fee stays flat and more sites wind up in the network, will Scroll be able to keep its revenue per view higher than ads? Or will it wind up hurting publishers?

But really, this is why ads are okay…

I wrote last week that I don’t want to live in a world where there are no ads. And I really meant that. We are trying to find solutions to make every person pay for our content when, the reality is, most won’t.

That doesn’t inherently mean that they shouldn’t have access to our content. Finding other monetization tactics that do work should absolutely be part of your portfolio of revenue. This is why I push diversification. If 5% of your readers decide to get a subscription, 95% can still be monetized with advertising.

There’s nothing wrong with gating content. But I also don’t believe it’s the only way. Finding a balance is key to operating a media business.

I’ll end on one final point… I can get behind subscriptions, ads, ecommerce, or whatever other monetization tactic you want to try. But please, can we agree this is the last time I write about microtransactions? Theoretically, a really cool idea, but in practice, just a horrible user experience. Unless the internet fundamentally changes, I don’t see that changing.

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