In this article we will attempt to examine from a system theory point of view, whether an innovative revenue model in use by Medium.com will succeed. Medium allows customers to pay $5/month to become a Member. In turn, people can also become Partners and publish articles that they designate as Member only, for which they get paid proportionally to how many Members viewed them.
In the history of software as a service, there have been two types of revenue models: sell to businesses and sell to individuals. Let us examine both of these models.
Sell to businesses
Businesses prefer to maintain control over their information. Why? Because information is their whole revenue model. Information can come in the form of documents, computer code, customer data, videos or photos. If a business wishes to buy software or service, it considers the control over the information as being a very important factor.
So when selling to businesses, we have the following relation:
Information control: High
Price to charge: High
This is a reasonable relation between the additional work the supplier might need to do to provide for better information control and the higher price it may need to charge for it.
Now let’s examine what happens when we sell to individuals.
Sell to individuals
If we ask an individual whether control of information is important to them, they are most likely to answer ‘Yes’. But this is far cry from the truth, as an average individual’s life is supported mostly by ad-based services.
What does an advertiser do at the most fundamental level? Advertiser spies on people and tries to steal their attention. From this we may conclude that most of the information that individuals possess when using day to day personal technology is not under their control.
Taking this as a postulate — individuals do not value control over their information — we may then ask how much can we charge if we do allow them control over said information? In other words, if we promise to stop spying on the individuals, what is it worth to them?
Since the need for information control is low, we have the following relation:
Information control: Low
Price to charge: Low
The answer is that we must charge the individual a very low price if want them to pay.
What is a low price?
Now that we showed that an individual will not pay a high price for control of their information, we may ask just what does high and low mean?
Let us start with a business. Suppose we have a company of 100 employees. How much does a business make per year? A rule of thumb is that a business makes:
Revenue = Number of employees x $100,000
We assume each empoyee makes on average $40,000.
Now suppose a business subscribes to a service at $10/user per month (this quote is taken from Microsoft Office Business subscription on March 16, 2018.) That is, for 100 users it works out to $1000 per month for a product subscription. Translating it percent, it is 0.12% of monthly business revenue for product subscription.
Now, for an individual who makes $40,000 a year, 0.12% of their monthly salary works out to roughly $4 a month.
So we have that an individual, if they are interested in the same level of information control as the business, should pay $4 a month for it.
Given that an individual does not give the same level of attention to information control as a business, can we charge an individual $4/month and expect them to pay? Of course not. We first have to determine how important their privacy is to them and only then set a price tag.
In my opinion, without any further research, I suspect individual to give the importance of control over their information to be 1/100th that of a business. If we take this (anectodal) measure as true, we should charge a user no more than $0.04/month for a given service. This works out to about $0.50 per year.
Many companies have been trying to monetize individuals by charging them directly. The state of the internet today shows that the ad-based model is currently winning. So what are these companies doing wrong?
I think that the businesses are overestimating the willingness of people to pay for the control over their information. Instead of charging people $5/month, companies should start by charging as little as $0.10/month and teaching the individuals the advantages of non-ad-based service models.
It is rather ironic, however, that WhatsUp, one of the most successful companies that did this — by charing $1/year for its services — was subsumed by Facebook — an ad-based business. (Update: another company that made Newton email client extinct because they charged too much: https://link.medium.com/uW9x5DvmjR). This is to be expected, as any system is very resistent to change — the alternative being extinction. It will take a fundamental shift in technology and a new mindset to make the transition to an internet where people control their own information. I’m looking forward to it!
How to Estimate the Annual Revenues of Any Private Company: https://ryanborn.net/revenue-estimates/