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402 Payment Required and why micropayments are doomed

The promise of fast, seamless micropayments (by micro I mean <$1) has been circling around the web for a while now. The original HTTP status codes, created over 30 years ago, even contain a „placeholder” for such a system, which is still reserved for future use:

The HTTP 402 Payment Required is a nonstandard client error status response code that is reserved for future use.

With the advent of Bitcoin, related arbitrage opportunities, and attention economy problems, cryptocurrency experts have renewed interest in providing micropayments solutions.

But I am not convinced this is a problem worth solving.

The administrative cost of accepting payments

Accepting payments and donations has their administrative cost. Taxes, fulfillment, answering support questions, upkeep of the payment system – most of this stuff can be automated, but you are never able to get rid of these pesky details.

Of course, the answer is easy – just make it up with higher volume!

But there is a catch-22. With more volume, there is more upkeep, more treadmill, more support, and bigger risk that you will run into a problematic customer. This constant administrative cost is a reason why every Credit Card processor charges a roughly similar rate for processing payments. They have overhead too.

2.9% + 30c of the fixed cost.

Dire reality of Paypal, Stripe and other processors

The cognitive cost of the purchase

Each payment has not only a material cost but also a cognitive cost. While you are purchasing something, you not only whip out your hard-earned cash, but you also have to make a purchase decision.

  • Is this really worth paying for?
  • From the myriad options available, is this one the best?
  • How much did I spend already this week?

All these decisions go through the customer’s head each time they are trying to buy something on the web (and IRL). That means, that each customer can only make so many purchases, regardless of their price.

While customer pays a higher price, you benefit. If they pay a high cognitive cost, everybody loses.

Subscriptions and bundles

Bundles and Subscriptions are both ways of addressing this issue.

  • The purchase decision is made only once. In case of a bundle, its spread over items and in case of a subscription – over time.
  • The administrative cost for the seller is also more manageable. It’s one customer instead of many, one fulfillment and one line item in a tax sheet.

That is why you are witnessing an explosion of subscription services – Spotify, Disney+, Netflix… Even Apple is moving to Apple TV+ because iTunes pay-for-a-single-episode model didn’t work out.

Micropayments are never taking off.

There are a million exciting technical ways of making micropayments work. Cryptocurrencies, in particular, are a favorite tool of those working on technical details.

The problem is human nature (and isn’t it always?). By putting the value of 50c on something, you are signaling that this is what it’s worth.  Higher price means higher perceived value, and as recounted by Robert Cialdini, raising prices can, surprisingly, bring more customers.

Micropayments are a favorite excuse of non-customers. If you have something worth paying for, it will be worth paying more than $1. People not willing to shell out a $5 will find an excuse not to shell out 50c either. You don’t want these people as your customers. Pricing psychology and market economics are against < $1 transactions, and maybe that is why there is not a single successful micropayment startup.

Provide real value, raise your prices, and start solving $300 problems instead of 30c problems. Better yet – start a subscription!

In the words of Patrick McKenzie:

And if you came here from Hacker News, you might like another one of my articles:

A tale of two paywalls

It was the best of times. It was the worst of times. It was the age of me helping the WordPress.com users earn a living.

We are building a whole suite of products and features that would unlock the economic potential of the people starting their journeys as the publishers. Our goal has just the right keywords to suggest that we are building a „paywall.” But, Paywall is not a straightforward affair. Let me explain how I think about Paywalls:

Traditional Paywall – let’s call it „big publisher paywall.”

This is the paywall we all think about and see in leading publisher sites like New York Times, Washington Post, and similar ones. Since the business model of those sites is publishing, they produce news articles. That is what they get paid for, and that is what they are meant to guard.

They are usually monetizing through the quantity of content. There are several modes of operation here:

  • “Metered Paywall” is the most popular approach of “3/ month free” articles
  • “Nagwall” is where you get progressively worse reading experience, or they would badger you to sign up, but they will not block the content outright.
  • “Hard paywall”, where you have no way of accessing the content without a subscription

That technical solution is tightly coupled with:
Producing a lot of content with a short shelf life.

If a site had 3 evergreen, amazing pieces that are bringing the majority of traffic and the rest would be meh content, then there would be no reason to pay! A quota of 3/month is enough to consume this great content, and there is no reason to sign up for more. Because there IS no more. So these sites are producing content that is enough to draw the traffic and give you a taste of future goodies, but not enough to fill you up. Additionally:

  • Since you pay for quantity, it incentivizes larger teams or news organizations
  • It’s best to have a uniform quality. If there is a breakaway hit, it is used to draw traffic and not be value in itself
  • They tend to focus on general topics (news, sports) to have the biggest possible total addressable market.
  • They have already a huge back-catalog of existing content when starting a paywall (hard to pay for quantity when there are only 20 pieces on a site)
  • The signup messages are short and minimal because it’s clear what you pay for – more of the same

Publishers using these paywalls have other, complex needs – customization, email newsletters, corporate strategy. They don’t exist in a vacuum and are usually connected to a bigger organization and budgets.

“Member features” / “Niche blogger paywall”

Now, let’s consider a case of the smaller blogger, maybe even a 3-person team running a site.

  • They have no hopes of competing with NYT or Washington Post on quantity and broad-spectrum journalism
  • They cannot put out more than one piece per day
  • They tend to be very niche, and their Unique Value Proposition lies in being practical and having a perspective not found anywhere else
  • They don’t have an institutional brand like NYT, so they have to earn trust by producing great (free) content as well
  • They have a tiny (or non-existent) back-catalog of existing content.

Because of these traits, bloggers overwhelmingly are separating free and premium content.

  • Promotional content is what made them famous. Free articles with great quality and unique perspective are bringing traffic to the site
  • Paid content usually has a very clear value proposition, based on the blogger’s expertise.

Some of the ways for bloggers to monetize is to offer:

  • Drip feed, where you get access to “private blog”, with new relevant content being consistently added
  • All-In membership, where you get access to the back catalog of private content
  • Online Course
  • Online Community – where you pay for ongoing relationships with the blogger but also other people that paid for the same access (being connected to a blogger’s message enough to pay is a good filter for other people willing to do so, hence you can connect with similar-minded folks easily while skipping the internet randos that never pay.)
  • Product – (software download, excel spreadsheet for job hunting, or a physical product like a planner)
  • A Service – say coaching, private lessons, etc..
  • Hybrid – any mix of the above

The Source of this list is Membership Guys.

None of these business models are compatible with readers being able to “peek” pieces of content of their own choosing. Bloggers/site owners are making a clear distinction of what pieces of content are free and which ones are “premium” worth paying for. Sure, they tease what’s inside the „premium”, but they are explicitly choosing which parts can be accessible.

Additionally, the “free” section has to be pretty accessible as well. Before a customer trusts a blogger “out of nowhere”, she has to form a relationship based on time and trust. There is no brand like NYT to help with this decision. It will often take way more than 3 or even 30 free articles to convince a customer to pay.

If you are starting up, you are better off starting with:

  • Building up your catalog of the entirely free content that will help others discover your site
  • Once you have some free content, you should introduce „member only” section with something extra
  • Don’t concern yourself with the fancy mechanics of content blocking. You can start by sending your paid content manually via email. Don’t spend time on site features! If you are on WordPress.com, you can use the Premium Content feature we just released.

Book: On Writing by Stephen King

„Writing is a telepathy” – it’s a process that transports thought from the writers mind to the reader’s.

The biggest takeaway from this book is:

Damn, this guy knows how to write books! I know, insightful!

Part autobiography – part writing manual, „on writing” is a deep dive into Stephen King’s writing process.

An author of Carrie, The Green Mile, The Dark Tower series and countless other stories, Stephen is prolific to a point where people (including my mom) think he has ghost writers.

Now, pushed to spill his secrets, Stephen addresses his prolific career. The book is not self-congratulatory at all. It consists of two parts – one about writer and one about writing.

The writer

In the first part of the book, Stephen briefly tells his life story and it’s exactly what you would expect. He tells amusing stories about his teenage adventures, and later cocaine. All in all, I respect him more now than before reading this book. He just seems like a fun guy. Not only because of the cocaine.

He grew up poor, hardworking and fascinated with the stories. He kept writing since the age of 7 and not long after started sending his stories to journals and magazines, accruing quite a stash of rejection letters.

But he kept improving his art, kept going at it, getting better and better.

He immersed himself in storytelling – mostly pulp fiction, good writing and the kitschy movies of the 50s and 60s. He was at a drive-in cinema when his wife broke into labour.

This is not at all surprising for me. In fact, that’s precisely what Malcolm Gladwell discovered in Outliers and Walter Isaacson explained in Innovators.

Immersing yourself in your art and devoting hours of deliberate practice is key to being ’the best in the world’ in your area of expertise.

The Writing process

The second half of the book holds a few writing principles but is not in any way a curriculum.

If you want to be a writer, you must do two things above all others: read a lot and write a lot.

  1. Read, Read and read some more. You need to absorb new writing styles and writing tools, so you need to read any chance you get.
  2. Some well-behaved people will not considered it good manners to read while eating. If there is anything slowing down your progress more than not reading any chance you get, it will be listening to well-behaved people.
  3. Write a lot. A LOT.
  4. Ideal paragraph explains itself in the first sentence and in later sentences provides supporting evidence.
  5. Grammar is important. Adverbs are risky and sleazy. Especially in the dialogue. „He begged pitifully”
  6. Stories are made of:
    1. Narrative that moves the story from A to B
    2. Descriptions transferring the reality to the readers mind
    3. Dialogue
  7. Everybody is the hero of their own story. The best characters are the ones that are the heroes from their point of view
  8. “Write behind a closed door, edit in the open. The first draft belongs to you, the second – to anyone willing to read” – a concept similar to „Shitty first draft” of Anne Lamott
    Your second draft IS NOT an opportunity to add more stuff.
    Second version = First version – 10%

Benefits of daily writing practice

In the interviews I used to say that I write every day except Christmas, Fourth of July and my Birthday.
It’s a lie. In an interview you have to say something that sounds a bit funny and I didn’t want to look like a maniac.
The truth is that I write every day, including Christmas, Fourth of July and my Birthday which I try to ignore.

Stephen King

After taking the “Write of Passage” course, I finally understood why daily writing is helpful. Stephen’s reasoning is quite similar:

  • It gets the avarage ideas out of the way. You just have to flush the obvious out of your system
  • In the beginning you will use a hodge-podge of other people’s styles. There is nothing wrong with that. Only with writing you will be able to grow your own style. It needs room to develop and that room is the page.
  • Stephen says that when he is not writing daily, the characters in his mind start to ‘calcify’.
    It becomes harder and harder to make them move and it feels more like work.
    I found the same thing in regards to my blogging – when I don’t create something every day, it becomes harder and harder the next one.

”Write what you know about. If you know plumbing, the story about Space Plumbers is a good concept.”

You know what? I just very well may do that.

Book: The End is Always Near by Dan Carlin

I love Dan Carlin’s „Hardcore History” podcast. The stories of mundane concerns during wars, plagues, and other terrible events in human history are somehow deeply informative of the human spirit.

I am very grateful that Dan spares the gory details, but he keeps in the weight of the event and pulls lessons from the history books.

Thanks to Dan Carlin, I realized that history is like a TV series that really happened. And one more unpredictable than any “Game of Thrones” or „Witcher” script.

„The End is Always Near” is the first Dan’s book and a little more organized than the podcast. It has a central message that it supports very well – Humans always seem to be on the brink of extinction.

What stood out to me:

  • Through most generations in history, people were much tougher than we are. They have watched their sons and daughters die horribly, the wars and plagues were rolling constantly
  • The children were treated horribly as well. Basically everybody was traumatized, but somehow they haven’t seen it as trauma. Maybe with the constant risk of dying, psychological trauma was a less pressing concern?
  • The consequences of the Atomic bomb were enormous. Because nuclear retaliation is a tool that has to be deployed in minutes, only 1 person needs to make this call. Now, that the US president has this cross to bear, it automatically transformed the office of the president into one-man apocalypse machine
  • Cold War has introduced the tensions that turned the USA into a Police state and that is still the case.

If you want to listen more about the Cold War, here is the „Destroyer of Worlds” episode:

My highlights ( I’d love to have more, but I was not reading this on Kindle and my hardcover highlight game is not strong  )

  • Andrew Mellon, the secretary of the treasury under President Herbert Hoover when the 1929 stock market crashed, which initi­ated more than decade of economic collapse, thought the coming hardship would be good thing. “It will purge the rottenness out of the system,” Mellon said, as reported in Hoover memoirs. “High costs of living will come down People will work harder live more moral life Values will be adjusted, and enterprising people will pick up the wrecks from less competent people From Mellon’ point of view maybe he got his wish. The Depression put an end to the Roaring Twenties time remembered for high living, speakeasies, jazz, flappers, the Charleston, and the advent of motion pictures What Mellon might have thought wasteful frivolity was simply fun to others. Things got lot less fun when money became more Scarce.
  • Before the modern era, the number of people who lost multiple children to illness was astonishing One wonders what effects this might have had on individuals and their society as whole The historian Edward Gibbon, who wrote The History of the Decline and Fall of the Roman Empire, was one of seven children All six of his siblings died in infancy.
  • One member of the Greatest Generation offered this solution for bringing down the Soviet Union: “We should have been dropping Playboy magazines, blue Jeans, and Elvis Presley records on them, and they’ll do It themselves
  • Lloyd deMause quotes piece written by the chief of police in Paris in 1780 estimating that of the, on average, 21,000 children born in that city every year, only 700 were nursed by their biological mothers. 
  • From 410 onwards successive Western imperial regimes Just gave way or lost practical auditority over more and more of the territory of the former Empire The Western Empire delegated itself out of existence Central authority
  • Saxons apparently ignored the warning, continued to kill evangelizing clergy, and never ceased their usual small-scale raiding and banditry on the border. Charlemagne fought cam­ aign after campaign against them, and eventually succeeded in Cutting down the sacred tree they venerated as holding up the universe and allegedly beheading 4.500 of them in day at Verden in 782. And, like the Roman emperors who preceded him, Charlemagne found out that there always seemed to be more ferocious barbarians behind the ones he’d just subdued. 
  • In the end, the clergy suffered fatalities at the same rate as the rest of the population, and their deaths led to unexpected consequences For example, to replace losses in their ranks, the church lowered the ages at which people could attain positions of authority. This led often to very young, hardly prepared peopie in positions that had previously been held by much older, more august figures. Before the epidemic, members of the clergy had devoted their whole lives to the church. The people who replaced them weren’t necessarily as committed or as educated. Corruption began to creep in, especially as men attained elevated posi­ tions in the church due to money changing hands, not thanks to their lifelong commitment or qualifications. Over the course of around two centuries, the clergy reputation diminished, tarnished by abuses and excess and lack of high standards. This dissatisfaction led to the development of the many complaints that the German theologian Martin Luther
  • In 1899, Tsar Nicholas II of Russia ? called meeting that would come to be known as the Hague Convention, the first of many to be held on the establishment of international law re­ garding armaments There, representatives of more than two dozen countries took up the issue of airships, with the Russians proposing ban on all bombing from the air. The American del­ egate counterproposed that the ban last only five years, since the science might improve to allow for precision bombing which might prove humane insofar as it could shorten Wars.
  • From September until November 13, London was bombarded every night. total of 13,000 tons of high explosives and 12,000 incendiary canisters were dropped. Other cities were raided, too, and the most famous raid is the one on Coventry on 14 November 1940, when 450 bombers discharged 500 tons of high explosives and 880 incendiary canisters. Civilian losses were appalling, mainly because there were few adequate air raid shelters. The attacks failed both to stop the British raids over Ger. many and to squash morale. Indeed, the whole idea of using bombers to destroy civilian morale was flawed for several reasons. One may have been the bravery of the citizenry
  • The physicist Freeman Dyson, who worked for the raps Bomber Command, said years after the war, “I felt sickened by what knew. Many times, decided had moral obligation to run out into the streets and tell the British people what stupidi- ties were being done in their name. But I never had the courage to do it. sat in my office until the end, carefully calculating how to murder most economically another hundred thousand people It takes time to get to point of logical insanity
  • It’s hard to really know how much of the navy’s opposition was truly based on morality or how much might have been an effort to defend the necessity and relevance of its branch of the military services In the face of those looming budget cuts. (Indeed, the moral complaints would be notably muted later when navy submarines began to carry nuclear weapons The admirals’ testimony elucidated key moral question that the world still wrestles with decades later

Your product is either a commodity or hospitality.

Have you ever been to a truly great hotel? You walk in and find yourself thinking:

  • “Oh, this makes sense” when you see an extra pillow
  • “Ok, that’s nice” when you discover a lovely porcelain tea set, with all you need prepared for you,
  • “That’s beautiful” when you open the window.

Everything is just where you want it, whenever you want it, just how you want it before you even realize what it is that you want.

You feel like all your concerns are melting away, and you don’t have to deal with minutiae anymore.

These are the same thoughts I would use to describe my Apple experience. Of course, we can talk about the declining quality of the keyboards, but when interacting with Apple products or great hotels, I don’t mentally tick off the list of benefits. I enjoy the feeling ‘everything being in its rightful place.’

MacBooks and iPhones are expensive – they don’t stack up feature-to-feature or number-to-number to other offerings on the market. My more technically-inclined friends keep reminding me that a different machine has more burro-bytes or zetacycles than a $2000 Macbook.

What I usually tell them is hard to justify, so I started viewing it through a lens of how I would judge a hotel.

Welcome to the Hotel California

Such a lovely place (such a lovely place)

Such a lovely face.

– The Eagles

That hospitality is Apple’s entire business strategy. Playing in the commodity sandbox requires you to play the cutthroat game of racing to the bottom of the lowest margin.

According to Forbes, Apple’s profit share is over four times larger than Samsung, its nearest competitor. 

Despite this success, people rightly point out, that by most of the measurable parameters, devices from Cupertino are falling behind – they have slower processors, smaller pixel density and are more expensive.

And yet, this is not the game Apple plays.

The full vertical integration is the strategy that also works in luxurious resorts. They have thought deeply about every single need of their users and designed an experience to cater to them. There is rarely a need to venture outside.

‘We are programmed to receive.

You can check out any time you like,

But you can never leave!’

– The Eagles

I won’t belabor the Apple point any further, I promise.

Think of the great products you really love. Maybe it is an app for tracking your fishing expeditions or a tool you use at work.

If you feel at home while using this product, then it’s real business is hospitality. A great host knows exactly what his guests want and provides it to them before they realize it themselves.

Focusing on the user’s secret needs, of course, is simple but not easy. Your business has its own budgets and trade-offs, and you will have to make it all work. Both types of businesses have to tackle logistics, value chain, porter’s forces, and labor laws.

But the first question they ask is different.

The hospitality business is about leading with Qualitative Questions, like:

  • “How can we make this experience better.”
  • “What do our guests secretly want?”

Commodity business asks Quantitative Questions first:

  • How can we make this cheaper?
  • How can we have more feature X?

Hospitality is opinionated. To best suit your specific needs, it has to know what is the group of people that it does not want to make happy. In a truly great hotel, the other guests matter. They make you proud to be a part of the group and – in truly exceptional ones – they help you learn a thing about yourself.

There are, of course, hotels that I would consider a commodity and not hospitality. The proliferation of price comparison engines makes it easy to shop around with numbers, commoditizing the whole industry.

When searching for a hotel during my travels, I’ll use Booking.com to find something affordable. But inevitably, after an hour or two, I’ll stumble upon a photo that will make me abandon my price limits.

I’ll know if this hotel is genuinely hospitable if it has a working iPhone charger by the bed instead of some useless desk phone.

The Hospitality vs. Commodity lens helps me better understand the product-market fit for consumer businesses. B2B and enterprise markets have their specifics – like bundles and vendor relationships that make it play by different rules.

But every consumer business can learn a lot from great hotels.

Feel free to attach this post to your expense report, but don’t blame me if it gets rejected.

Still, the stay will be lovely.