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.