Making Name-Your-Price Work for Digital Goods

In Monday’s post on the Economics of Abundance, I gave “name your price” as an example for how to deal with zero marginal cost.  This is a case of voluntary price discrimination, i.e. folks who value something more are more likely to name a higher price.  The first question of course is if such a scheme can work at all, that is will anyone pay if paying is entirely voluntary.  We know the answer for this to be yes from the Radiohead experiment with about 40% of folks paying (according to Comscore, but band claims more did), but even for the much lesser known Saul Williams about 20% of folks payed (this is actually not an apples-to-apples comparison as in the Saul Williams case folks could only choose from two prices: free and $5).  There is also plenty of evidence from other situations in life where the strictly rational choice (as in economic rationality) would be to pay nothing, such as the honor-system bagle example from Steven Levitt’s “Freakonomics” book.

The second question is how to optimally implement a “name your price” scheme.  The above cited experiments are all one-off payments that take place prior to downloading or playing the music.  Of course you could first play it for free and then if you like it come back and pay, but the basic setup is to put payment first.  That is in direct contrast with the basic nature of music and news in that they are experience goods.  You don’t really know how much you will like a song or how informative a news article is until you have listened to the song and read the article.  Any “name your price” upfront scheme will be hobbled by this.

Conversely any scheme which relies on the consumer to remember to go back after the fact of having listened to the music and enjoyed it or read the article and found it informative is hobbled by the inconvenience of doing so.  This may sound trivial but is a significant hurdle because it combines with other costs of per-song or per-article payment such as credit card fees and the cognitive load of figuring out how much to pay, into a total transaction cost that is likely to be very high compared to the value in question.  For instance, let’s say that deciding how much to pay, figuring out where to pay and getting the payment done adds up to 6 minutes of time, then even if you value your time (implicitly) at only $20/hour you would be “incurring” $2 of cost, which totally swamps the say $1 you might have wanted to give (and this is not even counting any processing cost).

So an optimal scheme is likely based on some kind of automated tracking of actual consumption patterns.   This is not an original insight.  For instance, Fred hints at it in a post from 2005.  But it is getting surprisingly little attention in the current round of discussion around pricing news and is rarely mentioned in conjunction with naming your own price.  Such as scheme would let folks set a voluntary monthly value for their music listening and (separately) for their news reading.  At the end of each month the system would allocate the monthly value across artists and writers based on actual consumption and possibly other signals (such as bookmarking a blog post).  For folks who want to manually make changes to the allocation it should be possible to do so.

There are a two fundamentally different ways such as system could come about.  The easiest starting point would be a closed system implemented on a single service.  For instance, TheSixtyOne could fairly easily add this to their existing site.  The downside of that is it will only cover music on TheSixtyOne, but I believe that is far offset by the upside of not having to deal with labels and other intermediaries that might otherwise have to be paid also.  Eventually, there might be an open system ideally using server side tracking (much like an ad server) but maybe getting started with a browser plug-in.

One other important aspect of such a system would be a way to show to the world that you are participating in it.  Talk is cheap and I am pretty sure that a much higher fraction of people say they paid for the Radiohead album than actually did.  But a name-your-price system could easily allow folks to have a badge (for their blog, MySpace page, Twitter profile) that shows they are participating and on click-through shows their actual allocation (this could be done in percentages if people don’t want to show dollar amounts).  Again this would initially be super easy to do in a controlled environment such as TheSixtyOne.  This type of external signal can help foster the right kind of social dynamic in which participating becomes the norm rather than the exception.  As more people participate there will be a lot of data in the system which can be use to further improve the level of voluntary contribution.  For instance, when someone new signs up, the system could show the monthly level of contribution by others in the same ZIP code.