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Why Micropayments Fail, And One Notable Success Story

by John Krystynak on Aug 20, 2015

For years, micropayments have been a siren song for publishers on the Internet. Many have regarded micropayments as the perfect solution to users’ objections to ads, and more recently, as an appropriate response to the rise of adblockers. Responding to this demand, entrepreneurs have come up with what feels like thousands of strategies to make micropayments a viable monetization strategy for publishers. Every formal attempt has failed.

In the world of online news outlets/news publishers, micropayments were for years a collective fantasy, but that some critics of the idea called a “dangerous delusion” in the context of journalism, and others referred to with endearing terms including “micro-nickling”, “nano-diming”, and even “micro-scalping.”

Over 15 years ago, in The Case Against Micropayments, Clay Shirky outlined the reasons why micropayments will never work, the most important of which is: “Users hate them.”

One reason users don’t like micropayments for content is it requires a decision. “Users want predictable and simple pricing,” he writes. “Micropayments, meanwhile, waste the users’ mental effort in order to conserve cheap resources, by creating many tiny, unpredictable transactions.” In other words, micropayments are confusing because they suggest that something is worth enough to require a buying decision, yet costs so little that its implied worth is almost nothing.

One type of micropayment that does work — one you might not even think of as a micropayment — is in-app-purchases (IAP). IAP are a huge source of revenue for mobile games, but also drive revenue for other types of achievement-focused apps, like fitness apps. Users are willing to pay to buy items that help them succeed or advance; they even purchase tokens of achievement.

One report estimates that IAP generated $14B in revenue in 2015 and could grow to as high as $36B by 2017, and most apps that offer IAP also use ads to generate additional revenue. But the crucial difference is that IAPs are transactions that are made by users through a protocol (App Store or Google Play) with an already established payment method. This circumvents the huge hurdle of getting people en masse to adopt a new product for use with the “pay money to see no ads” model (which is an uphill battle, to say the least). Lastly, people are usually sure about the value they will get through IAP — they are buying something in the context of a game or app they have used and like enough to pay for more features or advantages. There is no psychological tax.

Ostensibly, IAP and traditional advertising are very similar. People who click ads, or those who make IAP transactions, are subsidizing the content for those who abstain. Traditional ads and IAP formats focus on driving quality users to take an action and the publisher is compensated for that action. The lesson learned from the IAP model is that payments in small amounts can only add up to a sustainable business model if three things are in place: the content is desirable (its value is clear), the consumer doesn’t have to think about it too much, and the transaction is easy. Until publishers figure out how to leverage that magic combination in the context of online content, consumers will continue to shun micropayments.

 

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John Krystynak is AppLovin’s Chief Technology Officer.

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