Selling digital beer – not the economy as my grandad knew it

Does price per kilobyte equal price per kilo? Normal rules of distribution and cost of raw materials don’t apply in the land of ones and zeros which means only one thing – pricing of digital goods needs a proper shake up.

Long time ago in a not so faraway land people didn’t sell or buy stuff but relied on simple trade. I’ll give you sack of wheat, you give me three chicken. Boom! Valuation was made.

Value would probably wary quite much from day to day depending on supply and demand. To make trade more universal we added money into the equation as a “middleman” that made it possible to store value for later use.

Bear with me here…

One day one clever person had an epiphany: “It would be so much simpler if I charged the same amount for the stuff every time someone wanted to buy it. No more haggling!”

So he put up a price sign and fixed price was born. And large portion of the world today is using fixed prices. Yes, there are countries where it’s possible to negotiate prices and some countries where seller even expects you to haggle as it’s part of the culture but in most modern world there are fixed prices.

Mass production has certainly helped and for all practical purposes we seem to have figured out the perfect way to price physical goods.

Digital goods are… digital

Digital goods are something that can be made / copied without additional cost indefinitely. Creating 2 isn’t cheaper or more expensive than creating 200, 2000 or 2 million.

Use torrent to spread whatever you’ve made (be it music, ebook, video, software…) and your distribution cost is a big fat zero so that scales indefinitely as well.

Brygghus brewery in Malmö, nope, this doesn’t scale indefinitely. Photo by Leif.

What happens if you sell digital goods as if they were physical goods and put a fixed prize on it? Depending on your belief system (and assuming whatever you offer has value to people) you either get filthy rich or you create a setup that does not follow normal laws of value.

Physical goods Digital goods
Scarcity The less the pricier Can be copied indefinitely, can’t be scarce
Demand Higher demand, higher prices As distribution scaled indefinitely demand doesn’t affect price
Raw materials More materials, more exotic materials drive cost up Bytes don’t cost anything
Production cost Time, manpower, machinery, producing more costs more Additional copy has 0 cost

If none of the normal rules apply then how do you value digital goods, how do you put a price tag on them?

Answer is simple: You don’t because it’s not possible!

That is why Flattr is a big supporter of pay-what-you-want (or for some it’s pay-what-you-can-afford) approach and why we think more sellers of digital goods should adopt it. Enough success stories exist that prove it’s not utopian hippie dream but a solid approach to “selling” stuff online.

I’ll stop here and next week will look into why fixed price is still the most common way to pay for digital goods.

Disclaimer: Yes, I left the cost of research and initial creation out of this train of thought, that was intentional. I’ll come back to this in one of the future posts.

7 thoughts on “Selling digital beer – not the economy as my grandad knew it

  1. hi linus,

    in principle you are absolutely right, especially for written digital content and even for most of todays produced music, but a lot of digital content has not always been digital.
    especially for movies theres a lot of stuff to do in the analogue world until you have the finished product …pure manpower, endless creative dedication of lots of people… and this chain costs usually lots of money which should at least recoup in selling the final movie. that is the reason why a lot of creators will not go away from fixed prices, simply because they cannot calculate their distribution-success.
    when i switched to flattr on http://www.cinemander.com i lost several movies and partners on our site because of that.

    have you any idea how to make people believe in a self-determined distribution-system when producing still costs fixed money?

    cherrs
    martin

  2. Cool post, made even cooler (for me at least) as I just posted today similar ideas on my French-language blog: La culture, ce n’est pas comme la confiture.

    My take on it is that content creators could actually use both the digital and physical world to great advantage, by offering free or very cheap digital versions of their work and then proposing high-quality, more expensive physical items with extra stuff (books, making-of, etc.).

    Also, one of the interesting by-products of the digital era is that I think that most of the ads we see nowadays, on TV or print (and web) are doomed to oblivion in the mid-term as they can easily be edited out digital goods.

  3. Martin: That is the part I kind of left out of this, the cost of development or production of the original “copy” so to speak. Will get back to that issue in future posts.

    I would love to hear why you lost movies and partners. Sounds bad & strange and would dig into changing that if I can.

    Alias: Awesome, will read up on your post!

  4. @linus, some of my partners quitted because they said it would not be the appropriate way to distribute their content. others needed a lot of work to convine.

    on the other hand the users, at least here in germany do not know flattr very well. i even gave our users flattr-coupons and they didn’t use it because they didn’t want to register again to another website.

    for what i hear from people they are getting tired of more and more and continuously more things to care about in the virtual world…

  5. Hm, but what did adding the flattr button really change the way of distribution? Either I missed something or they did. Hm.

    The problem with “registering” to another service is a true problem. But it’s solved by doing a product that people wants to use. We should not convince them to join another service. We need to convince them flattr is something everyone should do.

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