Micro Payments, Micro Profit?

The only way to make significant revenue with micro payments is to get an awful lot of them.

Any questions? :)

OK, I’ll say a bit more about my rationale for that position.

I work with a lot of membership organizations and the idea of micro payments is often very appealing to their leaders. They provide a very low price point on some products which they can point to when members complain about overall prices of products. It’s also quite trendy, with high profile examples like Kiva.com leading the way with that business model for micro-lending.

Let’s take a look at the math for a hypothetical association. Let’s say they are a scientific society with 20,000 members who pay $399 a year to join. We’ll use them as our pre-qualified base of prospects for a micro-payment product.

Evernote, the very popular note taking application that works on almost anything with a chip and a screen, recently shared some stats. Shortly after they started up, about 1% of their free users converted to paying customers.

If we take a mirco-priced product at $1.00 and 1% of our hypothetical base makes the purchase, then you end up with this:

(20,000 * 1%) * $1.00 = $200.00

Compare that revenue to what they get in membership dues:

20,000 * $399.00 = $7,980,000.00

The organization will literally waste more in jammed paper in their printers than they would make on this single micro-priced product. This is before taking into account the costs of producing the product and implementing micro payments, online access, etc.

Hell, having a single staff meeting to discuss this product already puts it in the hole!

This association would need a base market of about 2,000,000 people to make the revenue even slightly interesting with these assumptions. They still need a lot more people in that market even if you bump up the price and the conversion rate.

Other issues with micro payments include:

  • They must be frictionless to complete (think texting to donate to the Red Cross for Haiti, for example).
  • Products with micro prices are often perceived as low value by your prospective buyers.
  • You’ll often need a wide array of micro-priced products rather than just one to have the level of sales you need to create significant revenue.
  • Repackaging content from other sources into micro-priced chunks often requires selling it to an entirely different, and larger, market.

The only exceptions I might make for developing micro payments if you don’t have a large enough market include:

  • It serves a political or policy need that provides enough value beyond cash revenue;
  • People who purchase the micro-priced product are great candidates for macro priced products that you then sell to them (classic loss leader transactions).

I’m sure someone somewhere in the association world has done a successful micro payment model. (Let me know about it in the comments if you have!) But every leader and product manager must go into the decision making process with a realistic understanding of the numbers involved before committing resources to implement this model.

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4 thoughts on “Micro Payments, Micro Profit?

  1. David, I would go further and say that many products that aren’t even mico-priced would fail your test. Take your example: If you raised the price to $50 (50 times the micro price) your total take is only $10,000. When total overhead costs are calculated in to the product (including those staff meetings!) the net profit plummets, and often comes up in the red.

    Associations need to be better about making these calculations for ALL of their products and pricing.

  2. Nice walkthrough. I’m not sure whether you considered if the micropayments are recurring or not. Evernote’s product surely must be built upon recurring revenue.

    I wouldn’t think associations should spend too much time on micro-products and micropayments but a strong recurring revenue stream can start off with a low conversion rate.

  3. Allan, that’s a very good point. Recurring small payments would have much greater value. Those payments bring their own complications, usually arising from providing new content or maintaining an ongoing system of some sort that is worth the subscription.

    Of course, many products/services that can be offered as a subscription with monthly payments are hopefully worth more than a micro amount of money each month.

    Thanks for the comment!

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