Sunday, 27 February 2011

The economics zeitgeist, 27 February 2011

This week's word cloud from the economics blogs. I generate a new one every Sunday, so please subscribe using RSS or the email box on the right and you'll get a message every week with the new cloud.

Back to normal this week - we seem to have successfully connected to most of the blogs as usual. The words moving up and down the chart are listed here, but be aware that since last week's list is not representative, this week's moves are also unusual. Next week will be back to normal.

I summarise around four hundred blogs through their RSS feeds. Thanks in particular to the Palgrave Econolog who have an excellent database of economics blogs; I have also added a number of blogs that are not on their list. Contact me if you'd like to make sure yours is included too.

I use Wordle to generate the image, the ROME RSS reader to download the RSS feeds, and Java software from Inon to process the data.

You can also see the Java version in the Wordle gallery.

If anyone would like a copy of the underlying data used to generate these clouds, or if you would like to see a version with consistent colour and typeface to make week-to-week comparison easier, please get in touch.

Thursday, 24 February 2011

Behavioural economics of paywalls #paywalls11

I couldn't make it to Paywall Strategies 2011 today, but it's a subject that's very interesting to me so I thought it was a good time to write about it. The whole question of paying for online news - and other information - combines two of my main research areas. First, it's all about pricing, and one of the most interesting and important new phenomena in pricing at that. And second, because the argument can only be resolved with a deep understanding of cognitive incentives (and disincentives).

 
In fact, the area of micropayments was one of the earliest case studies I considered when getting into the pricing world several years ago. It's one of the clearest departures from conventional supply and demand dynamics. Here's an example:

 
13% of people say they would be willing to pay for content online. And yet only 4% do. Why the gap? Yes, there's always a difference between what people say they'll do, and what they actually do. But from experience with other products we would expect this gap to be in the opposite direction, if publishers were using the right methods to win paying customers. With many products, people who say they would not pay, or would pay only a low price, can be persuaded to hand over more money if the structures are right. Why not with electronic content?

 
One of the conversations I've been watching on the #paywalls11 hashtag this morning has gone down the route of "What can we offer that consumers want to pay for?" This tweet is typical (and seems reasonable at first):
This is a trap. Of course there's some truth in it: quality will have an influence on the price point achieved. But in fact, it's not what you offer that determines whether people pay - but how you offer it.

 
Back to that demand curve. In economics, the cheaper a product gets, the more of it people are meant to buy. But with content, below a certain point, when price drops, quantity demanded does not rise. In fact, the actual price level is not really the force that the seller is working against. Instead, there are two distinct cognitive barriers to purchase, neither of which is directly related to the price level as such.

 
The first barrier is the inconvenience of making payment. It's a hassle to enter your credit card number, register an account with your email address, or whatever it is they make you do. In fact, people who are quite willing to enter their credit card details for a £1.50 purchase become unwilling to do so for a 5p payment. In conventional economics this makes no sense. But what if individuals are using the price of an article as a cue to its value? The cheaper the article gets, the less valuable it looks; and the less worthwhile it is to bother with entering their details. Consumers are quite logical, sometimes.

 
(A secondary consideration here is on the supply side - publishers may incur credit card processing costs which are greater than the revenue received from each transaction. But that kind of problem is easier to overcome, if a genuine revenue stream exists.)

 
The second barrier is an issue of principle: many people simply refuse to pay for online articles, having grown used to getting them for free. In this regard, the difference between free and 1p is far greater than the difference between 1p and 5p - or 50p. And this psychological and behavioural barrier is the most important thing for online publishers to overcome.

 
Many people are trying to lower the first of these barriers: a constant stream of new micropayments schemes have entered the market over the last fifteen years. Until recently I expected Facebook credits to have the best chance of success, but Google OnePass looks like it might also be a competitor. Each of these two has the benefit of universality: many people are logged into both sites all the time already, meaning there is no need to log in to yet another system in order to trigger a payment. I am sure that, sooner or later, this will stop being a problem.

 
The second is harder to bypass. Ingrained assumptions are notoriously hard to shift, especially when there is competition out there who are happy to pander to them. One way to do this is to reframe the product as something different. With the launch of new platforms - notably the iPhone and especially the iPad - publishers have had the opportunity to start afresh, with few existing expectations working against them. Since there is no history of free news content on iPad, there are lower barriers for many people to the principle that they might have to pay for it. The drawback of this approach is that by changing the nature and name of what you offer, you risk losing the momentum and loyalty of the 20-50 million unique users which several of the top news sites each have. The more seamless the migration from standard web use to any new access method, the more people will expect it to remain free.

 
But apart from "make an iPad app", what more can behavioural economics tell us about how to improve takeup and increase revenue from selling news?

 
I'm going to go a bit deeper to analyse this, to the level of decision theory. The goal is to understand the whole lifecycle of a person's decision to consume, and/or pay for, news and the influences on it. So consider the cognitive process of a person who is about to show up at a page on your online newspaper's website.

 
They come to this in one of three ways: through searching for something specific; browsing in an undirected way and happening upon it; or checking the page as a part of an ingrained newsreading habit. Each of these involves its own behaviours and motivations.

 
1. Directed Searchers

 
Those searching for something specific are the most purposeful and "rational" group - the most likely to be willing to accept a conventional offer to pay for something. They have a goal in mind, they are carrying out a specific strategy to achieve it, and a financial transaction - at least potentially - can form a legitimate part of that strategy. This model works well for many types of specialist content - clip art, legal documents, iTunes, or films. But the challenge with news is twofold: one, most people probably don't look for news in this way; two, there are lots of free competitors out there who will be found just as easily as your paid content.

 
To convert directed searchers, you have to make salient why your offer is different to all the others they are seeing next to it on Google. Here's the challenge. Almost any form of words you could use to do this; any format of news page you could design, or any keyword strategy, can be copied by the free people too. There's one exception. They will never copy the phrase "You must pay for this article".

 
My suggestion would be, in this case, to make a virtue of the paywall. Emphasise that this is a paid-for article - put it in the title tag so it shows up right in the search results - and is correspondingly higher quality than the free alternatives. Higher quality could be on a number of dimensions. It might mean "better checked". It might mean "more personalised". It might mean: news, analysis and opinion, balanced and all in one page. That hardly matters. The point is that price is a signal of quality, and at least some people are going to be willing to pay for it.

 
What NOT to do is get people into the page in the belief that it's free and THEN ask them to pay. If you let people know up front, conversion will be much higher. Yes, many people will be put off clicking on the link. But those people are unlikely to pay anyway. The people who might pay, will be _more_ likely to click; and (subject to testing, as always) I'd predict this approach would significantly increase revenue.

 
2. Undirected Browsers

 
A different approach altogether is required for people who browse semi-randomly. This behaviour occurs on twitter, on Facebook, and when people are looking around the Web for one thing, but get distracted by another. There's no explicit goal here, so you are relying on mini-goals created by the individual in the moment of browsing. These provide short-term motivation when there is no conscious goal.

 
The most common mini-goal is satisfaction of curiosity. So you must pique curiosity, and then tease them, holding back fulfilment until the reader coughs up. This picture from @ilana highlights a clever way to do this: show the article comments but not the article itself. An excellent way to build curiosity is to read what other people have been saying about something.

 
Other mini-goals are revisiting a forgotten goal, affiliating with a friend and various time-management goals such as one more click or getting back to work. Each of these calls for its own pricing mechanisms, but this short article isn't the place to go into them. I'll be publishing something longer on this if you're interested, so leave a comment below or email me (leigh@inon.com) and I'll send you a copy.

 

 
3. Habitual Readers

 
For many people, reading the news is part of a regular habit. They may do it once or twice a day at certain times, or on a Sunday morning (that particular tradition is already well monetised by printed Sunday newspapers, of course) or when there's a break, a boring moment or a tricky task at work they want to distract themselves from.

 
For these people, satisfying the habit triggers reminders of certain previous happy events (or deflection of negative feelings such as hard work) and that is the value being provided. Anyone who regularly satisfies a specific need is likely to develop specific strategies for doing so. The publisher's job is to become the habitual starting point of the reader; and to achieve this you need to:
  • achieve trial
  • make payment acceptable
  • make payment automatic

The FT's strategy for this looks effective: offer a little for free, persuade people to sign up very cheaply (4 weeks for just £1), then once they are in the habit of reading, bill them regularly. The habit-forming behaviour is embedded further by regular email reminders of articles that might be of interest.

 
Some people think the FT can only do this because it has a distinctive business-oriented product; if its news were the same as the Guardian's, or Telegraph's, or Times, it would be very difficult to get people past the first point of payment. But many news outlets have sufficient personality to get people into regular reading habits, and that's an important part of consumption too. Guardian readers certainly see themselves as Guardian readers - it's a badge of identity. (Indeed, Guardian readers probably have a stronger sense of the identity of Daily Mail readers than do the Mail readers themselves). The Times is experimenting to see whether the same principle will work for them.

 
Mixing it all together

 
Trying to capture all three of these different newsreading behaviours in one business model is not so easy. This is a different version of the marketer's traditional problem of price discrimination. Can you separate audiences into different levels of demand and charge each of them the appropriate price? In this case, it's about segmenting by behaviour instead of by willingness-to-pay.

 
It's certainly possible to present different versions of an article according to whether the user approaches from Google (directed searcher), Twitter (undirected browser) or direct from a bookmark or as a registered user (habitual reader). And as long as the price structures are not directly comparable, the segmentation should work. Charging a Guardian reader a sub of £7.99/month does not stop occasional visitors from paying 50p for an authoritative update on what's happening in Libya today; nor vice versa. And the type of articles of interest to directed searchers are probably (mostly) different to those which stimulate the curiosity of browsers.

 
So identifying key user behaviours should give you the ability to sell to all of them, with a business model that works for each group.
 
There's much more to talk about on this subject: retaining subscribers once you have them, upselling them to new services, the role of advertising. All of that will be covered in the extended version of this article, so once again: email me (leigh@inon.com) or post a comment and I'll send it to you when it's ready. 

Sunday, 20 February 2011

The economics zeitgeist, 20 February 2011

This week's word cloud from the economics blogs. I generate a new one every Sunday, so please subscribe using RSS or the email box on the right and you'll get a message every week with the new cloud.

Bit of an unusual one this week - we have a new server and the software is much stricter about XML validation, so lots of the blogs aren't currently coming through in our feed. So our data set is much smaller and looks unrepresentative. So take "production" and "oil" with a pinch of salt. Anyway, the words moving up and down the chart are listed here.

I summarise around four hundred blogs through their RSS feeds. Thanks in particular to the Palgrave Econolog who have an excellent database of economics blogs; I have also added a number of blogs that are not on their list. Contact me if you'd like to make sure yours is included too.

I use Wordle to generate the image, the ROME RSS reader to download the RSS feeds, and Java software from Inon to process the data.

You can also see the Java version in the Wordle gallery.

If anyone would like a copy of the underlying data used to generate these clouds, or if you would like to see a version with consistent colour and typeface to make week-to-week comparison easier, please get in touch.

Thursday, 17 February 2011

Unsubstantiated assertions

I should have known better than to read this article by Joss Garman of Greenpeace (Obama's new fear is a cleaned-up China), but having done so I need to respond to this point:
In Cancun, European leaders were often left on the sidelines, with little new to offer beyond their 20% emission cut, agreed in 2008. This carbon target is now insufficient to make Europe a player in the clean tech markets – a 30% target is the minimum needed to drive private sector investment into the sector.
This assertion seems to be supported by no evidence whatever. Why would a 20% emissions cut not be enough to drive private investment in green tech, but a 30% cut would? For that matter, why would Europe's emissions targets even be a major influence on private investment - presumably if there's a market in the US and China, European companies will still want to capture a share of it?

After 19 years on the Internet, I shouldn't be all that outraged that someone published an unsubstantiated opinion. I don't really even disagree with the basic point about reducing emissions. It's just a shame that Greenpeace couldn't be bothered to marshal any of the good arguments for it.

Sunday, 13 February 2011

The economics zeitgeist, 13 February 2011



This week's word cloud from the economics blogs. I generate a new one every Sunday, so please subscribe using RSS or the email box on the right and you'll get a message every week with the new cloud.


I summarise around four hundred blogs through their RSS feeds. Thanks in particular to the Palgrave Econolog who have an excellent database of economics blogs; I have also added a number of blogs that are not on their list. Contact me if you'd like to make sure yours is included too.

I use Wordle to generate the image, the ROME RSS reader to download the RSS feeds, and Java software from Inon to process the data.

You can also see the Java version in the Wordle gallery.

If anyone would like a copy of the underlying data used to generate these clouds, or if you would like to see a version with consistent colour and typeface to make week-to-week comparison easier, please get in touch.

Sunday, 6 February 2011

The economics zeitgeist, 6 February 2011


This week's word cloud from the economics blogs. I generate a new one every Sunday, so please subscribe using RSS or the email box on the right and you'll get a message every week with the new cloud.


I summarise around four hundred blogs through their RSS feeds. Thanks in particular to the Palgrave Econolog who have an excellent database of economics blogs; I have also added a number of blogs that are not on their list. Contact me if you'd like to make sure yours is included too.

I use Wordle to generate the image, the ROME RSS reader to download the RSS feeds, and Java software from Inon to process the data.

You can also see the Java version in the Wordle gallery.

If anyone would like a copy of the underlying data used to generate these clouds, or if you would like to see a version with consistent colour and typeface to make week-to-week comparison easier, please get in touch.

Wednesday, 2 February 2011

Turbulence ahead, and externality entrepreneurs

I have just remembered to link to Turbulence Ahead, the blog of Gerard O'Neill, who spoke on a panel with me last year at the Geary Institute.

His latest post has a nice quote from Sean Corrigan:
"...prosperity cannot be forced, but must be built one exchange at a time as individuals further their own self-interest by catering to the interests of others..."
Corrigan intends this as an argument for his Austrian, laissez-faire philosophy. And it does support that case. But when we think about it a little more deeply, it also illuminates a different view.

The quote hints at, but perhaps underplays, the role of the entrepreneur. Presumably each consumer knows about a certain range of available goods, and they are already choosing whichever subset is best for them (I'd usually insert a critique about economic rationality here, but this time I'll leave that alone and make a different point). Given this starting point, in order to get economic growth we need one of two things to happen:
  • Wholly new goods or services become available - because someone has invented an entirely new technology. The iPhone being a typical recent example: before the iPhone, we spent our money on other phones, or other things less good than an iPhone; now that it is available, we spend some of our money on that, we get more utility and the world is happier. Economic growth has occurred.
  • A consumer is introduced to a good or service they weren't previously aware of. This could be a product they haven't heard of before (I was told about a service called Dropbox recently which I think is pretty good) or it could be a service provider they hadn't met before, such as a good graphic designer or hairdresser.
Consumers are busy (they've already allocated all their time to utility-maximising activities) so these inventions, discoveries or introductions are the job of the entrepreneur. As an entrepreneur, I will do one of two things.

Either I have an idea for an invention, and take the risk of investing in it in the hope that consumers will want to buy it later. Or I might identify a consumer desire which is currently not met, and introduce suppliers to consumers in order to fulfil it. The latter is a much more common entrepreneurial path - most businesses are not fundamentally inventing new stuff. Instead, they build their understanding of a set of customers, and then find some resources - employees, subcontractors or capital - which together can meet those customers' needs.

Corrigan says that prosperity must be built "one exchange at a time". That's trivially true, but actually the input of the entrepreneur is somewhat different from the straightforward operation of market exchange. Simple exchange is a trade between two people who know what is on offer and decide to swap (typically) an amount of money for a quantity of product. The entrepreneur, by contrast, is trying to (paternalistically?) guess what a person will want before they know it themselves. They they create the product or service, offer it to consumers and try to persuade them that they want it. Of course this is still a process made up of freely chosen transactions, but it is not entirely a gradual process of micro-level decision-making. Apple's invention of the iPhone was, in one sense, imposed from above and swept suddenly out to a large market. The involvement of the cellphone networks and their subsidy of the phones through service contracts makes this an even more complex scenario than the simple free-market model would suggest. But these complexities were absolutely necessary to the introduction of the product.

And importantly, this whole process works properly only if the private company can capture all the returns to its innovation. If they are unable to charge the full value of their product or service because of consumer biases or competition, or if there are big positive externalities where third parties benefit in addition to the buyer, then some products might never get invented even though there would be a net benefit to society.

This seems more often to be true of services than goods; and in particular, certain kinds of social goods to do with education, health or security. Education has vast positive externalities and it seems unlikely that a wholly private market will generate enough of it to be optimal. Public health is the same. And basic universal security is almost a precondition for any other market exchanges to take place.

But to look again at the question of building prosperity "one exchange at a time". Imagine that I can figure out that person A - with a four-week training course - could be effective at doing job B. The company offering the job hasn't met A, and A is not aware that the job is available (or is disillusioned after nine months of searching for work). I could introduce the two of them. I could even offer the training for free to make the trade more likely; and if I'm a government which will benefit from tax revenue if the person is employed, it would be worth my while to do so. But if I don't step in, it will probably never happen on its own.

Of course, jobs do get filled in a private market; and recruitment agencies exist which charge for this service; and a big share of the benefits of a job is captured by the parties who enter into it. But by no means all of them. A job generates a multiplier effect, with spin-off benefits for the family of the employee, those who supply goods to them, the customers of the employer, and society as a whole. This is especially true if the employee is in the bottom half of the wage distribution; recruitment agencies are less interested, the employee may well be unmotivated or lack some of the skills required to find a job, but it's still in everyone's interest for the person to get one. It is entirely legitimate for someone to help match the parties up; and it may well be that this help is initially unasked-for (just as nobody asked for an iPhone before Apple invented it). The government, as society's representative, can act on our behalf in bringing about externalities - because society benefits when those externalities occur.

I don't suggest that person A should be forced to take job B; indeed, if this government employee discovers the potential match it is their responsibility to try to sell the idea to both parties - just as the entrepreneur has to sell their concept both to the consumer, and to the providers of labour or capital that enable the product to be created. And this doesn't (necessarily) mean monolithic, universal government plans for the whole economy; it can be done on a small scale and probably will be the better for it.

In other words, just as entrepreneurs have a role in finding undiscovered opportunities for exchange, governments can have a role in finding undiscovered opportunities for positive externalities, and making them happen. The government may be usefully looked at as an "externality entrepreneur".

Tuesday, 1 February 2011

National Rail oops

Oops. I have just tried to check out some train times on the National Rail website. Seems they have been doing some maintenance and deployed something slightly wrong to the live server. As soon as I try to enter the station I'm going from...


This makes it ever so slightly impossible to use the site.

Of course, anyone who's written a web app has done this at some time, but it's very reassuring to see one of the busiest sites in the UK making the same mistake. And the best thing is the smug feeling of knowing exactly what they have just done and why it happened. Maybe my web development days are not entirely behind me...