Monday, August 24, 2015

Payment Costs

Reply to: Hey there!

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Glad you appreciated the info!

Regarding volunteers… aren’t we volunteers? Here we are on Medium pouring our time, effort, energy, experiences, uniqueness, information, sweat, tears, blood, bones and brains into our stories! Well… more or less… heh. And nobody pays us for our significant sacrifices! Sheesh!

Maybe our sacrifices are worthless? Or maybe it’s the free-rider problem? Or maybe it’s the compensation barrier problem?

Here’s your story that I recommended…. Money Is A Broken System Of Value. Clearly I liked it… hence the recommendation. And recommendations are certainly useful! It’s nice to know whether people like a story. But the problem with votes/likes/recommendations is that they don’t communicate how much somebody likes something.

Does it matter how much your sacrifice is worth to other people? For sure!

Let’s say that your story was worth 10 cents to me. Is it possible for me to send you 10 cents? Of course! If paypal doesn’t allow payments as small as 10 cents then I could snail mail you a letter with 10 cents in it. The problem is that the postage would cost a lot more than 10 cents. Not to mention the time and effort involved in getting your address, finding a letter and writing your address on it, finding a dime and putting it into the envelope, sealing it and risk getting a paper cut on my tongue, looking up the correct postage, finding stamps and sticking them on the letter and putting it in my mail box.

The harder it is to give you 10 cents… the less likely it is that I will do so. This is the compensation barrier problem. Actually I just made that term up. Maybe barrier to payment would be a better term? Barriers to entry is a real term… but for a different, albeit equally important, concept. Perhaps the closest correct term would be transaction costs.  However… that entry doesn’t mention anything about the difficulties associated with making a payment (unless I missed it). So maybe “payment costs” would be a better term?

Right now the payment costs on Medium are too high. One way to reduce the payment costs would be to give us all digital wallets. I could use paypal to put $10 dollars into my Medium wallet. Then I could click the dime button that was next to the recommend button on your story. Voila! With one click 10 cents would be transferred from my wallet to your wallet! It would be sooooooo stupid easy and quick to give you 10 cents! You could either spend that 10 cents on other stories or you could save up your money and have Medium paypal it to you.

Here’s another way of looking at it…

Recommend button (free)
Really recommend button (1 cent)
Really really really really really recommend button (5 cents)
Really really really really really really really really really really recommend button (10 cents)

You get the idea. Rather than having a recommend button with 25 “reallys” in front of it… it makes more sense simply to have a 25 cent button.

With the current system… we can sort stories by popularity (number of recommendations received). But if Medium did a better job of facilitating compensation/communication… then we would be able to sort stories by value (amount of money received). I’m pretty sure that most people would prefer to sort stories by value rather than by popularity!

If valuating stories was as easy as recommending them, then Medium would have a lot less volunteers and a lot more paid writers. It stands to reason though that few, if any, of the compensated writers would be able to quit their day jobs. But… it might encourage them to quit their less profitable pastimes. The more lucrative it is to write stories… the less lucrative it becomes to play video games or watch TV or have sex.

So by giving you 10 cents for your story… I’d essentially be trying to motivate/incentivize/bribe/encourage/inspire you to continue doing something that benefits me… instead of doing something that doesn’t benefit me.

In economic terms… giving you 10 cents for your story marginally increases the opportunity cost of you doing something other than writing stories.

With this in mind… if I truly value your story at 75 cents…. but, because of the free-rider problem, I only give you 5 cents… then I’m inadequately incentivizing you to do something that I benefit from. On the other hand… 5 cents is certainly better than 0 cents!

Let’s say that only members of Medium could read stories and it cost $5,000 a year to be a member. Members would be completely free to choose which stories they spent their $5,000 dollars on. Would this eliminate the free-rider problem? Yup. But would it result in the maximum payment for stories? It seems… doubtful. Having to pay $5,000 dollars to become a member of Medium would create a pretty high barrier to entry.

x = a lot of people paying a little
y = a little people paying a lot

Eh? Midgets would have to pay the most?

x = a lot of people paying a lit
y = a lit of people paying a lot

Maybe it would be nice if “a lit” was the opposite of “a lot”? Or something like…

x = a large amount of people paying a small amount
y = a small amount of people paying a large amount

That works… but it requires too many letters! Or…

x = more people paying less
y = less people paying more

I suppose that’s the best way?

Anyways…

It’s entirely possible that x > y.

By minimizing payment costs… Medium would become a market. Or, it would become a better market. Who doesn’t want to participate in a better market? But it’s not like the model would be impossible to copy. So competitors would quickly emerge. And we’d see a continuum of membership fees. All else being equal… whichever website/market has the highest paid writers would have discovered the optimal membership fee.

Minimizing payment costs helps to clarify demand. Clarifying demand increases benefit. The optimal membership fee will be the fee that provides the most demand clarity… which will maximize benefit.

You know what India has? A lot of nice orchids. You know what I like? Pictures of nice orchids growing on trees. That link takes you to my favorite photos on flickr. I’ve favorited 100s and 100s of photos of orchids growing on trees. When I search my favorites for “India” there are only 47 results! That’s way too few results! There should be a lot more results!

Here’s one photo that I particularly like… Foxtail Orchid. It’s a nice photo of a really nice orchid. Here’s a photo that I might like even more… Acampe praemorsa. Even though the orchid isn’t even blooming… the photo really shows how dry the habitat is. Which is right up my alley! I live in very dry Southern California… so I’m especially interested in drought tolerant epiphytic orchids.

Dinesh Valke took the photo of the epiphytic orchid in a dry habitat… and I’m the only one who fav’d it.

So there Valke is in India. And there you are as well. He took a photo that I like and you wrote a story that I like. Both of you voluntarily did something that I benefit from. And in neither case did I accurately communicate the amount of benefit that I derived from your respective actions. And in neither case is it entirely my fault. This is because neither Flickr nor Medium have grasped the value of minimizing payment costs. In other words… neither website understands the value of clarifying demand.

My point is… yes, I’m sure that that the government in India is a problem. But it’s only a problem because people don’t understand the value of clarifying demand. And changing the government is probably the hardest thing that you could possibly do to help people understand the value of clarifying demand. It would be a lot easier to change Medium or Flickr. And, honestly, this really isn’t the first time that I’ve told Medium that it should minimize payment costs by facilitating micropayments! So if changing Medium is an epic mission… then trying to change the government would be a monumentally epic mission.

It’s probably a lot easier to grab a couple of your best programming friends and create a website that minimizes payment costs. Your website would help people understand the value of clarifying demand and our respective governments would quickly change accordingly.

Am I stereotyping you Indians by assuming that you have at least a few friends that can program? Heh.

I actually modified some code to create a forum that facilitates micropayments. This blog entry… RudeBagel… has some links to some of the code that I modified. Let me just say that I’ve spent infinitely more time studying economics than I’ve spent studying programming!! The code works… as long as there aren’t any 12 year old hacker kids around!

The website is online… but every page should, in theory, redirect to the login page and I’ve disabled the registration. I’m trying to make some modifications and am looking for any excuse to procrastinate.

You and your programming buddies are welcome to build on the micropayments forum idea or create some other type of website that minimizes payment costs. In any case, should you get stupid rich from doing so, then I’ll be sure to sue you for a huge chunk of the money! Because I’m American! And we Americans love suing people. :D

Actually… the general trend is in the direction of clarifying demand. Take Patreon for example. However, Patreon was created with the intention of helping creators get paid. It wasn’t created with the intention of clarifying demand. This is a subtle but important distinction. If the founders of Patreon had actually understood the value of clarifying demand… then they would have set it up so that sponsors would be free to pay what they wanted for specific creations.

Dinesh Valke has 275 pages of photos on flickr. Do I value all his photos equally? Noooooo.

Here’s my valuation ranking of his photos…

  1. Epiphytic orchids growing in dry habitats
  2. Epiphytic orchids
  3. Epiphytes
  4. Plants
  5. Animals
  6. Other

I don’t want to encourage Valke to take more photos in general… I want to encourage him to take more photos of epiphytic orchids growing in dry habitats. I want to encourage him to do something that creates more, rather than less, value for me.

Clarifying demand is all about increasing the accuracy of communication… which is what increases benefit.

Basically, we want treasure maps to be more, rather than less, accurate.

Let’s say that Flickr minimizes payment costs and Bob, an American, is about to spend a few months backpacking around India. Before he take his trip… he searches Flickr for “India” and sorts the photos by value. What types of photos are the most valuable? Which subjects are in the greatest demand? Perhaps after scrolling down a bit Bob will see that I’ve allocated $100 dollars (hah… I wish!) to Valke’s photo of the epiphytic orchid in the dry habitat.

Medium, like Flickr, also clarifies demand so Bob decides to search Medium for “India” as well. What stories are the most valuable? Which stories are in the greatest demand? Bob also conducts the same search on Youtube… which also clarifies demand.

Bob ends up with a fairly accurate treasure map. With some luck and skill he can cover the cost of his trip. Of course, a billion people in India will have access to the same exact treasure map! So Bob will have some pretty stiff competition when it comes to supplying the demands of consumers. Which is really wonderful for consumers.

Anyways, I’ve rambled enough! If not, then here are some more ideas on the same topic… Creating The Most Efficient Demand Net.

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