Our Friend the Market Inefficiency

Getting a great deal can take one of two forms:

  1. Some things have lower prices than a lot people are willing to pay. Bruce Springsteen concerts are in this category. The reason 100,000 people are willing to pull their credit cards out of their wallets and spend a morning hitting refresh on their browsers is because he’s selling 30,000 tickets at $100 each. If tickets were $500 each (or whatever they end up going for in secondary markets like StubHub), the number of buyers would more closely match the number of tickets.

  2. Others things have a level of quality that is associated with much more expensive comparables.

Just to be clear, I’m not endorsing any of these products. I chose these examples specifically because I’m not a Springsteen fan, I don’t drink coffee, I’ve never tried the sunscreen, and the company that made the amplifier is out of business.

What I am interested in is the idea of inefficiencies in the consumer marketplace: outstanding and unique products whose standard price presents an anomalously good value. As a consumer, I want to know about these products because I want to buy them. And as someone who believes he offers such a product, I want to figure out the best way to market it.

The product I offer is shared access to books, movies, music, the internet, and live presentations. I’m the director of a public library.

For decades, libraries have operated under what we now think of as a freemium model. Access to a public library is generally included as part of your taxes, just as access to free or freemium web-based services are generally included as part of the fees you pay for internet access.

Most libraries lend you a book or DVD or CD for free for a limited time. If you want to keep borrowing it for free beyond that limited time, you need to renew it. If you want to keep it even longer, you usually pay a small fee for each extra day you keep it (at the library where I work, “extended use fees” for books are 10 cents/day). If you want to keep the item indefinitely, or if you lose it or damage it, you have to pay its full replacement cost, along with a modest processing fee.

Seen from this perspective, libraries fit the definition of being a great deal both for category 1 and for category 2. Regarding category 1, the Springsteen Ticket Model, we collect extended use fees all the time, and frequently have to charge people to replace items, so we’re clearly charging less than people are willing to pay. Regarding category 2, the Wow So Cheap for Such a Great Product Model, we’ve seen considerable growth over the past few years, so it seems likely that we’re perceived by many as providing services that are at least acceptable relative to those offered by our more expensive comparables.

Perhaps for this reason, some libraries have found that they’re able to charge for services, such as borrowing DVDs, reserving an item, getting an item from another library, printing, faxing, or speeding up your access to especially popular items. These fees are controversial: those who object to service tiers worry about the damage to libraries’ egalitarian ethos and reputation. Those in favor of charging for premium services believe the additional revenue can help to keep libraries solvent and provide a rising tide of income that lifts all boats: premium services for some could equate to better services for all.

I don’t know the answer. Perhaps there is no definitive heuristic. What’s the right price to charge when your users think of your services as free, or believe they should be free, especially when advertising isn’t an option?

Like many others, I’m eager to see how Twitter users react to increases in advertising, and if Google and Facebook can continue to grow while simultaneously becoming less reliant on advertising. If advertising continues to work for companies that offer “free” services, they’re simply different from libraries. But if these companies start charging users for services that were previously free, it will be telling. It will also be telling if they don’t, because it likely means they can’t.

 
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