BUAD 307
Marketing
Fundamentals

 

 

 

MIDTERM REVIEW

04--Micro-payments—problems, opportunities, and applications

PowerPoint Narration

Micro-payments involve payments of small amounts of money—i.e., 50¢-$2.00.  Theoretically, it would be possible to sell a number of virtual products online—e.g., songs or documents—at very low prices since marginal costs of production and distribution are minimal.  Thus, it would be possible to make money on volume even though the revenue for each item is small.

 In practice, however, it is very difficult and expensive to collect small amounts of money online.  Typically, online payments are made through a credit card or through services such as Paypal.  Credit cards generally charge a percentage of the sale, which can be as high as 3.5% for online merchants (which are deemed to be risker to serve than conventional retailers and most other businesses).  The big problem, however, is the base fee, which typically ranges from 30-35¢.  With a 35¢ base charge, a payment of 50¢ might incur 35¢+0.35*50¢=37¢, leaving only 13¢ of the original payment.

If consumers were willing to pay something like $20.00 in advance into an “escrow” fund of an online service, that service might be able to dispense small amounts for a more reasonable charge of, say, 5-10¢.  Notice, however, that there would be a serious chicken-and-egg problem here in that few merchants would accept payments from this service until a significant number of customers participate.  Consumers, in turn, would wait to sign up until these payments were widely accepted.

Cell phone service providers—who have an established billing relationship with their customers—may be able to offer this service in the near future as more people switch to ordering through mobile devices.

Main Midterm Review Page