Why I’m not sold on value for value
The concept of value of value is one where information yearns to flow freely, transactions should be voluntary, unlimited and direct. In V4V model, people pay what something is worth to them.
Sounds great. On paper. There are some issues…
## Free sucks
At least, that’s the perception. People don’t assign much value to free. Ask anyone who has ever ran any business and has not suggested a value for a product or service and they’ll tell you that they earned far less than when charging for the thing.
It’s true, some people will give a lot, some a little, and most none. Most - none. None.
## Pricing is Signal
Pricing is a signal of desirability and quality. Of course, it is often incorrect and people manipulate pricing all the time. But for the most part, people don’t see much value in free. Unless a recommended price is offered, people will usually pay nothing. This is not a great model to thrive on if you spend years of your life acquiring knowledge and turning it into products that nobody ultimately buys.
I have very personal experience with free. I’ve created and sold digital products and ran many pricing experiments myself. The highest priced products usually generated the most revenue. Surprise! The middle cost product (same product, just priced less) decimated the revenue stream. When set to 0 (even with a suggested minimum price), I generated almost no revenue at all.
None of this is surprising. Pricing acts as a psychological anchor. “You get what you pay for” is ingrained in our brains whether we think about it or not.
## People are clueless
The issue with price is that most people don’t have a clue what anything is worth. The only time people have any rough idea of what they should pay for something is when they have already purchased that thing in the past. But, introduce something they have never before purchased and they won’t have a single clue about what to pay. Take for example a set of professional photos of you and your family. Unless you’ve been to a photo studio in the last 5 years, you probably won’t have a single clue what that package of photos is worth. Does that mean the product is worthless? Of course not, but people don’t know what to pay.
In a value for value model, the absence of price makes it super difficult to determine the value of anything. You may take some social cues from previous payments from other people, but this could backfire for the content creator.
Suppose I created a UI framework that saved developers hundreds of hours. In theory, I should be able to charge at least a few hours’ worth of value for this product. If the developer’s time is valued at $100/hour, a $200 price for a product that saves you $2000 worth of time seems very justifiable. Not only do you get to use it once, but you can re-use the product for ALL future projects and employment.
Now, remove the price and see what people pay. Absolutely nothing. You may have a few people who pay $200 voluntarily, but it’s highly unlikely The vast majority will pay nothing, and some may “tip” in the 5-$60 range. Anything that approaches a $100 mark is seen as a purchase. Hey, I don’t make the rules, I just see what other founders have figured out long ago and combine with my own observations. Don’t kill the messenger.
## Free is Expensive
If I am accurate in my assessment and recall my personal experiences accurately, then the majority of people who consume your value will do so for free. When that content is a product, you may end up spending a lot of time on supporting the thing that is not generating any revenue. You don’t want to be rude and ignore people so you’ll probably spend your valuable time answering questions and helping them troubleshoot issues. All of that time adds up. Startup founders who offer free tiers or near free tiers of services learn very quickly that free customers are the most painful and demanding. You are basically forced to charge just to avoid dealing with demanding people who expect everything for nothing.
## Free is Noise
Price is not just a request for value, but it acts as a feedback signal for future content. If you have no idea what people are paying for, it’s difficult to know if what you create is worth anything. A situation where the vast majority of your content is consumed for free yield a lot of noise.
Well, why not focus on the people who pay? You certainly could, but it ends up being a tiny fraction of the sample size you could have had if you actually charged something up front.
## Lack of forecasting
Businesses rely on predictible revenue. Forecasting is necessary for all sorts of decisions if you work with anyone but yourself. It helps with purchasing decision (expenses) and with planning of future products. Value for value makes it impossible to know what your revenue will be next month as you just have no idea if everyone pays nothing or a lot.
## V4V could make you uncompetitive
In a model where one person charges a fixed price and the other is relying on the good will of the people to "see the value" in their work, the person with predictible revenue will most likely win out in a competitive environment - enabling them to get ahead of you and your business. They will have an easier time planning further content / products and hiring people to scale the business even further.
## It’s not all hopeless
That’s not to say that I don’t like the idea of value for value. Of course I only want people to pay if they find the thing useful. The issue is that people may not know the thing is useful until they’ve already acquired it. At that point who is going back to pay for the thing they already got for free? Few to none.
Value for value may work. For some.
I’m not saying value for value doesn’t work sometimes, for some people. It is entirely possible that a person earns a living on v4v transactions. However, I think for that to be true there may be other factors at play such as social standing, personal brand, influence, likability, status within a community. The vast majority of creators do not fall into this category and will just struggle.
I’m cautiously optimistic about V4V and hope it works out at scale. But as it stands, I have not seen much evidence that it actually pays the bills. Yes, there has been some support for podcasts on Fountain, but it is unclear whether it is just as or more significant than traditional transaction model.
## “Information is not scarce” is irrelevant
There’s some notion that information yearns to be free and cannot be scarce by nature. I think this may be a false argument from the start. When we purchase digital things, we are not paying for scarcity - it’s totally irrelevant. We pay for the experience and the feeling we get from that thing. In fact, the same is probably true for physical products (with the added benefit of personal sustenance). I don’t go into the grocery store to buy a dinner and fork over the money because it’s scarce. I pay because I’m hungry. There’s utility and there’s pleasure and fulfillment. If I’m having a dinner with friends, there’s also fun. Unless I am totally misunderstanding the argument, I’m not sure how it applies.
## In Summary
* Value 4 value may work at scale, but remains to be seen
* It could be great fun money but not serious enough to pay the bills (for most of us)
* Sounds good on paper but we humans have our own ways of thinking about value and what it's worth
* May work well for people who build a personal brand or have status in a community
As always I look forward to your thoughts. Let me know if I’m overlooking something or should consider some point of view in more depth.
