by Adam Juda on Tuesday, June 23, 2015
As an economist, I always make a note of movie scenes that involve pricing. One of my favorites belongs to Animal Crackers. Captain Spalding discusses Signor Ravelli's pricing strategy for his musicians. It goes something like this:
- Spalding: "What do you fellows get an hour?"
- Ravelli: "For playing we get ten dollars an hour."
- Spalding: "I see. What do you get for not playing?"
- Ravelli: "Twelve dollars an hour."
How ridiculous! I mean, who would possibly pay someone to not do something?
Actually, it happens more than you might think.
One example is extortion - a form of coercion in which a victim is forced to pay up in order to prevent punishment. Other crimes such as blackmail, payola and even kidnapping might also apply to this definition.
While the world of criminal enterprise is rife with examples, there are plenty of legitimate businesses that pay folks to not do something. This American Life chronicled a group of teachers in New York City who were being paid not to teach classes. Many of them had been accused of wrongdoing but could not be fired. Similarly, Fox News reported that American car companies have long maintained job banks that house large numbers of autoworkers whose job is quite literally to not work on cars.
Similarly, The Economist profiled some folks who are paid to not chop down trees. I can only imagine what the average lumberjack would have to say about such a financial arrangement.
Now that we've seen that people can (and do) get paid to not do things, we can think about applying this strategy to the world of software. All too often we think that customers pay businesses to deliver software, but firms can also charge for not delivering software. One can look to MailChimp for an example. The firm charges customers money to remove undesirable ads from its mass mailings. That's right, the firm went to the trouble of developing complex advertisement display software and will only not include it for customers willing to pay a higher price. Google behaves similarly with its Google Apps for Business accounts. Do you want those pesky ads removed from GMail? You'll need to hand over some money.
Some examples are far more insidious. I worked on a software project that aggregated a lot of important data. One of the most complicated portions of the application was a routine that added tiny errors to the resulting analysis. We then segmented our customers into two groups. One received the system that returned pristine data (the data that was not passed through our custom error-adding service), while the other group received a system that returned less accurate results. Which group do you think was willing to pay more for our work? Exactly! The folks paying the most were receiving the least advanced software. For those of you who don't believe that a company would ever intentionally release erroneous data, I point you to one of the more obscure examples: trap streets.
Here's yet another example from the software world: removing wasted CPU cycles for fun and profit. In this humorous anecdote, a group of programmers intentionally added useless code to slow down a software system. Group members would then periodically remove portions of it in order to increase the perceived value of their labors. While many would laugh this off as a silly story, many financial companies charge huge premiums for not delaying stock price reports. For large trading firms, even a fraction of a second delay could decrease the value of a stock quote by millions.
Can you make money by not doing something? I'll bet you can, if you have a sufficient understanding of monetization strategies. Of course, I'd prefer that you don't "not buy my book" on software pricing. While it may save you money in the short run, the wisdom it contains will pay for itself. Oh, and I'm also available for business consultations. You can either pay me to work, or to not work. It's your choice. After all, the customer is always right.