The Market for Lemons and the Pricing of Zonks
Tuesday, February 17, 2015
One of the more interesting television shows from my childhood was named Let's Make a Deal. The show's host (Monty Hall) would offer various deals to members of the studio audience. One of the most common deals presented was the offer to trade a valuable good for a mystery item behind a curtain.
Sometimes the curtain hid something amazing - a new car or lengthy vacation. Sometimes there was nothing but a "zonk" - a gag prize worth nothing. No one would knowingly trade a valuable item for a zonk, but the lure of the unknown behind the curtain was often too strong to ignore.
As a consummate showman, Monty Hall optimized the ratio of zonks to good deals to maximize his ratings. He always made sure to maintain a strong enough record of trades that folks would always be willing to risk it all for what lay beyond the curtain.
It's interesting to compare Monty Hall's system of deals to a similar offer presented by many websites (including this one). Consultants, authors and product promoters will often offer a trade of their own. If a visitor is willing to offer up his email address, he receives an informational product in return (such as a copy of my guide to online revenue models). Just as in Let's Make a Deal, the people being offered a trade are being asked to give up something known (their email addresses) in exchange for something of unknown value. There's an added complication, however. All of these products are being offered by different parties, and none of them are interested in ratings or reputation. Their goal is simply to maximize the number of email address that they can use for marketing purposes.
Many businesses make the rational decision to put minimal effort into creating a high quality good for trade. Instead, they create zonks. By the time a visitor is able to evaluate the quality of his trade, it's too late. He's already given up his email address. The result? Web surfers are becoming evermore weary at the prospect of trading their email addresses, due to the increasing number of zonks that they have received in the past. This leads to a vicious cycle in which businesses are less willing to invest the effort to create good products for trade and visitors are less willing to provide their email addresses. The cycle will then continue until all content will consist solely of zonks (valuable content will be pulled by their owners and repurposed).
There's a reason why they call economics "the dismal science," but a firm grasp of its principles is vital to the success of any business venture. If you're in the software space, do yourself a favor and buy a copy of my software pricing guide, or contact me for a consultation. Oh, and my free offer isn't a zonk - I swear!