Consumers Value Internet Apps, But Will They Pay?

By Gary Kim February 11, 2013

The consumer surplus for online media (value compared to price paid) amounts to about $970 for each U.S.-connected consumer each year, or about 2.5 percent of the average annual U.S. income, according to The Boston Consulting Group.

The comparable consumer surplus for offline media is approximately $900, according to new research by The Boston Consulting Group. 

Some might interpret those findings to imply that there’s potential for a new annual revenue stream of about $1,000 a year for online video and other applications. That probably is a bit of a leap.

An economist’s notion of “consumer welfare” or “consumer surplus” is not always identical to “consumer willingness to pay” for a product.  Consumer surplus is the monetary gain  perceived by consumers when they’re able to purchase a product for a price that is less than the highest price they’d be willing to pay.

In other words, consumer surplus is the difference between “regular price” and “on sale” price. The concept might also be said to include the “value” of products or services that are tough to evaluate, because the products are available “for no extra charge.”

The surplus might be said to include the value consumers themselves place on a media-related activity or product over and above what they pay for it.

E-mail, instant messaging, online shopping or social media might provide relevant examples. People likely place high value on such apps and activities, but may not be willing to pay much incrementally to keep using such products.

For that reason, third-party revenue models are highly likely. Consider the high surplus ($311) users say they get from user generate content and social networks (Facebook and YouTube).

Consumers put a high value on this content, and the direct cost to them is essentially “free” (no incremental cost beyond the requirement for a device and Internet access). But access to an “audience” paying attention is valuable to advertisers.

Likewise, a user of a free app that might be “just about to buy something” is useful to a retailer.

The point is that “consumer surplus” might well be said to exist, even for “free” products such as Facebook or YouTube. But that does not necessarily mean people will “pay” significantly more than they presently do, for such value.

Edited by Braden Becker

Contributing Editor

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