4 ms·

This has got more to do with production and consumption of a physical good as compared to a "virtual" good than anything else. The marginal utility you mention

This has got more to do with production and consumption of a physical good as compared to a "virtual" good than anything else. The marginal utility you mention for coffee is derived from the physicality of the product - and thus I think the Starbucks vs. app comparison is invalid. The barrier to entry to create and deliver a software application is extremely low as compared to creating and delivering almost any physical good. The physicality of a thing - especially coffee - ensures that only one instance of it can be used at any time (and it would probably be "used up" during consumption). Creating a new copy has costs (where copying and delivery costs are zero and more than one copy can exist at a time disorienting the supply/demand dynamics, people would always be reluctant to pay for a thing - hence digital piracy). Software, has no such restrictions and virtually zero delivery costs. That's why RMS always said that charging for the act of software development is right. But charging for copies of the same stuff (and not providing its source) is not - people may talk about intellectual property - but that's a different debate. When you buy a car, you pay for it - your neighbour with exactly the same model also pays for it. It's also "open-source" (or at least, it used to be) - you can take it apart and figure out how it works. What you might not be able to do is to create the car from scratch (you may not have the tools, materials, expertise etc.). And that's why you pay a hefty sum for it. The same does not hold true for simple apps - they are easy to put together, the tools to do so are freely available in most cases and the expertise can be gained in a short amount of time. Hence, the $0.99 price tag - because the developer knows it's easy enough to put something together for free - if you had the time. Note that this does not apply to high-end software where significant amounts of R&D and engineering effort is required - and hence the end-product can't be easily reproduced from scratch. That's why I still feel slightly guilty (and very privileged) when I can download and use Linux for free and browse through its source all I want - economics says it shouldn't be free - but it is.

tptacek 14y ago
The bit about "coffee" and "$5" and "less than" and "marginal utility" have to do with the value of $5 to the average Starbucks customer reading things on the Internet, and nothing at all to do with the nature of coffee other than that coffee is not Important to people's lives. The point of the comparison is that coffee means so little to people that the cost of a cup of coffee is a good proxy for "how much you should spend without thinking". That it is an imperfect proxy is something that obviously will not be lost on a site full of nerds like us, but s/trees/forest/g.
- photon137 14y ago
  Why not price the coffee at $30 then for millionaires? Surely the marginal utility of $30 to them would be similar to that of $5 to someone earning $60k? Why would one pay $5 for the same amount of gas one month and $3 in another month when the marginal utility derived from the purchase of gas is precisely the same? Ignoring the price effects induced by the supply/demand characteristics and intrinsic nature of the good in question (inelasticity of gas demand, in this case) leads to bad pricing as much as incorrectly estimating the marginal utility of a product to consumers.
  - tptacek 14y ago
    All manner of ridiculously expensive gewgaws are priced that way exactly in order to exploit the marginal utility of $30, or $100, or $5000 to millionaires. The problem with pricing Starbucks that way is that a huge chunk of Starbucks strategy involves there being a Starbucks on every quarter, ready for any passerby be they millionaire or middle class, and while it is notoriously easy to do price discrimination within a band of $1-$10 prices, it is very hard to do price discrimination across a $1-$100 spectrum of coffee.
    - larrys 14y ago
      "huge chunk of Starbucks strategy involves there being a Starbucks on every quarter" The other chunk of Starbucks strategy is that it's not about coffee. Speaking strictly of the product (and not the experience which of course is equally important) Starbucks secret sauce is essentially that it is a "sugar delivery system". I've yet to be in a Starbucks (and I"m in them every single day) where the majority of the beverages that are sold are not black coffee but drinks with a high sugar and even mocha content that are addictive on several levels.
      - roc 14y ago
        Sure. That's why they get away with selling bad coffee. If you're going to load it up with sugar and cinammon and whipped cream and three shots of caramel the quality of the coffee is largely irrelevant.
bad_user 14y ago
That's why RMS always said that charging for the act of software development is right. But charging for copies of the same stuff (and not providing its source) is not. While I understand the rationale behind this statement, it never felt right. When designing a new car, a lot of money goes into research and development, money that cannot be recovered (sunken costs). However, once that's over and the assembly line is put together, the cost of creating new copies (while never zero) it definitely converges to the cost of the raw materials involved. The more items the assembly line produces, the cheaper it gets. And when buying a car, you're paying a lot more than that, because you're in fact buying a brand, not just some pieces of metal put together. I also disagree on a car being "open-source". Assuming you can make copies of your car and give those to other people, you'll be obliterated by trademark, copyright and patent lawsuits. Also many car manufacturers are voiding your warranty if you go to unauthorized car repair shops. And if you can look under the hood, that's only because of strong consumer protectionism laws. Apple has more than 50% profit margins on iPhones. Is that moral? Well, they need to earn a profit (otherwise they wouldn't be in this business) and they also need to pay the research and development costs for newer versions or for other products. And after all, this is capitalism - if you don't like it, buy from somebody else. So why can't this rationale also work for pure software? After all, the developer needs the profit to develop newer versions, improvements or other applications from which you may also benefit. And again, this is capitalism. If you don't like it, search for something cheaper, or create your own. RMS's principle (being paid only for creation of software, not for delivery of copies) does not work because it doesn't scale. You cannot put together an assembly line for software, like you can for physical products. This effectively means that you end up selling your time, which makes a good living, but it won't make you rich and it won't allow you to work on lots of silly things that may or may not pay off. Also, only simple apps can be cloned easily. No software can currently match Adobe Photoshop, which still deserves every penny, and it wasn't for a lack of trying. I use Gimp because the price of Photoshop is too high for my amateurish needs, but I would shell out the cash for Photoshop in a heartbeat if I would be a professional photographer or designer. The $.99 price tags is common just because the app stores are filled with crap, with most apps not even deserving $.99 - but create an app that enriches people's lives and even allows them to make some money, and you'll have no problem selling it for $90 or even $900.
eru 14y ago
The car example is a bit more complicated nowadays: The price of the car does not only cover the variable costs of the producer, but also has to recoup the fixed R&D. Software is only special, because the variable costs per item are essentially zero.

tptacek 14y ago

The bit about "coffee" and "$5" and "less than" and "marginal utility" have to do with the value of $5 to the average Starbucks customer reading things on the Internet, and nothing at all to do with the nature of coffee other than that coffee is not Important to people's lives. The point of the comparison is that coffee means so little to people that the cost of a cup of coffee is a good proxy for "how much you should spend without thinking". That it is an imperfect proxy is something that obviously will not be lost on a site full of nerds like us, but s/trees/forest/g.

photon137 14y ago
Why not price the coffee at $30 then for millionaires? Surely the marginal utility of $30 to them would be similar to that of $5 to someone earning $60k? Why would one pay $5 for the same amount of gas one month and $3 in another month when the marginal utility derived from the purchase of gas is precisely the same? Ignoring the price effects induced by the supply/demand characteristics and intrinsic nature of the good in question (inelasticity of gas demand, in this case) leads to bad pricing as much as incorrectly estimating the marginal utility of a product to consumers.
- tptacek 14y ago
  All manner of ridiculously expensive gewgaws are priced that way exactly in order to exploit the marginal utility of $30, or $100, or $5000 to millionaires. The problem with pricing Starbucks that way is that a huge chunk of Starbucks strategy involves there being a Starbucks on every quarter, ready for any passerby be they millionaire or middle class, and while it is notoriously easy to do price discrimination within a band of $1-$10 prices, it is very hard to do price discrimination across a $1-$100 spectrum of coffee.
  - larrys 14y ago
    "huge chunk of Starbucks strategy involves there being a Starbucks on every quarter" The other chunk of Starbucks strategy is that it's not about coffee. Speaking strictly of the product (and not the experience which of course is equally important) Starbucks secret sauce is essentially that it is a "sugar delivery system". I've yet to be in a Starbucks (and I"m in them every single day) where the majority of the beverages that are sold are not black coffee but drinks with a high sugar and even mocha content that are addictive on several levels.
    - roc 14y ago
      Sure. That's why they get away with selling bad coffee. If you're going to load it up with sugar and cinammon and whipped cream and three shots of caramel the quality of the coffee is largely irrelevant.

bad_user 14y ago

That's why RMS always said that charging for the act of software development is right. But charging for copies of the same stuff (and not providing its source) is not. While I understand the rationale behind this statement, it never felt right. When designing a new car, a lot of money goes into research and development, money that cannot be recovered (sunken costs). However, once that's over and the assembly line is put together, the cost of creating new copies (while never zero) it definitely converges to the cost of the raw materials involved. The more items the assembly line produces, the cheaper it gets. And when buying a car, you're paying a lot more than that, because you're in fact buying a brand, not just some pieces of metal put together. I also disagree on a car being "open-source". Assuming you can make copies of your car and give those to other people, you'll be obliterated by trademark, copyright and patent lawsuits. Also many car manufacturers are voiding your warranty if you go to unauthorized car repair shops. And if you can look under the hood, that's only because of strong consumer protectionism laws. Apple has more than 50% profit margins on iPhones. Is that moral? Well, they need to earn a profit (otherwise they wouldn't be in this business) and they also need to pay the research and development costs for newer versions or for other products. And after all, this is capitalism - if you don't like it, buy from somebody else. So why can't this rationale also work for pure software? After all, the developer needs the profit to develop newer versions, improvements or other applications from which you may also benefit. And again, this is capitalism. If you don't like it, search for something cheaper, or create your own. RMS's principle (being paid only for creation of software, not for delivery of copies) does not work because it doesn't scale. You cannot put together an assembly line for software, like you can for physical products. This effectively means that you end up selling your time, which makes a good living, but it won't make you rich and it won't allow you to work on lots of silly things that may or may not pay off. Also, only simple apps can be cloned easily. No software can currently match Adobe Photoshop, which still deserves every penny, and it wasn't for a lack of trying. I use Gimp because the price of Photoshop is too high for my amateurish needs, but I would shell out the cash for Photoshop in a heartbeat if I would be a professional photographer or designer. The $.99 price tags is common just because the app stores are filled with crap, with most apps not even deserving $.99 - but create an app that enriches people's lives and even allows them to make some money, and you'll have no problem selling it for $90 or even $900.

eru 14y ago

The car example is a bit more complicated nowadays: The price of the car does not only cover the variable costs of the producer, but also has to recoup the fixed R&D. Software is only special, because the variable costs per item are essentially zero.