Web App Business Models: User Needs and What People Pay For

As customers, we have a finite number of needs that we’re willing to fulfill by parting with our hard-earned cash. If you’re planning a web application that can’t build a business model around one or more of these needs, you may face difficulties generating sustainable revenue.

Assuming you can create a business model that satisfies one or more of these needs, how do you know how much to charge? With the development and infrastructure costs of web applications continuing to drop, the price of services has to be increasingly based on value rather than cost.

This article describes a list of common consumer needs that can be charged for, together with guides for pricing where possible.

• Time: Convenience, Efficiency, Immediacy
• Scarcity
• Comfort
• Esteem: Id, Desirability, Self-Image, Ego
• Belonging: Relationships, Sex, Affection
• Survival: Health, Safety, Wellbeing
• Financial Security: Wealth, Success, Career
• Entertainment: Emotion, Experiences
• Intellectual Stimulation: Creativity, Learning, Expression

We’ve all heard the clichés about shortening attention spans (see: MTV Generation, Twitter) and about our tendency toward increasingly busy, on-the-go lifestyles.

For whatever reason, it seems we can’t fit enough into our day, and enjoy the temporary status of owning something before our peers. We’re willing to pay to get somewhere faster (e.g. our commute to work), do something in less time (e.g. a boring chore), or get something early (e.g. the latest smartphone).

There are two options for traveling from Heathrow Airport to central London by rail: the faster Heathrow Express, or the slower – but cheaper – London Underground train.

The Heathrow Express is about four times faster, and is four times more expensive.

There are three standard book shipping rates available (“per shipment”) from Amazon: ranging from the 3-5 day rate, to the 1 day rate, which is about four times more expensive.

The Royal Mail delivery prices have more of an exponential costing structure: some of the specialist “immediate” delivery rates are proportionally considerably more expensive than the associated decrease in delivery time.

These examples hint at a simple pricing structure for Time: you can charge for a service based on a multiple of how much time it saves.

For example, if you provide a service that allows a user to perform a task three times faster than their current software, then you can charge three times the price of their current software.

The Royal Mail example may hint that for specialist (business/emergency) needs – rather than standard, every-day consumer services – this multiple can be increased to as much as 5 or 6 times. For example, if you offer a specialist service that provides something twice as quickly as another service, in some circumstances, you may be able to charge 2 (for twice as quickly) x 5 = 10 times the price of the other service.

As a rule of thumb, stick with the simple single multiplier: charge a single multiple of the current price, that is directly proportional to how much time you save the customer.

There are numerous industries based almost entirely on the value of scarcity: art, antiques, oil, collectable records, autographs, land, and many more. Some of these values are entirely intrinsic, such as modern art, and have little relation to their utility; others, such as oil, are valuable because they are both scarce and useful.

Evidently, something doesn’t automatically acquire value by being unique or scarce: there must also be an element of demand.

On the web, we can interpret scarcity in a number of ways.

First, because we use unique textual identifiers (‘names’) to access services, there is value to the more memorable – and hence scarce – names. Currently, this mostly applies to domain names, but this practice is also filtering down to other services, such as Twitter user names.

The second method, as with oil in some regards, is to purposefully limit the supply to artificially inflate the value. Online, this model usually takes the guise of a limited-membership website, such as Beautiful People – an online dating service where membership applications are vetted by the community – or by invite-only services such as The Deck.

There are currently over 80 million active .com domain names. A standard .com name can be registered for around $10, but as the graph on the left shows, scarce memorable names – such as sex.com and business.com – have been sold for many millions of dollars: up to a million times more than the standard price.

The graph shows the price of precious metals relative to their rarity, in terms of quantities on the planet: their mass abundance. Silver occupies the bottom-left of the graph, with Rhodium in the top-right.

Although a relationship does exist between supply, demand and acceptable price, it is difficult to generalize the price multiplier/ratio of scarcity and additional perceived value. Nonetheless, it is a useful model to consider when identifying possible pricing structures and buzz generation, e.g. invite-only.

We pay for comfort in a variety of ways. It influences the types of hotel we will –or won’t – stay at, the optional extras we choose for our car, and the size of monitor we use for our computer.

Digitally, comfort comes in a number of forms.

Advertising is often purposefully inserted to cause us discomfort (“to get our attention”), such as interstitial pop-overs that require manual dismissal, or forced interruptions that periodically disrupt us. Nagware and Spotify Premium are two related examples that charge for the comfort of removing annoyances.

It could also be argued that usability constitutes a form of comfort; it’s not just the efficiency gains of usable software that increases its value (as per the Time category discussed earlier), but also the more pleasurable, comfortable experience that ensues.

Apart from a few minor perks, the only perceivable difference between the First Class and Standard Class train ticket from London to Cardiff is the comfort: larger seats, personal space, and less chance of screaming children. For this comfort, you pay a 3x premium on the standard price.

A return flight from London to New York offers a range of seating options. Again, apart from a few minor perks, the only difference is the comfort: you still leave and arrive at the same time.

Depending on how much additional comfort you require, you can pay a 2x premium, a 5x premium, or even a 14x premium for the First Class option.

A major UK retailer stocks a variety of pillows of a similar size, with the price of the most expensive (soft goose down) being 27x the price of the cheapest (basic fibre filling).

Clearly there is an ability to charge a premium for comfort, however you intend on interpreting it. The data above doesn’t show, however, what percentage of people actually chooses the more luxurious option, or the ratio of availability between the standard and luxury versions.

Also note that in these examples, the same provider is making a range of options available, from the low-comfort to high-comfort – though there are other examples, such as five star hotels, that only cater to the high-end.

Consciously or subconsciously, many of us spend money on our image, or purchases that raise our self-esteem. These may include brand-name clothing, make-up, tanning sessions, aftershave, hair-cuts, diet books, plastic surgery, or even larger status items such as cars.

Online, if we ignore the myriad flat-stomach/white-teeth websites, the most prominent examples of fulfilling this need are retail stores, fashion/women’s magazines/blogs (e.g. Donna and Navaz) or ‘rating’ sites like Rate My Prom Dress and Hot or Not.

The graph plots the typical price of a fashion magazine, lipstick, perfume, a ladies haircut, teeth whitening and breast augmentation, against a subjective ‘impact’ that each has on the perceived image of a person, rated on a 0 (low) to 5 (high) scale.

The example data implies an exponential relationship between the potential impact on a person’s image, and the acceptable price.

As a caveat, note that the data doesn’t take into account the longevity of each product: a breast augmentation operation not only has a higher immediate impact on one’s perceived image than reading a fashion magazine, but it also has a longer impact. This is worth considering when pricing self-image services.

This is related to the previous category of desirability and self-image, but a separate category that people will pay for: the basic human need for relationships – friends, family, communities, partners – and sexual intimacy/satisfaction.

Relationships and Sex could be divided into separate categories. However, as many websites – dating, social networking, etc – can be used by people seeking either a relationship or just sex, we’ll treat them as a single category. It could even be argued that some people might not realise which it is they are really looking for.

On the web, these range from generic social networking sites, through online dating services of all types, to niche sex groups and pornography.

This is a difficult category to identify a trend or pattern in prices: most social networks are free, dating websites average about $15-$20 per month, and the oldest profession in the world offers sexual gratification for hundreds or thousands of dollars, depending on a variety of factors.

A trend we may be able to infer from this is that there is some correlation between price and the probability of intimacy.

Our physiological needs – nutrition, safety, health – are our highest priority needs, but ones that we often take for granted, especially in developed nations.

Web resources that fulfill these needs include online grocery shopping, recipe websites, online pharmacies, health resources such as NHS Direct, and the occasional map that allows us to browse the crime rates of an area that we may be investigating for a home.

A pricing guide is difficult to extract due to the diversity of services and products covered under this topic, but like the Belonging category, we can identify a generic pattern.

There appears to be correlation between the effectiveness/impact of a product/service and it’s price: from the single digit prices of vitamins that may not have a visible effect, to four, five or six digit prices for life-saving operations.

In western culture, financial security equals freedom, though ironically it is something that we dedicate the majority of our lives to. Even if we don’t seek colossal wealth, many of us still feel the need to achieve in our status or career.

As well as the more obvious wealth-creation/management services – banking, trading stocks, job searches, business services – this category also covers any service that we may use to potentially save or create wealth in the short or long term. This includes vouchers and coupons, blogs (e.g. those who are blogging with the hope of monetization or being ‘discovered’), training, gambling, and any online resources we may use to informally educate ourselves on our chosen career, e.g. as a web developer, this may include technology blogs.

People are willing to pay £1 for a lottery ticket, over which they have no control of the outcome (choosing numbers does not control the outcome). They can also spend £10s on trading stocks (some control), £100s on personal development/training (which gives them more control) or £1000s investing in a small company or new business project (with almost absolute control of the outcome).

It seems that when spending money on services that are related to personal wealth and success, we evaluate them not only the probability that the investment will make a return, but also the amount of control we have over the outcome. The higher the probability and control, the more we’re willing to pay/invest.

This broad category covers a range of topics, from the alleviation of temporary boredom, through to our ultimate desire for happiness. These are not physiological needs that govern our ongoing existence, but rather the need for emotional satisfaction – perhaps one of our defining attributes as a species, exhibited as hedonism it its most extreme case.

Many popular online destinations fall under this category, including travel retailers, video and audio websites, online games, and humorous magazines.

The graph plots typical prices against duration (factoring in replay/reuse) for various forms of entertainment: an individual mp3 download, an album, DVD, rock concert, video game, book and week-long vacation.

These average out at about $5 per hour.

The $5 per-hour average may explain the success of the $0.99 price tier for iPhone games. A large number of publishers create a wide selection of games, which due to the volume and platform design, cannot be effectively tested or researched before purchase. Therefore a $0.99 price-point may subconsciously register as “even if this game isn’t good, I only have to get 10-12 minutes of game play from it to be cost-effective”, which equates to playing it once or twice.

The final need that we’ll identify is that of creativity and desire for knowledge. Sometimes this is tied to a deeper desire for wealth or success, but often the purchase of a musical instrument, foreign language dictionary or painting set will be simply for the pleasure of creating, expressing or learning.

A number of online services cater to this need, including art/photography websites, blogging, news sources, and audio/visual creative tools. As mentioned, it is usually impossible to separate these as websites that specifically target the creative need, as they may also feed our need for belonging (community), potential wealth/career, or entertainment.

This category is difficult to generalize. Many online resources are free, yet people will pay hundreds or thousands of dollars for musical instruments, photography equipment, and other tools that allow them to experiment and express their creativity.

We subjectively classified the top 100 websites in the US into these categories. Each website was only placed into a single category, and the sites were classified based on the content/service they offered, not on how they are monetizing the site. Because of these limitations (which mean, for example, that banking sites have been classified as ‘wealth’ but not ‘time’, whereas they clearly fulfil both needs), you should be wary of inferring too much from the results.

As a general rule, information portals and search engines were not included, travel/maps/post were classified as ‘time saving’, weather as ‘comfort’, all fashion retailers as ‘esteem’, food as ‘survival’, banks and business services as ‘wealth’ and most news sources as ‘creativity/learning’ (except where they were overwhelmingly about wealth/business, etc).

This article discusses some of the main needs that consumers are willing to pay for.  If you’re planning a web app, it’s always worth reminding yourself what the base need is that you’re satisfying, and how much value it is likely to have with the user: a successful business/service should neither over nor under-value itself.

You should be able to answer “Yes” to at least one of these questions:

• Does my app allow the user to do something more quickly?
• Does my app allow the user to get something more quickly?
• Does my app give the user access to something scarce?
• Does my app provide something sought-after to a select number of people?
• Would people still use my app if I purposefully added occasional annoyances?
• Does my app provide a superior user experience to another successful app?
• Does my app improve the user’s physical comfort?
• Does my app make the user feel better about themselves or their image?
• Does my app allow the user to form or retain meaningful relationships with others?
• Does my app allow the user to potentially have sexual satisfaction?
• Does my app improve the health of the user?
• Does my app improve the physical safety of the user?
• Does my app give the user the opportunity to make money?
• Does my app give the user the opportunity to save money?
• Does my app improve the career prospects of the user?
• Does my app provide a service that the user needs to perform their job?
• Does my app allow the user to perform their job better?
• Does my app improve the perceived status of the user?
• Does my app provide entertainment for the user?
• Does my app allow the user to experience something emotional?
• Does my app allow the user to express their creativity?
• Does my app provide the user with relevant knowledge or information?

I highly recommend reading Kevin Kelly’s brilliant Better Than Free article, where he discusses the concept of “Generatives”: non-copyable qualities that retain value in a digital age. Also check out the predecessor to this article: Monetizing Your Web App: Business Model Options, which covers topics including advertising, subscriptions, and one-off payments.

If you’re looking for something a bit more philosophical, read (or, more likely, re-read) Maslow’s Hierarchy of Needs, or one of the many alternatives to his theory.

And finally, if you have any suggestions, improvements or other thoughts, please let me know in the comments below or via @zambonini on Twitter.