April 01, 2009

Why Lowering Transaction Costs is the Best Thing You Can Do

Just some quick math/thinking -

I was just thinking about wealth distribution, wealthy people and fair capitalism. By fair capitalism, I mean that it should be fair for someone to create something that everyone wanted, and receive fair compensation for the item when distributed to thousands and/or millions of customers. You get strange thoughts when you try to mix ideas of fairness (socialism) with capitalist distribution methods.

There are a great many problems that arise from industrialism and globalization in a capitalist society. A few that apply are the cost of distribution to a mass market, the costs of marketing to that market, and the cost of doing business along the way. The Internet has helped immensely with these things. Marketing to millions has a cost as low as $4.95 a month for a hosting account, $4.95 a year for a domain name and a few hours of someone's time to make a web page. With electronic property, or intelectual property that can be easily digitally distributed and created, the costs again are quite low.

The remaining problem is the cost of doing business. Let's say that I created some intellectual property(IP) that I wanted to sell on the Internet today. What is fair value for something that takes me 40 hours to create? Is it $2,000? After all, at that rate, I'm making $100,000 a year if I can keep up that pace. Let's say that a fair value of my IP is $10,000 - that should be a rather non-arguable round number for both artists and socialists. To keep a good standard of living in the middle of the country as such an artist, I would have to work very hard for 5 weeks per year until I die (inflation notwithstanding). If I wanted things like retirement savings or luxury items, I'd have to work more weeks per year during my working years.

Ok, so with a base value of $10,000 - if distribution and marketing are essentially free (due to uniqueness and desirability of the IP), how many people can I sell the item to? The global marketplace gives me reach to BILLIONS of people worldwide. If I could leverage desirability vs. cost in such a way that .1% of the people on the planet bought my item, I would only need to collect 1 penny from each of my customers. If the value of the item was 99 cents (say a song) - and I sold it for a penny to 10 million people, I would have $9.9 Million. By selling it for a penny, it would help me get the 10 million customers (globally!).

Herein lies the crux...there's no cost of doing business that would allow me to collect a penny from you. You may have a penny in your pocket, but if you want to send it to me, it's going to cost me transaction fees that will make it disappear. If there were a way, some way, for me to pay a flat fee of, say, $1,000 a year, to collect pennies from people without further transaction costs...I would become one of a myriad of people selling stuff for a penny on the Internet.

Dear Paypal - make it happen....

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