Advantages & Disadvantages of Micropayments

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Micropayments involve online commerce transactions for a small amount of money -- usually varying from a few pennies to a few dollars. Businesses are often willing to sell intangible products such as information for a small amount of money. However, the e-commerce challenge is to keep transaction costs low. There are several micropayment models. Each approach has pros and cons that will vary according to the type of business transaction and consumer purchase preferences.

Prepay Model

  • This approach to micropayments often takes the form of a subscription that allows users access for a prescribed period of time or amount of usage. Advance payment examples include newspapers, online games and social media sites. For example, one online social media company allows pre-purchase credits to be used throughout its site and keeps 30 percent of proceeds for providing this service to affiliate businesses such as app developers selling products. Prepay advantages include gift cards for consumers without credit cards and a purchase price that is high enough to cover business transaction costs. Potential disadvantages are the requirement for buyers to pay a lump sum upfront and the need for a sophisticated system by e-commerce businesses to record individual usage and remaining credits.

Postpay Model

  • With the postpay model, several microtransactions are aggregated and charged after they occur. The most visible examples are online music sales with charges after several individual songs are purchased. The postpay model has been effectively combined with the prepay model by some online businesses. For example, one company aggregates micropayments but also offers gift cards for prepayment. Postpay advantages are elimination of the upfront payment requirement in the prepay model and reduction of higher transaction fees by combining several smaller purchases into a larger one. Disadvantages include the need for a workable electronic processing system to aggregate purchases and a practical requirement that permits a single microtransaction to occur when consumers only want to buy one song.

Collaborative Model

  • For online publishers, the most workable micropayment model involves a business collaboration approach linking multiple sites. In most cases, each online publisher does not have sufficient readership volume to support a profitable micropayment system. One publisher, Thomas Baekdal, has named this model the Associated Micro-Payment System because of similarities to the creation of the Associated Press within the news industry. The primary advantage is that many online publishing businesses could receive additional income for written content. For now, a distinct disadvantage of the collaborative model is the challenge of creating a practical system that consumers will accept.

Pay-As-You-Go Model

  • As the name suggests, this form of micropayment involves paying as each transaction occurs. In practical business terms, this method does not work because transaction costs could easily exceed the amount of the sale. For example, if the price to buy an individual article is as little as 3 cents in order to create large-scale demand, the prevailing processing fee of 5 cents plus 5 percent of the transaction will wipe out any potential profits and create an overall loss. The primary advantage of pay-as-you-go is in favor of consumers who end up paying only for what they want. However, a critical disadvantage is that profit-minded businesses are unlikely to support this model because of the possibility of losing money on too many transactions.

References

  • Photo Credit Sergey Nivens/iStock/Getty Images
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