Brainstorm Tech 2010

Where the Fortune 500 and the innovators meet to shape the future of business. (July 22-24, 2010)

The real reason why consumers won't pay online

July 24, 2010: 1:10 PM ET

Short answer: it's a pain. That's good for Apple and Amazon, but not many others.

Left to right: Living Social's Tim O'Shaughnessy; Gilt's Susan Lyne; Slide's Keith Rabois (Photo: Matt Slaby, Fortune)

Consumers badly want to help buying stuff on the Web. It turns out it's not as easy as we'd think it'd be by 2010.

Gilt Groupe's Canadian customers, for example, run into so many roadblocks using their credit cards to flash-buy couture that Gilt plans to begin offering PayPal (EBAY), says CEO Susan Lyne.

Ning, the Valley startup that creates plug-and-play social networks, recognized that the 20,000 of its 350,000 customers who were paying for its services accounted for 70% of its traffic. That's why, says CEO Jason Rosenthal, Ning recently began shifting to a subscription-only business model. (It previously forced non-paying customers to view advertising.) Rosenthal, who spoke at a breakfast session at the Fortune Brainstorm Tech conference Saturday morning in Aspen, says Ning's goal was to convert 3% to 5% of its users -- a goal it passed in two days. (The education department's Karen Cator said Ning's shift caused such a stink in the education community that the Pearson Foundation offered to pay for the Ning subscriptions of educational outfits who fear they can't afford them.)

Paying, at least for e-commerce, can be tough. For small-ticket items, users are understandably reluctant to enter their credit-card data. They used to be because people were worried about privacy or fraud -- now it's mostly because it's such a pain in the neck. Those keyboard strokes, it seems, have a cost of their own. If you want people to "pay" with their typing labor, you have to make it worth it, notes Keith Rabois of Slide. Nobody expected just a few years ago that users would pay for playing games online, he points out. But they are. Perhaps the lesson is that fun trumps utility.

The keyboard tax can have huge implications on e-commerce. Swipely's Angus Davis notes that right now the very best way to buy something online is through Apple's (AAPL) App Store or on Amazon.com (AMZN) even though those two Goliaths charge upwards of 30% commissions to vendors, versus the 2-3% that credit-card companies charge. The reason? Apple and Amazon already have user's credit cards, eliminating the hassle of forcing a customer to re-enter their data.

There are good new solutions, like Boku and Zong, each of which allow purchasers to enter their mobile phone numbers and have charges apply to their phone bills. Guess why that's not prevalent yet? Mobile carriers take an even bigger cut of the sale than Apple and Amazon. That's cool for a virtual-goods purveyor like Zynga (whose gross margins on a product that costs nothing are 100%) but bad for almost any other merchant.

Note to wireless carriers: You're blowing a huge potential market.

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About This Author
Adam Lashinsky
Adam Lashinsky
Senior Editor at Large, Fortune

Adam Lashinsky is a San Francisco-based editor-at-large for FORTUNE, covering Wall Street and Silicon Valley. Lashinsky joined FORTUNE in 2001, after two years as a contributing columnist. Prior to joining FORTUNE, Lashinsky covered Silicon Valley for TheStreet.com and The San Jose Mercury News. A Chicago native, Lashinsky holds a B.A. in history and political science from the University of Illinois at Urbana-Champaign.

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