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Thursday, March 08, 2007

The myth that microstock agencies hurt stock photo pricing

I was talking with a photographer friend of mine about why he doesn't sell his own images on his website. His response was, "Who can compete with microstock agencies selling images for $1 each?"

My immediate response was, "I do just fine. In fact, I've raised my prices at the beginning of the year."

And that's when I realized that everyone in the photo business seems to have such a poor understanding of how retail pricing works, that it's because of those misunderstandings that I've been able to raise my prices. Let me explain.

The primary misunderstanding involved here is the assumption that successful stock photography sales boils down to price. While I've said many times in the past that photography is a commodity with infinite supply, this does not mean that all units within this supply chain have equal value, or that all merchants compete solely on price. And that's the main pricing mistake that most photo agencies and individuals make. Before we get into the complicated factors to consider here, let's first start with this basic question: How did microstock agencies come up with the $1 per image scheme in the first place?

I claim that the number is entirely arbitrary, devised through virtually no market research or any kind of scientifically bona fide analysis. As the most simple and basic example, any one of a gazillion studies on retail pricing shows quantifiable and reproducible results that buyers will always respond more favorably to items with prices that end in a 9. Anyone that's in the business of selling stuff knows at least this basic fundamental, so whatever mechanism that came up with the idea of $1 as a price point is immediately subject to scrutiny. A simple google search on these terms yields a plethora of data supporting it. I've combed through such reports for years, but the shortest and most concise paper that can act as a very quick crash course in pricing strategies is this paper from Harvard Business Review, Sept., 2003.

Simply put, if microstock agencies dropped their price by one penny, then statistical research shows that they should realize a 25-50% increase in sales. (This range is based on a number of other factors beyond the scope of this thread, but can be found in similar research studies on the subject.)

But before all you microstock agencies call your web designers and tell them to change the prices from $1 to $.99, the analysis isn't over yet. The next questions are, "Can you do better than $.99? Where's the real sweet spot in pricing images?"

To answer that, we now need to identify some important factors. First, who's the target audience? In this context, it's either "consumers" or "businesses." Price sensitivities are different for each, as is the psychology of marketing in each environment as well. I've been arguing for years that the consumer is playing a much bigger role in both the purchasing and sales of images into the broader economic engine of the photo industry, going directly against the grain of industry trade groups, photography journals, and of course, the stock photo agencies. They all believe that most of the purchasing is done by a fixed domain of companies--usually, large media and advertising companies at that.

The discrepancy between our two beliefs is explained by the fact that none of the groups I mentioned ever does market research outside of the demographic they believe to be the only one that matters, thus leading to a continual cycle of self-affirmation. This same mistake was done by national polling companies in 1944, when they thought the only people who really voted were the rich.

If the buyer for photos were more heavily weighted to consumers, then the proper price points would drift lower, whereas, if buyers were weighted toward businesses, then photos would command higher prices. The drift towards the lower end of the pricing chart would be more evidence to support my claims of who the buyers are, but the fly in the ointment is not so much the demographic of the buyer, but the intended _use_ of the image that the buyer has. It is this middle ground where the use is most likely a form of "business transaction" that helps nudge the scale more towards the business side. This distinction is important because of the enormous implications for understanding pricing models and the psychology of the buyer. That is, if we were talking strictly about a consumer-oriented market of buyers (despite their use of an image being business-related), then pricing really would be based largely on price, because that's how consumers think. Furthermore, we would then look to other similar retailers of consumable digital media for pricing models and guidelines. Say, Apple, who sells music online for $.99/song. (Gee, they must have thought this through. Imagine that.)

But because the use of the image is almost assuredly for business purposes, the perception of value factors in considerably more than it does for the consumer market. This now muddies the waters as for a good basis or reference point from which to build a pricing model.

Considering the "hybrid buyer" who is consumer-minded, but has business-oriented objectives, to establish the perception of value of a product (a photo, in this case), we must look beyond just price. The report cited above discusses the ineffectiveness associated with the diminishing returns of discounted item (buyer perceives less value in the entire line of products), and the ill effects of discounting of higher branded items (perceptions of the quality of a the merchant is reduced). Indeed, there are many other tangible and intangible factors associated with perception of value, and I discuss them rather extensively in one of the chapters of my first book. (You can read that chapter here. Note that the subject of that chapter is "prints," but the principles are the same nonetheless.) Examples include name-brand recognition, comparative and complimentary analysis, and the various effects that marketing itself has on perception of value. Each of these plays into where the tumbling dice may end up for a basis for pricing tiers.

Another important factor involved here is yet another time-tested reality of buyer habits: the effect of pricing on new customers vs. return customers. While many photographers hate (no, despise) the premise of "low-ball" pricing (bidding a job or selling an image below cost) this is an extremely effective method for getting new customers, and the practice is used pervasively in all industries. (The only time it is considered "unfair" is when there are too few competitors for market forces to maintain equilibrium, and one is deliberately trying to monopolize the market and force the other out of business.) Here, however, low-ball pricing is more done to upsell higher-priced items. The delicate balance here is knowing what percentage of your items to price low, and how low to price them. So delicate, it's like balancing a dime on its side. Yet, in my research on microstock price lists, everyone has some degree of pricing tiers based on image size or quantities of purchase, but the lower-priced items are so disproportionate in price (low) and in percentage of inventory (high), that there really is no significant upside to the higher-priced items at all. They're trying to balance this dime using a pair of socks filled with mud. In fact, they are so badly suffering from the ill effects of steep discounts, that they are both ruining their future pricing potential, _and_ failing to retain buyer loyalty.

It could be argued, though unsuccessfully, that companies like Getty, who own both full-service stock and microstock entities, are using the microstock as the loss-leader in order to rope the customer into the higher-priced imagery. While this could be argued as being a good strategy in theory, financial analysis of its earnings reports suggests that their execution leaves much to be desired (putting in doubt that this is, in fact, their strategy).

We haven't yet answered the question on where to pin the proverbial tail on the donkey with respect to the best price point for stock imagery, but we're getting closer. We know the buyer is a hybrid (consumer-business) and is therefore subject to price sensitivity to some degree. The next probing question is, how much does price competitiveness affect the buyer's perception of value--the part that affects the price he's willing to pay despite finding lower prices elsewhere.

This leads to the question: who is really hurt by the microstock pricing models? Many in the industry--like the friend of mine quoted at the beginning of this article, not to mention just about everyone in photo trade magazines and discussion boards--think that microstocks are hurting everyone. But this simplistic observation is not actually supported by any bona fide studies of buyer behavior. My analysis of existing studies on buyer behaviors and the nature of stock photography as a business purchase suggests that the only ones hurt by microstock pricing are the stock agencies themselves, no one else. The skeptic may respond, "who said microstock agencies are suffering? And how do you establish that no one else is being hurt by this?" Both questions have much the same answer.

I'm reminded of a quote by the famous investor Warren Buffet: "You can make a million dollars by investing a billion dollars in an airline."

The reason this quote feels apropos here is because it alludes to the relatively small amount of money that is made from an industry that should make a lot more than it is. For airlines, it's not such an easy problem to solve, but for microstock agencies, it is: simply charge more. The hybrid buyer (the consumer buying photos for business purposes) is not like a traveler shopping for an airline ticket, where he's getting exactly the same item (travel from point A to point B), making it a matter of finding the lowest price. We're all familiar with photo buyers threatening to go to a competitor with a lower price, but this is a negotiation tactic, not necessarily a reality that translates to price vulnerability. If this were really the case, they wouldn't waste the time negotiating--they'd just go. In fact, the time and work involved in finding images is substantial, so if the buyer can find what they want sooner, it's worth paying "some" amount in premium for the simple benefit of not having to keep looking. I'm not suggesting that price isn't important, I'm just establishing the fact that perception of value is based on more than just price alone.

The distribution of the points along the price spectrum represents a classic bell curve: price the product too low, and the perception of value by the buyer is too low; price it too high, and they go elsewhere. The fat part of the curve represents the price point where the number of people who do buy more than offsets the number of people who leave. The classic business school math problem addresses methods for determining this cross-over point. I claim that microstock agencies are far too low based on the total psychology of the patterns of this kind of buyer. If we hypothetically raised the price from $1 to $10 an image (or, better yet, $9.99), there's a ten-fold increase in price, but there will also be a drop-off in buyers. The question is, does it meet the cross-over point where the number of buyers drops off too far, yielding less revenue? More precisely, they would have to lose more than 9 out of 10 buyers to come out worse. Meaning, if only 1 in 10 buyers remain, the agency is making more money than it was before. Will more than 1 in 10 buy an image for $10 if they need it for their business? I'm betting yes. If so,, the next question is, what are people willing to pay for images? Why stop at $10? Why not more?

Indeed, why not more? In fact, a lot more. To illustrate, I cite a New York Times article about how a couple who sold chocolate for Valentine's Day for over $2000 a pound. Not only was this regular chocolate that you could buy in a store for $34 a pound, but the couple sold the unaltered sweets out of their Dallas-based apartment over the web. The amount of chocolate was so minimal--nine-tenths of an ounce--that even though the your $40 purchase didn't buy but a few droplets of the stuff, the ratio of sugar to dollars was enormous. Sure, you get a fancy tin box and some unique packaging, but let's face it, this is about marketing, not product. The pinnacle of this article, as it relates to photography pricing, is summed up as: "the market exists by convincing people they are getting higher quality by paying a premium."

The skeptic may object, "but that's Valentine's Day, a deeply personal gift, and a once-a-year purchase at that. Besides, it's all about marketing."

Oh, and photography is somehow not about marketing? Granted, most photographers are not that good at it, and certainly none of the microstock agencies even attempt to convince buyers to pay a premium for their images, but that doesn't mean that such a market doesn't exist.

This plays right into the discussion about a business-oriented buyer: there's a perception of need that can't be discarded. Whether the people who buy images are office personnel that need it for their employer's brochure, or a realtor in Kansas City, or a volunteer at home making a flier for a local AIDS cycling promotional poster, they are in more "need" of the right image for a valuable use, than they are price sensitive... to a point. If they are willing to pay $1 for the image, my bet is that they're also willing to pay $10 for it. The psychology is simple: it's only $10, and the time involved in finding something else from somewhere else doesn't justify that price difference.

In fact, I'd go further up the scale on how much they'd pay, but of course, this is where the diminishing returns get less predictable. So, I'll just stick with the $10 figure, since we're speaking entirely academically anyway. My premise is that the volume of sales for microstock agencies would not decrease by the same proportion as the price increase, which could yield considerably higher revenues (and profits) than what agencies are currently realizing. Their $1/image price is not only arbitrary, but it's only hurting themselves by virtue of their cutting off far more profit than they need to, and not retaining buyer loyalty. And that's the worst way to hurt yourself. They aren't hurting others, because buyers don't feel enough pain by going somewhere else and paying $10 (instead of $1) for an image. Thus, other agencies are not compelled to follow suit. (Or rather, they shouldn't.)

Again, the skeptic may retort, "But the buyer won't even start out at the site that charges $10. They'll start at the site that charges $1, and where they start is a big advantage." Ah, you're playing right into my hands again! Indeed, most people don't start image searches on an agency's website anyway, but on a general search engine, be it Google, Yahoo, or others. Why? Because the much larger stock agency called "the world" has a much bigger supply of images that the user can go through, and most importantly, there's a perception that search engines rank results in a way that has become reliable (even though ranking quality usually only applies to text-based searches, not images). Still, the growth of images.google.com is clear vindication of the theory: that's where users go first. While some stock sites may claim some high return visitor rate, the sheer volume of worldwide image searches dwarfs any of those numbers. Buyers for images are too fickle to depend on them to start at your site simply because it has the lowest prices.

And all this gets back to the discussion about how they are "hurting themselves." To understand this, we look at the factors involved with repeat buyers vs. new buyers. Lower prices may get some ratio of new buyers, but it's the unintended effects associated with the retention of those buyers. And here's the catch-22: if they stay, you're selling more and more product at severely discounted prices to a customer that should be paying more. If they don't stay, you've lost the entire benefit of the lower prices. So, not only do lower prices not guarantee buyer retention, or that they'll even start there over competition, but the perilous effects of their remaining loyal is almost worse. The entire objective of "low-balling" is to rope the user in so you can upcharge them later. Otherwise, there's no point in doing it. What most companies do is offer the big discounts at sign up, but once in, prices go back to normal. Microstock agencies don't do this, but should. This leaves microstocks in the worst of all worlds.

And this brings me to another data point for how I know $1/images fees aren't hurting the industry: me. Yes, despite the fact that most people see photo rates dropping, I've actually raised my prices. At the end of 2006, I did an analysis of image licensing across the industry, not just on rates, but the nature of how licensees use images. The data suggests that the way agencies across the field are pricing images is simply inefficient. The result of what I've done is a migration away from a per-use pricing model, to that of a "per-pixel" model. A demo can be found here.

By selling based on image resolution, not use, licensing is simpler, easier, faster, and more straightforward. (I still require the licensee to disclose what the use is, but I don't base my price on it.) I can give the end-user the perception of a lower price because they don't need a "high res file" anymore. For example, consider a 3x5" image on a 1/4 page. They only need 1500x1000 pixels (@300dpi), which costs much less than a full-res photo, which is what they used to get (and pay for). While the price-per-sale has dropped, the volume of sales as a result of more efficient pricing has more than made up the difference. (Three month sales figures show a three-fold increase in revenue.) When I measured the dollars I was getting for the number of pixels actually used by the client (rather than what I delivered), I found that my rates actually went up.

Pricing by the pixel has turned out to have many other advantages. For example, most customers used to ask for (and get) images sized at 300dpi. Turns out, few people actually need that much resolution. Most buyers are uneducated about the "300dpi myth," but once I explain it to them (via a help page from the licensing page), they are very happy to buy only the pixels they need. What they ultimately see is a price that initially looked like it was going to be $500, but turns out to be only $100. Sure, some stock agencies might have sold a similar image for $1, or even $10, but then, they didn't find it there, did they? And it's not as though the buyer wasn't aware that they existed.

Alas, this comes to the last important aspect of all this: you (and your images) have to be found in the first place. And here's the big news that isn't really news: being found requires ranking highly in search engines, and you don't achieve that by promoting rock-bottom prices. You have to amass users (photographers and buyers alike) through the organic process of time. People have to discover you, and search engines have to index (and rank) you. Each of these are the byproducts of building good content, having a good user interface, and providing an otherwise beneficial online experience. As a friend of mine once said, "it takes nine months for a woman to make a baby; you can't speed it up by throwing more women at the project." It is the same with websites: you can't speed up the process by trying to artificially boost traffic through inherently ineffective ideas, such as "really low prices." In fact, these lower prices will have a worse impact on the perception of value than any minimal, short-term benefit you may feel you receive.

Anecdotally, I learned long ago that when you price images low, you get a certain class of buyer that requires a huge amount of time with very little payoff. When you're a small company (or, an individual, as I am), then you need to build a business model that produces customers you can handle. I get around 10,000-20,000 unique visitors a day to my site, and there's no way I could do business if I had to deal with the low-dollar buyer, so I couldn't price images at $10/image even if I wanted to. The overhead in customer service would kill me. On the other hand, a large company with staff and infrastructure can. And this is where the danger of perceptions of self can hurt business: just because you can handle that many clients doesn't mean it's a good idea. Sound, fundamental pricing models are what they are, regardless of company size. Size only matters when you want to scale up. I can't scale up, but then, I don't need to.