Tuesday, December 25, 2007

How to create value using the Internet

I learnt of a convenient photo-printing service offered by Media Markt, a German version of Best-Buy. I know there are plenty of these services around now. But lets take the Media Markt service as an example.

This service installs an ActiveX plug-in in your (IE) browser that lets the user browse and upload pictures to Media Markt servers, along with specifying options for print photo sizes, number of copies, etc. Given that a small (10 x 15) picture costs 9 Euro cents, and also given that these sort of photo-printing services are pretty popular in Berlin, lets try to do a simple analysis of how value is created, and what is the inflection point of value at which users are willing to actually spend any real money on the Internet.

First, lets look at it from a user's point of view. Consider the "do-it-yourself" cost of printing pictures (based partly on this post on Slate)
  1. Color photo printer (e.g. Canon Pixma) = €100
  2. Cost per print (paper, ink) = 20 Euro cents
Power User
Let us amortize this over 3 years of the typical lifespan of the printer for a power user, i.e., more than the casual photo printer. So lets say the user fills up his 1GB camera memory 12 times a year (printing 12 batches of pictures) , with each fill comprising 200 pictures.

Total pictures printed of 3 years = 3 * 12 * 200 = 7200
Total cost = CAPEX + OPEX = 100 + 0.20 * 7200 = 100 + 1440 = €1540.

Causal User
For the casual user, who may print 100 pictures in a year in 2 batches, we have:

Total pictures printed of 3 years = 3 * 100 = 300
Total cost = CAPEX + OPEX = 100 + 0.20 * 300 = 100 + 60 = €160.

The biggest conclusion for the power user is - find a way to cut the OPEX, fast!

Now, lets look at the option of getting the photos printed online. Before the calculation, lets first admit that it is not as convenient to print pictures online as it is at home because
  1. Pictures take time and money to ship
  2. ActiveX control (Can't they do it in Javascript :-) ), in your browser, learning curve of operating the service
  3. PrIvAcy issues for all those racy pictures of what you did at the New Year's party
So for the power user we have
Total cost = 0.09*7200 + Postage ( 36 batches @ Euro 5 each) = 648 + 180 = €828.

And for the casual user
Total cost = 0.09*300 + Postage ( 6 batches @ Euro 5 each) = 27 + 30 = € 57.

The question the user needs to ask is, is the the cost saving of online photo printing (1540-828 = €712 and 160-57 = €103, over 3 years) worth the inconveniences I listed above?

In pricing online services, companies like Media Markt need to ask, is the cost benefit for the user large enough after factoring in the inconvenienceof "online" compared to the "do-it-yourself" approach?

Let me hazard a generalization here - entrepreneurs who want to know if their web-services business idea will be successful need to do the back-of-envelope calculation such as the example above.

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