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Why Online “Tip Jar”-Style Payment Systems Don’t Work

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Flattr, the online-payment startup founded by Peter Sunde of The Pirate Bay, said Tuesday it’s launching the ability to pay — or “flattr” — people using their Twitter username. But as we pointed out in our post on the news, the odds of this kind of “tip jar”-style micropayment system actually taking off are astronomically low. So why don’t online tip jars work? Ivan Kirigin, who founded and then shut down a tip-jar startup called Tipjoy, has some theories about that. One is that getting people to pay for things (such as content) that they aren’t already used to paying for is a very difficult thing to do — a point media companies looking at paywalls and other similar schemes might want to consider.

Although Kirigin says Flattr may have a leg up on similar attempts because of its plan to leverage Twitter — something Twitter is apparently interested in helping with, if a recent tweet from Twitter Director of Platform Ryan Sarver is any guide — the former Tipjoy founder says there are other flaws in the model. Among them, he says:

Twitter is an inappropriate platform for direct commerce [because] it is an information network.

In other words, says Kirigin, it makes sense to use Twitter to allow users to publicize that they have donated to someone using Flattr, but it doesn’t necessarily follow that the payment itself should take place on Twitter or via the Twitter network. This isn’t necessarily a fatal flaw to Flattr’s idea, but it’s an interesting point. The Tipjoy founder also says peer-to-peer payment is a lot smaller market than many people seem to think it is:

Roughly speaking, think of commerce as two orders of magnitude more common than transactions to non-profits. Similarly non-profits are an order of magnitude more common than P2P transactions.

But one of the biggest challenges for Flattr or any other system, according to Kirigin (who now works at Dropbox), is that “they are monetizing content that people don’t currently pay for.” And during a discussion about “tip jar”-style services on Twitter on Tuesday, the founder of another Twitter-based payment service called Twitpay expressed a similar view. Michael Ivey — whose startup has gotten investment from Google Chairman Eric Schmidt and is now focused primarily on appealing to non-profits and social-gaming companies — said that “monetizing content that people don’t currently pay for may be the hardest thing for a company to pull off.”

There’s a cautionary tale there for media companies trying to implement revenue-generating schemes such as paywalls and selling apps. Rightly or wrongly, news and related content from publishing entities has been free online for at least a decade now, and longer in some cases. Getting people to pay for that content even in a small way is likely to be just as difficult as getting them to use an online tip jar.

So then why are lots of people willing to tip waitresses or musicians who play in the subway, but are apparently unwilling to use online tip-jar services? Shouldn’t there be more tipping online because it’s so easy to do? Not necessarily, says Ivey. There’s one thing missing online that exists in the real world, and that’s the social pressure to tip. If you don’t tip or throw money to a musician, you feel bad, and the person you didn’t tip is looking right at you. Online, there’s no risk of that kind of awkwardness. Plus, you know you’re going to get the content for free anyway.

It’s possible Flattr could overcome these kinds of hurdles, and tipping people via Twitter could become a new social norm, just like tipping waitresses on your credit card. But we have a long way to go before that future arrives.

Post and thumbnail photos courtesy of Flickr user Dave Dugdale

19 Responses to “Why Online “Tip Jar”-Style Payment Systems Don’t Work”

  1. Without defining success it’s going to be difficult to determine how Flattr won’t work. For me it’s already a huge success because it allows me to express my appreciation for content authors. I hate ads and use AdblockPlus to create a browsing environment that isn’t stupid and humiliating. Flattr lets me pay back. I’ve been using it since it launched and I’m very impressed with how well it works and how quickly it’s growing.

  2. Mathew,

    I am so glad that you liked my Flickr photo so much that you included it on this page about tip jars.

    I enjoy when people use my photos that I work hard on, but as I noted on Flickr below each photo I let people use my photos on the condition that they provide me credit to my site. Please add my link when you can.

    Dave Dugdale

  3. Yacko

    People will pay. Whether Flattr goes flat won’t be for that reason. It will be whether they make the process friendly.

    There are two obstacles:

    1. The service must be seamless and ubiquitous and not be cumbersome. Anything that requires special sign-ins, special web sites will never work. If every micropay service were different that’s fragmentation. Why an outfit like DISQUS can’t move in this direction I don’t know. You can comment on an article, you can punch a like button, but you can’t pay a tip. And it has to be secure, not for the pennies you will spend that day, but for the link to the credit or debit card that backs it. No one is going to trust a service with credit or a debit card that mainlines to a bank account just to disperse $2 a day. Especially now, thank you Sony.

    2. There has to be a way to move payments as low as pennies efficiently. Not that all transactions are that low, but without beggar level coin, a service will not have oomph. People may tip well in a restaurant but the Internet tip will be 1/100th. Doesn’t mean you couldn’t also purchase music and video and software at higher amounts, but it has to scale down to even a single penny for money transfer service like this to gain traction. I might be willing to throw a buck or two a day among the 200 articles I skim a day. Many will get zero, a couple might get a quarter and the rest it is going to be pennies.

    Forget about growing fast. If an existing entity can put something together with a couple of hundred million users from day one and meet the above two observations, then we have something.

  4. With regard to news sites and content on the web, there is also a behavioral element to why people don’t want to pay. Even if is a very small amount, ie a few cents, people don’t want to make a decision every few minutes while they’re consuming content about whether to pay or not. This is also one reason why micropayments haven’t taken off.

    • Yes, this is one of the things Clay Shirky mentioned in something he wrote about micropayments years ago — the “social friction” of having to make those decisions over and over, even for small amounts.

    • @Yacko, I think it’s the point in the consumption cycle when you leave the tip that’s very important. Making the decision to pay (or being forced to in the case of paywalls) before you consume causes people to go into purchase-mode, even for small amounts of money. But I find it pretty easy and low-key using TipTheWeb to tip a buch of stuff right after I consume it, and not disrupt my normal browsing flow:

  5. Social media cognoscenti “know” how people tip in their circles – but as today proved, what is “obvious” social decorum to one is viewed as not-so-classy to another.

    Some Asian people don’t tip. At all.

    Other people don’t like giving out their credit cards. Every story like Sony Playstation feeds that fire. And by extension, many people simply don’t do things they aren’t comfortable doing.

    As a retailer, every transaction has a cost. Some costs are obvious. Others, like lost sales when you don’t accept the buyer’s preferred mode of payment, are not obvious unless you actually see what’s happening — not an easy thing for online retailers to do. Some days, it feels like more bricks-and-mortar merchants are comfortable with an also-ran like JCB than they are with Paypal.

    Now – if Paypal managed to find a way to let offline customers pay their bill with Paypal in the store, I think things would turn around. If the NYT could somehow let Starbucks “know” that their subscriber was ordering a coffee, and that SBUX should give them a copy of today’s paper, I think that would feel a little magical. And then, perhaps, the miasma of doubt and uncertainty around online payments might finally start to go away.

  6. henchan

    There are a couple of barriers not mentioned in this article.
    The existence of a third party to the transaction – in this case Flattr – tends to make people behave differently than when doing offline tipping especially w.r.t cash.
    Secondly, up to the point that critical mass is reached, network effect is negative for exchange services. Buyers and sellers both require a subscription.
    Bitcoin completely mitigates the first of these issues and the second could be partially resolved by integration between alternative micro-payment services. For instance, it would be great if I could send and receive Bitcoin, rather than using Paypal for cash in and out of Flattr.

  7. I believe a big part of it is also perceived value. Waitresses give you food, a smile, and those are things that people value. Music is also a ‘higher-value’ product that people value. Good written material that you want to read again and again are also things that people value. Same goes for quality software (would be interesting to see how the donationware project model compares to the presented analogy). Read-once-and-leave messages, as twitter and most news sources offer, don’t fall into that valueadd category, and thus people don’t feel inclined to tip.

  8. Matt,

    I’m so tired of cynical and skeptical articles about flattr comparing it to other failed ventures. The thing that people need to understand that is different about Flattr is that it’s already successful. Flattr is already working, it’s growing rapidly, and it’s bringing in real revenues without advertising for emerging creatives and traditional media as well. Honestly people, were are dealing with Peter Sunde the co-founder of The Pirate Bay one of the largest, most disruptive, and successful websites in the world, oh ye tech writers of little faith…..wake up!

    • Thanks for the comment, Evan — I am certainly willing to believe that Flattr might be able to make this work. I just wanted to point out that lots of smart people have tried, and the odds of success seem low, judging by the history of those efforts.

  9. “So then why are lots of people willing to tip waitresses or musicians who play in the subway, but are apparently unwilling to use online tip-jar services?”

    Aside from the reasons mentioned in the article, you can hand over some cash and not need to hand over a bunch of personal information along with it. Online you either need to enter credit card information, or login to some service so that previously entered credit card information can be obtained to perform the transaction. Whether you care about privacy or not, that’s also an extra step that can be enough to deter people as well.