How Tech Companies Pass Along Costs (or Don't)

Nov 15 2018

Have you ever wondered why you don’t pay for Facebook but you pay a service fee for Grubhub? I did - and I spent a great deal of time thinking about why brings a company to charge or not charge a customer. It can be reprhased as who pays for your value? Facebook covers your server costs, data storage, processing power, etc. Grubhub charges you for the same things. Why the difference?

Why I feel this is important to discuss is that both parties derive non-monetary value from the exchange. It is not like filling out a survey or buying software, both parties get something besides money. So how do you decide who pays between two parties that benefit?

It seems the main driver is intrinsic customer value. This is opposed to securitized customer value. By these terms I mean can the company derive significant non-monetary value from just you alone versus you plus 99 million others?

I have broken this thought experiment up into small case studies that I have put in a table below:

Company Who pays? Customer
Salesforce Customer No The data cannot be sold as it is proprietary and what can be learned and sold is minimal relative to the whole business.
Grubhub Customer No The data is individually worthless. You need either a lot more user data or another company’s data to make it valuable. For example, the fact that you bought a chicken sandwich alone is hard to monetize. But if we see that everyone in Florida is buying them or that you also are a food influencer on Instagram, now it’s worth something.
Codesignal / Codefights Company Yes Codesignal matches interviewees with employers. They get paid thousands when a hire is made so each customer can be extremely valuable.
Facebook Company Yes The data is individually valuable since Facebook knows so much about how you interact, what you like, and really just who you are. Your data can be paired with other company’s data but is not really necessary. You can see this value directly by looking at the value add from Facebook’s Advertiser platform.
Google Maps Company Yes Your maps data alone is not that valuable. Securitized it is insanely valuable because it is hard data to come by in terms of large quantities and value. However, the customer is more than that because it is a part of the Google Suite. With that in mind, keeping the consumer a part of this ecosystem is very valuable especially because of ads.
Captcha Company Yes Keep in mind, the customer is not you. It is the business that puts the captcha code on the platform. You almost receive disutility from Captcha which is a good way to realize you are no the end consumer. It is primarily to protect the companies. On this note, since each customer provides thousands of users to Captcha’s product, they are very valuable. Why? Because Captcha uses this data to train OCR, vision-based artificial intelligence in cars, and much more.
AWS Hybrid Maybe This one is a little different as you can pay for AWS but there is a free tier. The reason is you are not necessarily valuable to AWS. This is because AWS uses your data to improve the system which is used internally. So your data makes their operations better. However, you are a small drop in the ocean of data. The other value add is if you start a company or go to a company and you have used this in the past, you may start using AWS there. Then you are of high-value because of the relationship. So it is something of a hybrid value which is why you sometimes pay sometimes don’t.

Why is any of this important? It signals that companies which can derive significant value from a customer, should not bite the hand that feeds them by charging them. Also the funnel of incomming customers will likely be much greater than if there was a fee associated with using X service.

I personally found these mini case studies interesting to show how these companies can avoid charging customers. I hope you do too.