Common Losses

There is a weird sort of problem that comes up over and over again, any time you see a system where you pay some flat amount for an unlimited amount of a given service.

Here’s the problem: If the service itself is opt-in, then the only people who will buy it will be people who believe they’ll be getting more than the value of what they paid.

Want an example? Okay, a while ago there was this thing called “MoviePass” (as of right now it’s actually coming back, but you can research that yourself if you like). You paid a flat monthly fee and could see an unlimited number of movies. The problem is that the only people who would buy such a thing are people who expected to see enough movies that they’re paying less if they buy the pass.

Predictably, that meant that the MoviePass people started losing money. But the thing is, you can’t solve that problem by raising the price!

Let’s say a movie costs $10, and a MoviePass costs $25. No one who sees 2 or fewer movies a month would buy it, and anyone who sees 3 or more movies a month is getting a great deal (and costing the company money!) if they do. So uh oh, MoviePass raises the price to $45. But all that changes is that the people who see 3 or 4 movies a month drop their subscription and only people who see 5+ movies a month use it, so you still have the same problem.

There are only two ways a system that has everyone pay the same no matter how much they use can work. One is if it’s not optional, so everyone has to buy a MoviePass even if they see no movies ever, and then the MoviePass people can price it higher than the average cost. On average, everyone is getting ripped off, but a few people get enough out of it that they benefit at the expense of everyone else. Or, if the system is voluntary/opt-in still, you can get by for a long time by being really obscure about the costs, pricing, quality of service, etc. that people are getting. So if you think about an all-you-can-eat buffet, some people eat more than others, but almost no one knows the exact cost of the food they’re eating, etc.

(Medical insurance finds a way to do BOTH, which is why it remains so lucrative, and so terrible for most people.)

I’m always very wary of any service offered to me at a flat rate regardless of my usage. Either the service is going to be ripping me off in some way, or they’re not – and then they’ll go out of business.