Ripoff or bargain?
Imagine a horrible world where the only internet connection (laptop or phone) is from the inflight wifi beaming down from Southwest flights criss-crossing overhead – basically dialup. Then one day Google Fiber announces that 2Gbps fiber is coming to your neighborhood.
What’s the most you would be willing to pay for gigabit speeds?
- $100 a month?
- $500 a month?
- $3,000 a month?
When fiber got to my neighborhood in Austin and my download speeds jumped to 1.75Gbps for just $100/month, I felt like I was ripping off Google. That gap between what it costs vs what I'd be willing to pay aka my “consumer surplus” is enormous for fiber.
That got me thinking about how much I'd be willing to pay for other product categories if the alternative was to downgrade out of the category entirely to a "shitty substitute". If my only alternative was a flip phone, how much would I pay for an iPhone?
We can chart this thought experiment onto a Rippoff-Bargain continuum by calculating the ratio of what a product actually costs vs willingness to pay.
| Product | Shitty substitute | Willing to pay | Actual cost | Ratio |
|---|---|---|---|---|
| Google Fiber | Southwest’s dialup wifi | $2,000/mo | $100/mo | 20 |
| Figma | Photoshop 3.0 | $150/mo | $10/mo | 15 |
| Jeep | E-bike/horse | $5,000/mo | $504/mo | 9.9 |
| iPhone 14 | Nokia 3310 | $6,000 | $799 | 7.5 |
| 72” HDTV | 30” CRT TV | $4,000 | $1,000 | 4 |
| Contact lenses | Glasses | $1,000/yr | $500/yr | 2 |
| Garmin Forerunner 935 | Basic GPS watch | $400 | $299 | 1.3 |
| Carta | Excel | $2,500/yr | $8,000/yr | 0.3 |
Many of the enterprise SAAS tools I evaluate for purchase end up with a ratio below 1.0 and thus aren't purchased, because the "shitty substitute" is still pretty good.
PS - To the lovely people at Southwest Airlines, when I fly from Austin to Las Vegas for $198 instead of driving across West Texas, I sure do appreciate all that consumer surplus.