Last week we saw the launch of Tipit.to, the Dutch startup by Reinier, Jeroen and Alper. Tipit is a webservice that allows anyone to give a small tip (starting at 1 cent) to anyone. Tips are aggregated before payed and a similar system is used for payout. This makes it way more easier to pay a tip using Tipit than having to go through the PayPal process for every 10 cents you want to pay someone.

Why tips?

So why would you leave tips? Well honestly there are numerous reasons, but I always like to think about it as a good anti-advertisement measure. Most sites show Google Ads simply because the income they get from it pay for the server bills, which doesn’t mean they feel happy to have to show their users advertisement. Instead, a Tipit button on a website could allow users to make simple and easy donations, eliminating the need of advertisement.

Creative uses

There are obviously other reasons to have a tipjar besides preventing advertisements, and since the launch last week we have already seen a few uses that were pretty creative. The most notable is Lauren, who’s house burned down and is now looking for some money to get his life back on track (photos and videos here, or tip him here).

How to join?

Setting up your own tipjar is pretty easy, just go to Tipit.to, sign up, create a tipjar, and place the nice button on your site. In contrary to other services like Paypal they don’t need an awful lot of info about you before you can set up an account, and in contrary to services like TipJoy they pay out real money.

Is tipping the future?

I personally think we will see more and more tipping in the future. Tipping is the logical extend of the currently increased social activity on the web. Recent research shows that people are clicking less and less on advertisements and honestly I think we all hate to see them around anyway. Add on top of this that many people are starting to feel more and more invested in the sites they use day in and day out (see Flickr users vs the Yahoo/MS news), and tipping is definitely going to be hot in 2008.

If you’ve ever had Economics 101, and even if you haven’t, you’ve probably heard about this ‘puzzle’ of sorts:

You and a stranger are offered 10 dollars. In order to receive it, you must propose a way to divide up this 10 dollars between you and the stranger. If the stranger rejects your division proposal, neither of you gets anything, otherwise it is divided as you directed. You won’t meet this stranger again and this game is only played once. What division do you propose?

Economists use this to explain the concept of economic rationality. Rationally speaking, the economically correct division is 9.99 for you, and 0.01 for the stranger. The stranger, if economically rational, will accept, because 1 cent is more than 0 cents. And thus, as you are also economically rational, you want to maximize your gains, so that’s what you propose.

These same economists will call Radiohead’s offering of their new album, In Rainbows, for ‘free’ (pay whatever you think it’s worth, including nothing), a sucker’s proposal. Clearly everyone would pay nothing — you get the same album regardless of how much you pay. And yet Radiohead is reported to have made to the tune of 10 million USD inside of a month. This wasn’t even expected; Radiohead’s bold move to release the album in this way was designed primarily to sell out concerts (which it has, all 21 of them). One might claim listeners are paying to ensure Radiohead will continue to make music, but Radiohead is not the kind of group that is pressed for cash, and I think they’ll keep making music even if they had to pay to do so. Thus, a rational economic human being truly has absolutely no reason to pay for this album.

So, how’s it work then? Are there are 10 million USD’s worth of idiots on this planet?

No. Human decency is simply an effective motivator. These album sales aren’t the first time the economists were wrong about humanity’s willingness to pay money just to be fair, instead of to optimize personal gain.

Reports that record labels are reconsidering this model abound, but I don’t think the record industry can afford it: This distribution model doesn’t NEED a record label. You can just record your complete song someplace, and pay some serious hosting provider to take care of distribution, and that’s all you need to do. Costs of renting studio time and bandwidth bills don’t amount to enough to require the vast pockets of a record label. The record industry’s clout with the radio can still help launch a successful music career. However, I don’t know about you, but I never listen to radio anymore. I might have a look at the iTunes top 100 from time to time, and I check Last.fm for song suggestions.

And thus we’ve come full circle, because in a world where music is distributed on a ‘pay what you think is fair’ model, with distributed recommendation engines, is economically far more efficient. It cuts out large swathes of middle men. Giving radiohead 10 million dollars was a smart move after all!