The Rise of the Pay-As-You-Go Pricing Model and Its Transformative Power in Business

Source: AI generated image (Dall-e)

The “pay-per-use” or “pay-as-you-go” pricing model allows customers to pay for a product or service based on their actual usage, rather than paying a fixed amount periodically or a price for a bundle of products or services that are not always used. For customers, it is an attractive offer because the initial price is usually low but easily adaptable to individual needs.

The “pay-as-you-go” model adjusts the cost to the actual consumption, offering low initial prices and adaptability to individual needs.

Application Cases

The most common examples of pay-per-use are associated with SaaS (Software-as-a-Service) like Amazon Web Services (AWS) or Google Cloud, where different metrics are used to determine the price to be charged for one functionality or another, for example, storage is charged according to the amount of megabytes of hard disk space required, bandwidth according to the transfer rate, etc. However, it’s not only SaaS that can be charged in this way. More and more companies and brands are using this pricing model.

A notable example of a company using this model is Winterhalter, which offers dishwasher machines for restaurants under the “Pay-per-Wash” scheme. This option eliminates the need for initial investments by restaurants, as there are no initial costs. Customers pre-purchase washes through a web portal and reload as necessary, with the additional benefit that the equipment does not generate costs during periods of inactivity. Additionally, there is an accounting benefit since if purchased in the traditional way, an asset would be acquired, while paying per wash acquires an expense, which is not strictly “a fixed expense” because it grows or decreases according to the level of use.

In the market, two possible moments to pay for the use are also identified: prepaid and postpaid. In the first case, Mowiz, a parking payment startup, the payment per use is made in advance as balance must be previously added to a virtual wallet and its balance is discounted as the service is used until it runs out and must be recharged again. For the case of postpaid, other companies charge after the product or service has been consumed, more common with utility companies like water or energy, and a more recent example is Michelin tires with their “pay-by-the-mile” model designed for companies with transport fleets.

Pay-as-you-go has multiple benefits as well as challenges for companies and brands that dare to implement it.

Benefits of Pay-as-you-go Princig

The main benefits of this pricing modality can be mentioned as:

  • Attractive to new segments. Some price-sensitive customer segments are attracted to a product or service that was previously inaccessible to them. The shift to pay-per-use now allows them to risk less, as in low-cost airlines, where you only pay for what you are really using and any aspect of value to the customer can be charged additionally, such as snacks on board or the possibility of sitting closer to the entrance.
  • Alignment between price and use. For services or products in B2B markets, pay-per-use is ideal as it makes resource use much more efficient, especially for companies that are just starting and prefer volume discounts as their operations scale up.
  • Flexibility. Customers see in pay-per-use a model more adjusted to their needs and seasonality. For example, imagine the possibility of paying for an air conditioning unit according to its use, paying more in the summer months and less in the winter months instead of having to make a very high initial outlay.

Challenges of Pay-as-you-go Pricing

In relation to the challenges of this Pricing modality, it is worth mentioning:

  • Difficult to establish willingness to pay for each benefit or functionality. Most companies are not clear on how much they can charge for each functionality of their product or service, nor the size of the segments that prefer one functionality over another when exposed to pay-per-use pricing schemes. However, this challenge can be overcome with market research techniques such as conjoint analysis (or trade-off analysis) that allows isolating each attribute and its perceived value to determine the price to charge.
  • Lower predictability of revenue. Companies that use pay-per-use are exposed to sudden changes in the usage patterns of their current customers. For example, it is easier to predict what the income from selling 1,000 air conditioners will be, than to know what their level of use will be in times when the weather varies so much. This, however, can be compensated with new customers who feel they can transfer that uncertainty to the service provider, before “equipment seller.”
  • High investments in technology. Pay-per-use supposes breaking down the value proposition into its individual attributes and then being able to measure the use of each one. This results in the need to have more complex information systems to measure use, bill, and collect it.

Recommendations for Implementing Pay-as-you-go Pricing

As you can see, while this pricing tactic is not without challenges, it is ultimately possible to overcome them to deliver and capture more value.

Here are some additional recommendations:

  • Choose utilization metrics aligned with how your customers perceive value, like Metromile, an insurance brand that charges by the mile driven instead of the traditional model of charging per year.
  • Offer combos and packages that incentivize frequent consumers (heavy users) with savings that reward their loyalty. Automate measurement, billing, and collection. Use the power of information to add more value.
  • Allow customers to know their consumption patterns and how these are projected into the future, or for example, if your product or service has an impact on their health, facilitate the connection of their data with monitoring apps.
  • Do it soon. If you are already imagining how you could charge based in consumption in your business and it seems technically viable, it is most likely that another company is already working on its implementation.

Conclusion

In conclusion, the ‘pay-as-you-go’ model not only represents a natural evolution towards a more digitalized and customer-centered economy but also offers significant opportunities for companies looking to innovate in their pricing strategies. However, its implementation involves challenges that require careful consideration and adaptation.

I would like to know your opinion on this pricing model and how you think it could impact your sector or your experience as a consumer. Have you had experiences with ‘pay-as-you-go’ that you would like to share? Do you see potential in this model for your business? I invite you to leave your comments and join the conversation about the future of pricing in the current market.

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