The Business Model Pattern Behind the Shared Economy? Pay per Use!
The Pay-Per-Use (PPU) business model, also referred to as metered services, usage-based pricing model, and consumption-based pricing model, can be defined as a business model that allows the customer to pay a fee as they go. They only pay for what they use, just as the name implies.
With this model, ownership and responsibility remain with the company which creates a consumer-focused model. Customers have full access to all offerings but only pay for what they consume inside of a set amount of time, versus paying with a monthly subscription model.
It is not a new business model pattern or new concept. Most of us are familiar with how our utilities are paid. We don’t own the power lines or telephone poles – we only pay for the wattage or services used over a monthly timeframe. This makes it affordable for us to have electricity wired directly into our homes or businesses.
A pay-per-use business model allows a customer to buy just what is needed without committing to subscription billing.
Benefits of Pay Per Use for the Provider
The Internet of Things (IoT) is data-driven and has made data gathering a part of every business. Pay-per-use gives us a way to capture more data from more people to use in future growth strategies.
The pay-per-use business model allows people to experience your product or service that otherwise would not be able to. This lower entry cost allows for an increased market share, and IoT makes it easier to track usage.
But tracking usage is not the only benefit. You can gain a better understanding of how the users interact with your product or service. Knowing their likes and dislikes directs innovation for improvements, customization, and new offerings.
The ability to gather data from a larger audience allows the provider to maximize profits and gives them the ability to cover fixed and variable costs.
Pay-per-use business models are service-focused instead of a one time sale. This means the provider is focused on customer loyalty and finding ways to satisfy their needs. This is done with value added offers and constant data analysis.
These offers are a way to create a revenue model that locks in customers and maximize revenues over the product life cycle while generating positive cash flow – and using for new customer acquisitions. Using this data allows the provider to broaden offers to new customers.
Example:
If you were a company selling toothpaste, the cost of building a manufacturing facility would far out way the profits from a $3 tube of toothpaste. Instead, you have the option to use a pay-per-use manufacturing facility that fills tubes of product, like yours.
You no longer need to own the machines, nor hire a crew to maintain them. The risk is transferred to the equipment owner. You only pay for the number of toothpaste tubes you need filled. It also reduces the business risk during times of slow demand.
As a business you also rely on outside services, such as Software-as-a-Service. Using PPU for these services allows you to reach ROI in a much shorter span of time.
Benefits of Pay Per Use for the Customer
Not all customers are ready to pay a monthly subscription or make a large one time purchase. Your services may not be scaled for every entry level out there. Pay per use is a more flexible option, especially for new startups or those with unpredictable cash flow.
The risk of ownership is with the company and not the customer. For example, copy machine companies have been using this model since they arrived in the office. You only pay for the number of copies used, and they provide all the maintenance.
Customers also benefit from the customer-centric nature of a pay-per-use model as companies are continuously improving their products or services to gain customer loyalty.
Example:
A specialty cake shop startup takes more than flour and sugar, and the operating budget often does not allow for the hiring of all the team members needed to be successful. However, the team can be outsourced using the pay-per-use model, which can help the shop reach ROI much faster. Some of the services include:
Marketing
Compliance
Financial
IT
Legal
Social Media
PR
More Pay Per Use Examples
The Pay Per Use Business Model Pattern works in many industries. Here are a few you probably know:
Cell Phones – pay as you go plans are available to consumers that own their own phones.
SaaS – pay only what you use, such as Amazon Web Services (aws).
Printing – only pay for the copies you have printed.
Digital Billboards – only pay for the number of impressions you choose.
Online Advertising – you decide how many clicks to pay for.
Shared Mobility - pay for every mile or every minute you use a e-scooter or car, such as ShareNow.
As you can see by these examples, pay-per-use can be found in Infrastructure as a service (IaaS), Equipment-as-a-service (EaaS), Platform as a service (PaaS), and Software as a service (SaaS). The top three industries currently using a pay-per-use model are IT, Services, and Transportation.
Is Pay Per Use Right For You?
To leverage the benefits of offering a pay-as-you-go pricing model strategy a provider needs to possess these critical components:
The necessary hardware and software to gather and compute consumption data, as well as the people to manage that data.
Strong network to deliver, install, and maintain a customer-centric product or service.
Be available for the customer during emergencies and be able to help them succeed.
Before making a final decision to use a PPU model, you may want to ask yourself these questions:
Is PPU more effective in solving the customer’s problem than other models?
How much volume do you need to break even?
Can you easily test and implement a value proposition?
What is the cost per use to your business?
What is the minimal offer that would compel your customer to buy-in?
Understand that you need critical mass to make this work. It can be difficult for a company to judge the service that should instead be an offer. PPU does not guarantee a new revenue stream, but it does introduce your business to new customers.
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