Pricing strategy – pay as you go is the third in our series of pricing strategy articles. In case you missed the first two articles, you can read them here: freemium + upsell and multiple editions.
The third pricing strategy we’re going to look at is pay-as-you-go, usage-based, or network-based pricing where customers only pay for what they use on a transaction basis.
How Does Pay-as-You-Go Pricing Work?
There are two different ways this pricing strategy can work:
1. You can put down a sum of money in advance and this sum is decreased as you use the service.
In this example, credits are purchased for a fee. As credits are used, the remaining number of credits counts down. Once the credits get to zero, you can no longer use the service until you purchase more credits.
In this version of the pay-as-you-go model, the business you’re purchasing the service from, (or your business if you’re providing the service) can choose if there’s also a time limit associated with the purchase.
For example, many telecommunication companies offer a pay-as-you-go option, but you have to use your ‘credits’ within a certain number of days.
2. In a web-based business, the pay-as-you-go model is usually connected with software as a service provider or (SaaS).
This model bills for outsourced services by user, transaction, time in use, peak period, or some other subscription metric. It is delivered through the cloud.
Some models are entirely usage-based. Users will pay a minimal setup charge, the usage fee, and costs for service and support. Other models combine a monthly recurring fee with usage charges.
Why Pay for Something You Aren’t Using?
Pay-as-you-go often appeals to consumers and businesses because it puts more usage control in their hands. It also ensures they aren’t paying for a product when they aren’t using it.
Pay-as-you-go has been shown to lower consumption compared to models where flat rates are charged. Businesses can sometimes be intimidated by this model from a revenue perspective if there is little or no flat recurring fee to depend upon from customers. Instead, the business must convince its customers to use its product enough to ensure a steady stream of revenue. This can make it more difficult to forecast future cash flow and make future decisions about the business.
Of course, there are benefits to usage-based pricing on both sides of the transaction.
Which Industries Are Leveraging Pay-as-You-Go Pricing?
Many cities are now charging a higher price for electricity during peak periods to encourage consumers to change their habits. There are even insurance companies that offer lower monthly premiums if customers use their cars less often.
Saving money can be a powerful motivator and in some cases, having a pay-as-you-go option may be the reason someone chooses your business over a competitor.
The internet of things (IoT) is making pay-as-you-go an accessible pricing model to businesses of all sizes and across all industries. Connected devices are relatively low-cost and make it simple to track and bill for usage.
The telematics industry for example uses connected devices to gather and measure data from vehicles. This data can then be applied to usage-based billing models, such as the insurance example above. These devices can also track additional data points related to location and even driver behavior.
Using telematics, shipping companies could charge for miles traveled or time spent in transit, among other data points. And the companies that provide the connected devices and manage the resulting data could also charge based on volume of usage, amount of data tracked, etc.
For additional information, also read how IoT opens gates to new recurring billing and usage-based pricing opportunities.
To read more on our pricing strategies series, check out:
FAQs about Pricing Strategy
Q: What is a Pay-as-You-Go Pricing Strategy?
The Pay-as-You-Go pricing strategy, also known as usage-based or network-based pricing, is a model where customers only pay for what they use, usually on a transaction basis.
Q: Can you give an example of how a Pay-as-You-Go Pricing Strategy works?
In one version of this model, customers can deposit a sum of money upfront, which decreases as the service is used. For instance, telecommunication companies often provide pay-as-you-go options, where “credits” are consumed over time and must be used within a certain number of days.
Q: How is the Pay-as-You-Go Pricing Strategy employed in web-based businesses?
In web-based businesses, specifically software as a service (SaaS) providers, the pay-as-you-go model usually involves billing for outsourced services by user, transaction, time in use, peak period, or other subscription metrics.
Q: What are the benefits of the Pay-as-You-Go Pricing Strategy for customers and businesses?
This pricing model often appeals to consumers and businesses as it provides more usage control and ensures that they are not paying for a product when not in use. Cities and insurance companies, for instance, may charge higher rates during peak periods or lower premiums for less vehicle usage, respectively.
Q: What challenges can businesses face with the Pay-as-You-Go Pricing Strategy?
Businesses might find it daunting from a revenue perspective, particularly if there’s little or no flat recurring fee from the customers to depend upon. Instead, businesses must entice customers to use their product enough to ensure a constant revenue stream.
Q: How does the Internet of Things (IoT) contribute to the Pay-as-You-Go Pricing Model?
The IoT makes pay-as-you-go a viable pricing model for businesses of all sizes and industries. Connected devices, which are relatively affordable, make it easy to monitor and bill for usage.
Q: Is the Pay-as-You-Go Pricing Strategy applicable to more than just telecommunication and web-based services?
Yes, the telematics industry, for example, uses connected devices to collect and analyze data from vehicles, and this data can then be applied to usage-based billing models. Shipping companies could also charge based on distance or time in transit, among other metrics.
Q: Why might customers prefer a Pay-as-You-Go Pricing Strategy over other models?
The option to pay-as-you-go can be a decisive factor for customers, as saving money can be a powerful motivator. This model may be the reason someone chooses a specific business over its competitors.
Q: What impact does a Pay-as-You-Go Pricing Strategy have on consumption?
Pay-as-you-go pricing has been shown to lower consumption compared to models with flat rates, often leading to changes in consumer habits and providing potential environmental benefits.
Q: Which established companies utilize a Pay-as-You-Go Pricing Strategy?
Several notable companies like Amazon Web Services (AWS), Microsoft Azure, and Google Cloud provide services based on pay-as-you-go pricing.
