Also called: Pay as you go, Fee for service
See also: Access over Ownership, Performance-Based Contracting, Platform as a Service, Subscription, Virtualization
|Key Partners||Key Activities||Value Propositions||Customer Relationships||Customer Segments|
|Cost Structures||Revenue Streams|
How: Provide the flexibility of charging customers as they go. Decide on what usage parameter best meters actual usage and at what rates. Typical parameters are time, quantity, location, time of day, and choice of service.
Why: The avoidance of up-front payments allow customers to make quicker decisions about buying or trying the product or service and can help remove barriers to entry in a high-margin market.
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The Pay Per Use model is an extensively employed billing method that charges customers based on their actual usage of a service or product. This model is particularly prevalent in the consumer media market, such as television and online services, and is particularly attractive to those who value flexibility in their payment options.
Instead of paying a fixed rate, customers are billed in accordance with their effective utilization of the service. The billing can be based on a variety of metrics, such as the number of units consumed or the duration of usage.
One of the most notable advantages of the Pay Per Use model is its transparency. The origins of the incurred costs are clearly visible to the customer, making it an fair and equitable method of billing. Furthermore, customers who make sparing use of a service will be charged correspondingly less, thus aligning the cost with usage.
Notable challenges include revenue forecasting. As customers tend to use services on an ad-hoc basis, it can be difficult for a company to accurately predict sales. To mitigate this, many companies include minimum usage requirements in their contracts to ensure a regular income.
Where did the Pay Per Use business model pattern originate from?
Pay Per Use has a longstanding tradition as a business model, with its origins rooted in the practice of pro rata billing for rentals. The model, which charges customers according to the specific amount of time an asset is used, has been further facilitated by advancements in electronic billing methods.
One such innovation inspired by the Pay Per Use model is the advent of pay per view services, which were made possible by the emergence of digital television. These services allow customers to watch films or sporting events on-demand without the need to subscribe to a traditional television network.
Unlike its analogue predecessor, digital television has greatly expanded the number of channels available, thereby offering customers a greater degree of flexibility in their viewing options. Moreover, by giving customers the ability to choose from a range of paid options, pay per view services are a quintessential example of how the Pay Per Use model has evolved to meet the demands of an increasingly digital age.
Applying the Pay Per Use business model
The Internet of Things (IoT) is a rapidly expanding world of interconnected devices that possess the ability to gather, generate and transmit data for further analysis or intelligent adaptation. The Pay Per Use model is uniquely suited to leverage this new reality, as it derives its enormous potential from the ability of smart networked products to sense and communicate usage data.
While technologies to measure product usage have been around for some time, the falling cost of information technology has opened the door to new applications and business cases that were previously infeasible. This has made it possible to harvest the insights garnered from usage data and use them to optimize product usage, improve customer satisfaction and drive revenue growth.
The Pay Per Use business model is an increasingly popular method of charging customers for products or services. It operates by metering the usage of a product or service, and billing customers each time they utilize it.
How Pay Per Use Differs from Subscription
The Pay Per Use model differs from subscription-based pricing in several ways. In contrast to fixed pricing tiers and minimum commitments, Pay Per Use is based on usage and does not assume a fixed fee. This allows customers greater flexibility in their payment options. Moreover, some companies use Pay Per Use as a tactic to encourage customers to try their services before committing to a subscription.
The Pay Per Use model does seldomly exist in isolation, and often coexists with subscription-based pricing. Some companies may offer a combination of both models in order to cater to a wider range of customers.
Is the Pay Per Use the right fit for your company?
Understand the potential benefits and challenges of this model, and determine if it is the right fit for you.
Customer advantages and challenges
One of the main advantages of Pay Per Use for customers is that they only pay for what they use. This is especially beneficial when demand falls below expectations, as it helps to reduce costs. Additionally, Pay Per Use eliminates the need for upfront capital expenditures, and transfers the operational risk to the equipment maker, who becomes responsible for ensuring the machine runs smoothly.
However, the Pay Per Use model also has its challenges for customers. High costs can occur during frequent use periods, and the total cost of ownership is not always less expensive. Additionally, some customers may prefer to have expenses on their balance sheet.
Customers typically evaluate the value of a Pay Per Use model on:
- Pay-per-use cost vs alternative
- Whether the Pay per (seat, customer, patient, user) delivers other financial, operational, or quality outcomes.
Business advantages and challenges
For businesses that offer Pay Per Use, the model offers several benefits. The value proposition is clearly communicated around use value, and it allows for disruptive market entry or market share move in a high margin category.
However, businesses also face challenges in implementing the Pay Per Use model. Solutions must be engineered to deliver the cost structure of Pay Per Use, and the fixed vs. variable cost structure must be determined to determine per-use-unit profitability. Without careful engineering, Pay Per Use can suffer from unpredictable revenue.
Businesses typically evaluate the value of a Pay Per Use model on:
- Retention. A high retention rate indicates that customers are finding value in the Pay Per Use model, and that the business is effectively meeting their needs.
- New User Growth. Allowing potential customers to try the product or service before committing to a subscription can help convert users into payinng customers. Tracking new user growth can provide valuable insights into the effectiveness of this marketing strategy, as well as the overall appeal of the Pay Per Use model for your product or service.
- Customer usage. Tracking how often and for how long customers are using the product or service, as well as identifying patterns in usage over time can help you optimize your product or service to better meet customer needs, as well as to predict future usage and revenue - and whethere it makes the Pay Per Use model a viable option.
Archetypical applications of the Pay Per Use business model
The Per-Per-Use business model has been seen to work remarkably well in a number of settings.
Straightforward metering and comprehensible billing systems
Pay-per-use works well when the service can be effectively metered and when billing systems and agreements are simple to communicate and easy to bill. For example, in the media business, pay-per-view has enabled the shift from standard broadcast technology to multiple cable channels. Similarly, for enterprise software companies, the shift to cloud-based computing models created the conditions for “pay-as-you-drink”, a change from prior business models such as upfront licensing, installation and maintenance costs. Customers authorize an agreement that charges their account per use.
Manage costs while scalilng
For software startups, particularly in the SaaS sector, once the initial minimum viable product is built, companies can scale revenue closer to the scale in costs required to deliver the service. Some SaaS companies prefer pay-per-use because the value relationship is made very clear to the customer, and they are able to prioritize feature and service development based on the customer’s expressed needs.
Hijacking the enterprise purchase process
Pay Per Use is particularly advantageous when there are low barriers to customer adoption. Because of low or no-cost startup fees, enterprise customers that typically take six months to a year to make a decision about enterprise software often leapfrog this decision and simply begin to try the service. Customers then increase their use based on the actual need of the company, as opposed to paying up front for licensing fees per seat.
Pay Per Use also provides valuable insights for the company. It gives more information about how customers use and value their products and services. Companies operating on pay-per-use can get greater feedback to refine their pricing and how they package products and services, to drive their profitability. This also allows them to develop more personalized and focused marketing strategies to increase revenue.
- Can you significantly lower the entry barrier for customers with a pay-per-use model?
- Can you incentivize positive behaviours by only charging users for what they use?
- How can we streamline our billing process?
- Will our clients exhibit a change in behavior with the introduction of Pay Per Use?
- What sort of product data can we collect and analyze?
- How can we offer additional value to our clients with these connected products beyond usage data?
- What can this model reveal about our clients' behavior?
- What is the cost per use for our business?
- What level of usage is required for our business to break even?
- What constitutes a minimal yet compelling offering that would incentivize customers to pay?
- Is there a user proposition that can be easily tested and executed?
- Does the Pay Per Use model more effectively address the client's problem?
- Will the service usage generate sufficient revenue to cover the cost of hardware on our balance sheet within a reasonable payback period?
- What is the total cost of ownership compared to other solutions?
- How can we arrange features, services and benefits into key elements of our offer and have potential customers prioritize these elements of the larger solution, and what would the MVP look like if lesser priority elements were removed?
- Are clients willing to share the data necessary to power the MVP and future services?
- Is the user proposition one that does not necessitate IT sign-off or a long buying cycle?
Customers pay monthly per user for access to specific software features. With short set-up time, increasing usage is easy.
When renting a car, customers are charged per minute, with hourly and daily rates also available. Parking and fuel are included.
- Business Model Navigator by Karolin Frankenberger and Oliver Gassmann
- Pay-Per-Use Business Model by Reason Street
- Is Pay-Per-Use The Future In Manufacturing Industries? by Oliver Wyman
- Usage-based pricing by John Elkington