The Rise of Pay-Per-Use Pricing: What It Means for Businesses and Consumers

Over time, the market has witnessed many different types of pricing models, for example, tiered pricing and performance-based pricing models that serve the favor of both the consumer and the business. Amidst all of these different pricing systems, there has been a sudden exponential rise in the pay-per-use pricing system, which has not only been adopted by many businesses but has also offered a lot of relief and cost-effectiveness to consumers for its simplicity and assurance.

One thing that we need to remember is that it can be introduced in any field or industry. In fact, it is already growing in popularity across different fields, product manufacturers and service providers, so much so that there are usage billing software, mobile applications, and online tools as well. In this article, we will decipher the pay-per-use pricing model and elaborately discuss what it means from both business and consumer perspectives.

It is a payment model in which the consumer does not purchase to own the product but only pays for using it. Every time and for every service that a consumer subscribes and uses, they only pay for that much without any additional cost or fee. In a nutshell, as the name suggests, the consumer pays per use of the product or service. 

Therefore, the more they use, the more they pay and vice versa. This pricing system works more affordably for consumers as they can only pay for the services they use rather than paying the full price. 

In addition to that, this way, consumers are more likely to receive better service and benefits because the product manufacturer or the service provider is more interested in building long-term relationships. This pricing model is not new, and utility companies, satellite television channels and broadcasters have been using it for over a decade now. 

With modern technology and innovation, it has become more accessible and convenient for businesses to offer such a payment model in different industries and services. But again, the pricing model has its factors that work differently for both consumers and businesses. Let us go through each perspective, understanding them.

From the business perspective, the pay-per-use pricing benefits are as follows:

#1 - Revenue Optimization

Most people do not believe this but with the PPU model, businesses can increase their revenue by getting hold of the full value of high usage customers. A 2011 study done by Huang and Sundarajan reflects on how PPU models can hike profitability when the implementation of the payment system occurs strategically, ensuring that it is in line with the needs of markets and customers. An increase in profits becomes possible as the model helps companies capture more market share and brings a decline in adoption barriers.

#2 - Customer Retention

When companies adopt the PPU model and allow their customers to pay only for what they use, they create a simplified payment framework that is basically inclined in favor of the customers. It becomes affordable for them, and so it attracts customers, induces trust, and leads builds a rapport. 

Once a customer has started using the product or service, it automatically becomes easy to retain them by continuously offering them the same product or service, as technically, the customer has settled with it. This works better with customer psychology as they find it cheap and affordable. Also, they do not have the burden of ownership and only pay the price whenever they choose to use the service or product.

#3 - Cost-Value Alignment

Cost value alignment refers to a process that involves plugging the gap between the value perceived by customers from an organization and what that entity is offering. With the PPU model, the business evaluates whether the expenses directly or indirectly encourage the company's goals or not. 

The pay-per-use pricing aligns cost with real customer usage; this provides not only usage-based billing but also flexibility and transparency, which leads to customer satisfaction and more efficient resource utilization. On the contrary, with a better cost-value alignment comes challenges such as pricing complexity, the requirement of robust tracking systems, good customer service and communication along with, financial planning and the ability to offer better support to the whole organization.

#4 - Competitive Edge

Most people confuse the subscription business model with PPU, but when it comes to subscription vs. pay-per-use, the drastic difference lies in how the companies charge fees to their customers. In the subscription model, the company generates revenue by charging its clients or customers a subscription fee at regular intervals. It can be monthly, quarterly or yearly. In comparison, the PPU model bills the customer based on their usage and consumption of the product or service.

Businesses that offer pay-per-use payment methods to their customers for their products and services always enjoy a competitive advantage against their competitors. It happens because those businesses that do not offer a PPU model force their customers to buy the product or use the service at an elevated price, which, in comparison to their actual utility, is exceptionally high. 

People usually do not like to pay for such services and feel exploited by the companies. 

Hence, they constantly seek better alternatives and flexible pricing models, and PPU is definitely a reasonably well fit for the customers tired of paying more than they actually use.

Now, looking from the consumer perspective, the pay-per-use pricing model benefits are -

#1 - Cost Efficiency

The number one benefit that consumers enjoy with the PPU model is not having to pay for the entire product or service and not having to buy it. Some consumers do not like to have the burden of ownership, and hence, the pay-per-use payment method is just perfect for them. If they actually buy it, compared to the price, the value they get is only a fraction of the utility associated with the service. It would be an expensive deal for customers, but thanks to the PPU model, it's not the case anymore.

#2 - Accessibility

With PPU, customers and clients access services and utilize products and resources without having to worry about purchasing a subscription plan or paying an overcharged price. This also ensures that they avoid limiting their usage. All of these benefits help clients have better accessibility to the product or service offered.

#3 - Transparency

Earlier, people had to pay a single price for all the services bundled together whether they used it or not, but with the PPU model, consumers pay only for what they want. This leads to higher transparency where consumers actually know the detailed price of their desired service and pay just for it, nothing more, nothing less. This also indicates that earlier businesses charged a collective amount for the bundled services without having to disclose the actual price of each service or product used.

The PPU pricing model is not new, yet it has a long way to go in the future. Companies trying to serve their customers in a better way and to attain customer satisfaction are trying to introduce this concept in their business model strategically. For instance, there is a new pay per kilometer pricing model introduced by car insurance companies. 

Similar to that, there have also been ideas surfacing about pay per mile, which was proposed for road taxes by the UK government. This shows that organizations are already incorporating the PPU idea as much as they can and are ready for a well-strategized implementation. It definitely has the potential to become increasingly popular among businesses and customers in the future.