Business Model: "Pay Per Use (PPY)" (aka Pay As You Go (PAYG), or Fee For Service)

?? REVENUE STREAM pattern ??

Prologue

The ?????? ?????? ?????? (??????) or Pay As You Go (PAYG) business model represents a paradigm shift in how companies charge for their products and services. This model aligns costs directly with consumption, offering customers unprecedented flexibility and control over their expenses.

By leveraging advanced metering technologies and data analytics, businesses can accurately track usage and bill accordingly, creating a transparent and fair pricing structure. This model has gained significant traction across various industries, from cloud computing to transportation, revolutionizing traditional pricing strategies and opening new market opportunities.

?? Key Takeaways

• Enhanced Cost Transparency: PPU models provide customers with clear visibility into their usage and associated costs, fostering trust and satisfaction. Research by Tzuo and Weisert (2018) indicates that this transparency can lead to increased customer loyalty and reduced churn rates.
• Flexible Scalability: The model allows customers to scale their usage up or down based on their needs, making it particularly attractive for businesses with fluctuating demands. A study by Weinman (2015) found that this flexibility can result in cost savings of up to 30% for customers compared to fixed-price models.
• Lower Barrier to Entry: By eliminating large upfront costs, PPU models make products and services more accessible to a wider range of customers. This democratization effect has been observed across various industries, as noted by Chen et al. (2018) in their analysis of cloud computing adoption rates.
• Data-Driven Insights: The continuous monitoring required for PPU models generates valuable data on customer behavior and preferences. Benlian et al. (2019) demonstrate how this data can be leveraged to improve product development and customer experiences.
• Revenue Optimization: While potentially less predictable than subscription models, PPU can lead to increased revenue by capturing the full value of high-usage customers. A study by Huang and Sundararajan (2011) shows that PPU models can increase overall profitability when implemented strategically.

?? Implementation

To successfully implement PPY:

1. Develop Robust Metering Infrastructure: Invest in accurate and reliable usage tracking systems to ensure precise billing (Weinman, 2015).
2. Create Transparent Pricing Structures: Develop clear, easy-to-understand pricing tiers based on usage metrics (Tzuo & Weisert, 2018).
3. Implement Real-Time Analytics: Utilize data analytics to provide customers with up-to-date usage information and predictive insights (Chen et al., 2018).
4. Offer Hybrid Models: Consider combining PPU with subscription options to cater to different customer segments (Benlian et al., 2019).
5. Optimize Operational Efficiency: Streamline backend processes to handle variable demand and usage patterns efficiently (Huang & Sundararajan, 2011).

?? Questions to Guide You

1. How can we ensure our billing process remains simple and transparent for our customers? Can you significantly lower the entry barrier for customers with a pay-per-use model?
2. What changes in customer behavior might we anticipate after implementing a PPU model? Can you incentivize positive behaviours by only charging users for what they use?
3. Which product or service metrics are most relevant for measuring and analyzing usage? What sort of product data can we collect and analyze?
4. Beyond usage data, what additional value can we provide to customers through our intelligent products?
5. How can we leverage the PPU model to gain deeper insights into our customers' preferences and needs?
6. How can we streamline our billing process? What is the cost per use for our business? What level of usage is required for our business to break even?
7. How can we offer additional value to our clients with these connected products beyond usage data?
8. What constitutes a minimal yet compelling offering that would incentivize customers to pay?
9. 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?

?? Real-world examples of successful implementation include:

• Amazon Web Services (AWS): Pioneered pay-per-use cloud computing services, revolutionizing the IT industry (Marston et al., 2011).
• Deutsche Post: Deutsche Post’s pricing model is based on the characteristics of the package or letter shipped namely size and weight, hence makes pricing really transparent.
• Dropbox: Users can start with a free account, which includes limited storage, and pay for additional storage as needed. Subscription plans are available for businesses and individuals with greater storage needs or advanced features.
• Homie: Homie offers pay-per-use solutions for washing machines and dryers, emphasizing affordability and flexibility. Customers can order the equipment online, and free installation is included. Payment is based on actual usage, and two contract options, “Light” and “Heavy”, accommodate different washing needs. Users can switch between these options twice a year for added flexibility. The low monthly minimum fee covers additional costs like maintenance and repairs. See Bocken et al. (2018).
• Mobility Carsharing: Mobility’s pricing model for subscribers and members is based upon the time a vehicle is used and the distance it is driven. The fee per minute and kilometer covers all cost of the car such as fuel, insurance, maintenance and depreciation.
• Philips Lighting: Offers "Light as a Service" to commercial clients, charging based on illumination levels (Plepys et al., 2015).
• Rolls-Royce: Offers "Power by the Hour" for aircraft engines, charging airlines based on flight hours (Ng et al., 2012).
• Salesforce: Customers pay monthly per user for access to specific software features. With short set-up time, increasing usage is easy.
• ShareNow (formerly Car2Go): Car2Go users pay a fee per minute for using one of the shared cars.
• Uber: Implemented a dynamic pricing model based on real-time demand and supply (Chen et al., 2015).
• Zipcar: Provides car-sharing services with per-hour or per-day billing (Shaheen et al., 2009).

?? Challenges to Implementation

1. Revenue Unpredictability: Fluctuating usage patterns can make financial forecasting difficult. Solution: Implement minimum usage requirements or hybrid pricing models.
2. Infrastructure Costs: Significant investment in metering and billing systems may be required. Solution: Gradually phase in PPU offerings while maintaining traditional pricing options.
3. Customer Education: Some customers may struggle to understand or adapt to usage-based pricing. Solution: Provide clear communication and tools to help customers understand and manage their usage.
4. Competitive Pricing: Determining optimal pricing structures in a competitive market can be challenging. Solution: Continuously analyze market trends and customer data to refine pricing strategies.
5. Regulatory Compliance: Certain industries may face regulatory hurdles in implementing PPU models. Solution: Work closely with regulatory bodies to ensure compliance and advocate for supportive policies.

?? Bottom Line

The Pay Per Use business model represents a significant shift in how companies monetize their offerings, aligning costs directly with value delivered to customers. While it presents challenges in terms of implementation and revenue predictability, the benefits of increased flexibility, transparency, and market accessibility make it an attractive option for many businesses. As technology continues to advance, enabling more precise usage tracking and data analysis, the PPU model is likely to become increasingly prevalent across various industries, reshaping customer expectations and business strategies alike.

PROFESSIONAL: I conduct academic research by interviewing CEOs of small and medium-sized businesses (SMEs) in Japan, known as Japanese Global Niche Top (aka "Hidden Champion").

• I am also conducting a holistic four-year study that examines the growing entrepreneurial ecosystem in Japan, which includes interviews with startups, incubators, accelerators, studios, living labs, venture capitalists, and government officials (to date, individuals have been interviewed in Tokyo, Osaka, Kyoto, and Hiroshima).

PERSONAL: I am a polymath and love all types of topics typically reading 2-3 books each week. Now, I have a chance to share my insights with readers!

References

Benlian, A., Kettinger, W. J., Sunyaev, A., & Winkler, T. J. (2019). The transformative value of cloud computing: A decoupling, platformization, and recombination theoretical framework. Journal of Management Information Systems, 36(3), 719-739.

Bocken, N. M., Mugge, R., Bom, C. A., & Lemstra, H. J. (2018). Pay-per-use business models as a driver for sustainable consumption: Evidence from the case of HOMIE. Journal of Cleaner Production, 198, 498-510.

Chen, M. K., Chevalier, J. A., Rossi, P. E., & Oehlsen, E. (2015). The value of flexible work: Evidence from Uber drivers. Journal of Political Economy, 127(6), 2735-2794.

Chen, Y., Alspaugh, S., & Katz, R. (2018). Interactive analytical processing in big data systems: A cross-industry study of MapReduce workloads. Proceedings of the VLDB Endowment, 5(12), 1802-1813.

Depaoli, L. (2022). Pay-per-use business model for automated assembly systems.

Fox, G. (2024). Pay Per Use Business Model Pattern. https://www.garyfox.co/patterns/pay-per-use/

Gassmann, Oliver, Frankenberger, Karolin, & Csik, Michaela. (2020). The business model navigator?: the strategies behind the most successful companies (2nd ed.). Pearson Education, Limited.

Huang, K. W., & Sundararajan, A. (2011). Pricing digital goods: Discontinuous costs and shared infrastructure. Information Systems Research, 22(4), 721-738.

Ladas, K., Kavadias, S., & Loch, C. (2022). Product selling vs. pay-per-use service: A strategic analysis of competing business models. Management Science, 68(7), 4964-4982.

Marston, S., Li, Z., Bandyopadhyay, S., Zhang, J., & Ghalsasi, A. (2011). Cloud computing—The business perspective. Decision Support Systems, 51(1), 176-189.

Ng, I. C., Ding, D. X., & Yip, N. (2012). Outcome-based contracts as new business model: The role of partnership and value-driven relational assets. Industrial Marketing Management, 41(5), 730-743.

Plepys, A., Heiskanen, E., & Mont, O. (2015). European policy approaches to promote servicizing. Journal of Cleaner Production, 97, 117-123.

Shaheen, S. A., Cohen, A. P., & Chung, M. S. (2009). North American carsharing: 10-year retrospective. Transportation Research Record, 2110(1), 35-44.

Toxboe, A. (2023, January 3). Business model: Pay Per Use. Learning Loop. https://learningloop.io/plays/business-model/pay-per-use

Tzuo, T., & Weisert, G. (2018). Subscribed: Why the subscription model will be your company's future-and what to do about it. Penguin.

Weinman, J. (2015). Digital disciplines: Attaining market leadership via the cloud, big data, social, mobile, and the Internet of things. John Wiley & Sons.

BMI Lab (n.d.). Pay Per Use Business Model Pattern | Business Model Navigator. https://businessmodelnavigator.com/pattern?id=35

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