Pay per use or subscription? Careful to make the right choice for your company or startup. Choosing the best pricing model, in fact, can mean the difference between failure and success.
To make this decision you need to consider, in particular, the type of business and customer behavior, but there are also many other factors to consider, such as the advantages and disadvantages each model brings, the strategies you can adopt, and the market trends between now and the future.
You’re in the right place to find all this information (and more). Now sit back and take the time to read this guide, which explains the differences between pay-per-use and subscription models and how to choose the optimal pricing model based on your specific needs.
What is pay per use
The first step is to learn more about the pay-per-use business model, also known as pay as you go.
Pay per use: how it works and areas of application
The way the pay-per-use model works is quite simple (at least on paper): the customer pays exclusively for what he or she uses. Thus, there is no fixed amount to pay, either on a one-time basis (as in more traditional pricing models) or on a recurring basis (as in subscription models).
While in some areas, such as technology services, the pay-per-use model may find easy application (because payment is based on the time of use recorded by a server or the amount of data downloaded), in other areas it may prove more complicated to implement an accurate and transparent measurement system.
In addition to the aforementioned technological sphere, there are many sectors in which the pay-per-use model is applied: they range from energy (the classic electricity bill is based precisely on a “pay-per-use” mechanism) to financial services, via transportation (think of the rental of cars, motorcycles, bicycles and electric scooters).
Just talking about transportation, it is necessary to dispel a myth: many people are convinced (wrongly) that pay per use is a recent pricing model, linked inseparably to the digital revolution; in fact, as early as the 1960s Rolls Royce introduced the so-called Power by the Hour system, applied to aircraft engines, under which companies could pay only for the actual hours of engine use.
Pay per use and subscription: key differences
To identify which pricing model is best for you between pay per use and subscription, you need to know the key differences and know in which cases it is more cost-effective to opt for one rather than the other.
Cost structure and flexibility
The most obvious difference between the pay-per-use and subscription models, as already mentioned, lies precisely in the basic idea: in the former, the customer has the option to pay exclusively for what he or she uses, while in the latter, he or she subscribes to a subscription that provides a recurring fixed payment (usually on an annual or monthly basis), regardless of the actual use of the product or service.
The pay-per-use model is more flexible because it allows for the best management of resources based on actual needs, avoiding wasting unnecessary money in the event that the customer uses the product/service only sporadically and giving the possibility of possibly modifying the “package” in the course of the work as their needs or availability change.
When the pay-as-you-go model pays off
To be even clearer than what has just been said in the immediately preceding lines, the pay-as-you-go model is more convenient for a customer in all those cases where he or she needs only occasionally to use the product or service for which he or she is paying.
When to prefer a subscription
A model in the form of a subscription, on the contrary, is preferred over a pay-per-use model by those who usually use the product/service frequently.
Notwithstanding what has just been said, it is worth noting that the choice of one model over another also depends, as pointed out in the opening of this guide, on the type of product or service.
Advantages and disadvantages of pay per use
Adopting a pay-per-use model certainly has advantages but – mind you – it also brings with it critical issues. Let’s start with the former.
Benefits for customers and businesses
The main benefit of a pay-per-use model for customers is the reduction of costs and, more precisely, of wasted money, since spending is perfectly parameterized to their specific needs. With such a model, therefore, customers do not risk paying for something that they do not then use. The pay-per-use model, in other words, ensures perfect alignment between the cost incurred and the value required. In this regard, always remember the words of Warren Buffett:
“Price is what you pay. Value is what you get.”
There are other benefits for customers: one of them is the aforementioned flexibility, which translates in concrete terms into the ability to activate/deactivate services and features according to one’s needs.
Companies, for their part, by adopting a pay-per-use model have the opportunity to optimize operating costs and, at the same time, attract a broader and more diverse customer base both in terms of economic availability and actual willingness to use the product or service offered.
With such a model, the possibility of customer loyalty also grows.
Risks and management complexity
We mentioned it earlier: it is not always possible to identify an accurate and transparent system for measuring product/service use. Similarly, it can be complicated to determine the pricing structure. Finally, an additional complexity at the management level of a pay-per-use model is related to the need to transparently educate customers about price levels and any additional costs that may be triggered when certain thresholds are exceeded.
Strategies for implementing a pay-per-use model.
To properly implement a pay-per-use model, adopting the most appropriate strategies, some preliminary considerations must be made.
Define units of measurement and rates.
Choosing the best unit of measurement and, more precisely, its so-called granularity (i.e., level of detail or precision) is crucial because it ensures maximum transparency and allows for a clearer idea of how to calculate the sales price, being able to structure rates on levels that correspond faithfully to actual usage.
Hybrid options: combining consumption and subscription
As you find yourself choosing which pricing model to adopt between pay-per-use and subscription remember that there is a third way, which is to adopt a hybrid model that can combine the features of both solutions and, in this way, potentially intercept a wider and more varied audience.
Keep in mind, for example, that not all customers appreciate the flexibility typical of pay-per-use models. Some, in fact, prefer to have predictable costs. Giving a choice between fixed plans and pay-per-use options allows you to intercept that type of customer base as well.
Monitoring tools and transparent billing
That of transparency is a recurring theme when it comes to the pay-per-use model because it is what allows you to establish a relationship of trust with the customer. Invoicing must also be extremely clear: that is, it must communicate without leaving room for misunderstanding what the system for measuring the use of the product or service adopted is, how the billing cycles work, and what the possible additional charges are (and when and how they are triggered).
Pay per use: examples of success
As we have already mentioned there are many possible areas of implementation for a pay per use model. There is no shortage of successful examples.
AWS, Azure and Google Cloud.
Cloud computing is one of the sectors that makes the most use of pay-per-use models: AWS (Amazon Web Services), Microsoft Azure and Google Cloud offer access to IT infrastructure with fees that are based on actual resource usage.
Car sharing and shared mobility
Car sharing and shared mobility companies represent another practical example of a pay-per-use model: people who rent a car (or a motorcycle or a bike or an electric scooter) typically pay based on the miles driven (or based on the time of the rental).
Energy services and IoT
The electricity bill, as noted above, is a classic example of a pay-per-use model because spending is based on actual energy consumption.
The Internet of Things (IoT) connects everyday household objects to the Internet and enables even more precise real-time monitoring of the usage of various devices than before, making it easier to charge users based on their actual consumption.
Future trends
When choosing a business model, it is advisable not to limit oneself to analyzing past examples and the current landscape. The real challenge is to be able to anticipate future trends and, with them, the direction the market will take in the short, medium and long term.
Customization and dynamic algorithms
It is reasonable to assume that the future of pay-per-use models will lie in hyper-personalization, that is, the ability to offer rates that are custom-built to the specific needs of the individual customer.
Dynamic algorithms, which are capable of automatically analyzing usage patterns, demand fluctuations and the various factors affecting it, and, based on this, adjusting prices in a (precisely) dynamic manner, will also play a decisive role.
Pay per use and sustainability
Sustainability is another aspect to be highly considered: pay-per-use models appear to be in line with sustainability goals because they promote more efficient use of resources, discouraging overconsumption and reducing waste.
The evolution toward increasingly flexible models.
Although, as pointed out earlier, some people prefer to deal with predictable costs, it is worth noting, finally, that the future evolution of pay-per-use models is moving in the direction of more and more flexibility, so that they can respond more and more effectively to the new needs of most customers, who want to have full control over spending.
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