Pay Per Use Models

Per per use models are doomed to fail. They have one goal, to simplify the costs of buying or paying for the incremental costs of a product or service. There isn’t a single successful pay per use model that consumers are unanimously supportive of.

Take music for example, would you pay $0.01 / song you have played on your mp3 player? Would you pay $0.32 / mile you drive your car? Would you pay $0.005 / time you shave your face / legs? What would you pay per use? We do it for electricity, water, sewer service, even long distance.

But aren’t these all doomed to fail? Long distance seems to be the next victim in this capitalism gone awry model, due to competition that allows unlimited long distance for flat rates. Cell phones now offer more minutes then people use for flat rates (even though the overages are still signficant).

But how about paying a flat rate for power or water? Will that happen? We don’t pay per pound for garbage pickup, even though the guy down the street might put out 10 times as much garbage as I do.

In the digital print world in which I work, 2 of the 3 major manufacturers of digital presses offer pay per click models in which you pay for every impression off the machine at a fixed rate. The 3rd offers a program in which you buy your parts and supplies and they rebate you the difference over your agreed cap.

Lets look at price per use models. They thrive on a “Las Vegas” model that represents the fact that you can’t beat the house. Vegas gambling brings in millions if not billions of dollars a year, banking on the fact that people believe they can beat the house and win big. The fact of the matter is you can’t beat the house over time. You might win big once in awhile, but the law of averages kicks in and you will ultimately lose money gambling in Vegas.

So why do we choose price per use models? Probably the most significant reason is simplicity. It is easy to price and understand your costs. They are fixed, or at least we assume they are fixed. In my world of digital printing, one manufacturer negotiates the click price so that different owners of their product pay different rates. There is no published click price, in fact you almost need a degree in accounting to understand what your click price actually is. So is that simplification?

Would you pay a fixed price per mile for your vehicle, if it included gas? Lets say you buy a $20,000 car (the average price of a new car today) and lease it over 5 years. Your monthly payment would be about $360. If you drive the average 12,000 miles a month, your cost per mile would be $0.03. Now, add the price of gas on average right now is $2.20 / gallon. Assume the average car gets 20 miles / gallon and your additional cost per mile for gas is $0.11 bringing the cost of driving your car to $0.14 / mile. Now, throughout the 5 years you are going to own the car, you will need to put new tires, brakes, shocks, windshield wipers, and carwashes to keep the car clean. Lets say you spend $5,000 a year (probably really high, but go with me) on these items which would cost an additional $0.034 / mile bringing the total cost of operating your vehicle to $0.174 / mile.

Why all the math? Well, lets say the manufacturer spells out the cost of a vehicle at $0.34 / mile. Which will cover all the costs of owning, maintaining and driving a car. If your cost is $0.174 / mile and the manufacturer is saying it should cost $0.34 you are saving alot of money paying for your gas and parts. But what happens when you don’t drive an average of 12,000 miles? or gas prices jump up or down? or you spend way more on brakes? These numbers start flying all over the place.

Now, would you pay for a new car, without having to pay for gas, maintainence or anything else, for the flat price of $0.34 / mile? Knowing that the car manufacturer was statistically making almost a 50% profit off the average person? This is why pay per use models are destined to fail over time, especially when competition offers non-fixed pricing. Pay per use models are closed ecosystems, disallowing you to use any parts not part of the model or to manufacturer spec.

Pay per use models will ultimately lose to competition and logic. You wouldn’t buy a razor and pay per shave, as the razor blades don’t have fixed lives. If you can get more out of a razor blade, you will. Take the internet for example, can you imagine if you had to pay per byte for every website you view? What if it cost you $0.000005 / byte for viewing this page? Would you accept this model? We want flat rate pricing, or we want to buy our supplies and utilize them the way we want. That is called freedom. In the end, pay per use models will fail in almost every case, once someone offers a reasonable alternative. Had Gutenburg charged a click for every impression off his printing press, he might have not died broke, but then again, someone else would have come along and offered to print for a flat price.

Leave a Reply