The pay-as-you-go model has become a popular business pricing model in recent years. It has seen success within the telecommunications, cloud infrastructure, and SaaS industries, and more industries are looking at how to implement this model.
Because of its flexibility (and other benefits we’ll get to below), this model caters to customers’ ever-evolving needs. When running a business, it is important to consider which business model will work best for the business and its customers. With so many different types of business models available, selecting the right one can be difficult. That is why entrepreneurs should examine each type carefully to see if one model is a better fit than another.
In this article, we will look at exactly what the pay-as-you-go model is as well as define some of its advantages and disadvantages.
What is the Pay-as-You-Go (PAYG) Business Model?
Traditional pricing models have customers paying fixed, and sometimes hefty, upfront costs or signing long-term contracts to receive services or products. The pay-as-you-go (PAYG) model is a pricing strategy where customers are charged based on their consumption. There is no obligation for users to continue to use the product or service.
This model allows consumers to only have to pay for what they use. Also, it can be attractive for those customers who have a lower budget or are infrequent users. Other terms you may hear for this model are consumption-based or usage-based pricing.
Here are the most common types of businesses that use this pricing model:
- Digital Marketing (Paid Advertising)
- XaaS (Anything as a service)
- Internet of Things
Types of Plans
There are two main types of plans businesses use when implementing the PAYG model, those are prepaid and postpaid. Some companies opt to use a combination of both.
With this plan, users pay for a certain amount of usage up front, often called credits. As users consume the service or product the credits count down and have to be replaced to consume more of the service or product. Sometimes businesses also place a time limit on when users need to use their credits. An example of this type of plan can be seen with ClassPass. Users pay for a certain amount of credits each month and then can use those credits for exercise classes. They can also purchase additional credits during the month if they need to.
In this plan, users will be charged for the amount of consumption at the end of the billing period. Businesses can use transactions, time in use, storage amount, or other metrics to measure and charge customers. This is similar to electricity or other utility bills. An example of this type of plan can be seen with Amazon Web Services (AWS). If you use one of their storage options, they charge based on the amount of GBs stored over a billing period.
Difference Between the Subscription Model and Pay-As-You-Go
Often, many people confuse the definition of the subscription business model with the pay-as-you-go model. However, these two models are very different. Whichever model a business chooses to use will greatly impact how the business is run.
The subscription model requires customers to pay a recurring fee to access a product or service. Usually, the fee is paid monthly or annually. This approach is commonly used by streaming services, magazines, and software platforms. For example, a user might pay a monthly fee to access Netflix or Spotify. Here, the cost remains the same regardless of how much or how little someone uses the service within that period. The strength of this model lies in its predictability. For businesses, it provides a consistent and forecastable revenue stream.
On the other hand, the pay-as-you-go system is rooted in a usage-based pricing structure. Customers are charged based on their actual consumption rather than a flat fee.
In essence, while the subscription model offers stability and unlimited access at a fixed price, the pay-as-you-go approach offers flexibility, where costs are directly proportional to usage. The best choice between these models largely depends on the nature of the product or service and the consumption patterns of the target audience.
Advantages of Pay-As-You-Go
1. Reach More Customers
Since there are no high upfront costs or a long-term commitment to access a product or service with this model, more customers are able to try them out. Committing to a subscription plan may be too intimidating for some users. As well, large upfront costs may not be reasonable for lower-income customers. This makes your products or services more accessible to customers. Making it easier to bring in new users.
2. Flexibility of the Model
This model can be customizable depending on your business. Determining the pricing structure for your company can help with meeting customer and business needs. Companies can experiment with this structure to figure out what works best for them.
This business model also allows customers flexibility as they can adjust their usage based on their budget. Customers don’t have to worry about hidden fees. They have more control and visibility over their payments and only pay for what they use.
3. Faster Revenue Growth
There’s no need to constantly update fixed prices when you’re charging for consumption. As more users test out your product or service you receive more revenue. Compared to if you had fixed package pricing, you would need to roll out new prices to customers as you grow. Combined with the low barrier of entry for customers, this model is naturally scalable.
4. Valuable Usage Data
Because this model is based on customer usage, your company will be able to review that data and see which products or services are performing well. The data will be able to help understand how and when customers are using your services and products. This can be beneficial in planning future offerings as well as adjusting prices and managing inventory effectively.
Disadvantages of Pay-As-You-Go
1. Unpredictable Revenue
The pay-as-you-go model does not have a fixed revenue stream like other pricing models. You may have users who test out your offerings and then sign on their whole company overnight. On the other hand, you could have customers who lower their usage rate unexpectedly. As well as customers who use your service or product sporadically over the year.
This could be a difficult business model for startups to use if they want to gain traction. It can be very hard to accurately predict and be able to forecast revenue with this pricing model.
2. Customer Retention
Because customers aren’t locked in with a contract, they can stop using your service or product at any time. Other pricing models have built-in incentives to keep customers, such as offering discounts for an annual subscription vs. a month-to-month one.
Without a commitment, it can be hard to build a loyal customer base. Customers can easily switch to competitors if they have lower pricing or an easier user experience. It’s important to focus on the quality of products and services to keep users coming back.
3. Complicated Payment Structures
This pricing model can be more complex to implement than other models. Companies will need to set up systems to accurately track customer usage. This may require an investment into technology and infrastructure if your current systems don’t support this pricing model.
It can also come across as complex for customers if they need to calculate pricing per day and determine how much they will use. Setting up clear pricing structures and easy-to-use payment methods will be key to simplifying the process for customers.
The pay-as-you-go pricing model is quickly becoming the go-to pricing model for businesses. It may not be the best for every company. However, can be a great option to consider for meeting evolving customer needs.