The third pricing strategy we’re going to look at is Pay-As-You-Go, usage based, or network based pricing where customers only pay for what they use on a transaction basis.
How does pay as you go pricing work?
There are two different ways this pricing strategy can work:
1. You can put down a sum of money in advance and this sum is decreased as you use the service.
In this example, a number of credits were purchased for a fee.
As those credits are used, the number of credits left counts down. Once the credits get to zero, you can no longer use the service until you purchase more credits.
In this version of the pay as you go model, the company you are purchasing the service from, (or your company if you are providing the service) can choose if there is also a time limit associated with the purchase.
For example, many telecommunication companies offer a pay as you go option, but you have to use your ‘credits’ within a certain number of days.
2. The more traditional pay as you go model works in the opposite way (pay in arrears).
Think of your utility bills, which you pay at the end of a pay period (usually 60 or 90 days) for the amount of water, hydroelectricity or gas, you used during that time.
You receive an invoice that shows how much you used, and then you send in a payment.
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In a web-based business, the pay as you go model is usually connected with a software as a service provider or (SaaS).
This model bills for outsourced services by a transaction, time in use, peak period, or some other subscription metric and is delivered over the Internet.
Some models are entirely usage-based - users will pay a minimal setup charge, the usage fee, and for service and support. – while others combine a monthly recurring fee along with usage charges.
Pay as you go has been shown to lower consumption, compared to models where flat rates are charged.
Many cities are now charging a higher price for electricity during peak periods to encourage consumers to change their habits. There are even insurance companies that offer lower monthly premiums if customers use their cars less often.
Saving money can be a powerful motivator and in some cases, having a pay as you go option may be the reason someone chooses your business over a competitor.
To read more on our pricing strategies series, check out:
- Freemium + Upsell
- Multiple Editions
- Pay As You Go
- Base + Overage
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