In the pay-per-use model, the specific use of a service or product by the customer is measured and charged. This model is widely used in the media market (television, online services, etc.) and attracts customers who want to benefit from flexibility. In other words, in the pay-per-use model, customers pay for services based on their actual usage rather than at a fixed rate (what?).
Depending on the service, they are charged in different ways, e.g., based on the number of units used or the duration of use (why?). A significant advantage for customers is that the origin of the costs incurred is very transparent (what?). The pattern is also very fair, because customers who use a service sparingly pay much less (what?).
Since customers usually use services spontaneously, it can be difficult for a company to estimate sales. To ensure reliable planning and regular income, many companies specify a minimum service usage in their contracts that guarantees them constant revenue.
The origins of Pay Per Use Business Model
Pay Per Use has a long history as a business model. Rentals have seemingly always been charged pro rata, that is, billed according to the specific amount of time the asset was used for, and new electronic billing methods have supported the transfer of the pattern to other areas.
Made possible by the advent of digital television, pay per view services are an example of a business model innovation inspired by Pay Per Use: customers can watch films or sporting events on demand without having to subscribe to a television network. Unlike analogue television, the number of channels can be greatly increased and customers given a flexible choice from among a range of paid options.
The innovators of Pay Per Use Business Model
The Pay Per Use pattern spurred the creation of a variety of innovative business models including the Internet advertising ‘pay per click’ model. Rather than having to pay for displaying their advertising, advertisers are charged according to the number of times Internet users actually click on a given ad.
Start-up GoTo, which used this billing method for the first time in 1998, is credited with having invented the pay per click option. Pay per click has now become one of the dominant models in online advertising. Google, for example, generates over 90 per cent of its advertising revenues with pay per click ads.
In 2008 Daimler launched its car-sharing concept Car2Go, which represents an innovative application of the Pay Per Use pattern. Typically car sharing or car rental services lend their vehicles by the hour or day. Car2Go takes a different approach: customers rent Car2GO cars by the minute.
Furthermore, they do not have to specify a return time and are permitted to hand in keys at their convenience. Car2Go also differs from other car- sharing services in that customers are not required to pay a basic annual fee, but simply a one-time fee on initial registration.
Car2Go has taken a page from the telecommunications companies’ playbooks by charging its customers for their actual usage of its services. Customers appreciate the flexibility and ability to control costs afforded by Car2Go, and Daimler seems to be on the right track with this form of car-sharing service.
After early pilot tests in Ulm, Germany and Austin, Texas, the Car2Go offer is now available in eight North American and nine European cities. By 2016 the company aims to reach at least 50 additional cities. Pay Per Use is also applied in the insurance industry, where various car insurers have been offering pay as you drive insurance policies for quite some time now.
Premiums are calculated on the basis of the policy holder’s actual risks, which are determined from his or her driving habits and other risk factors such as location and time of day. The data are transmitted to insurers via a GPS system. The US-based insurance company Ally Financial, formerly GMAC, has been offering this type of policy since 2004, making it a pay-as-you-drive insurance.
When and how to apply Pay Per Use
The Internet of Things is a world of smart networked products which sense and generate data and communicate them for further analysis or intelligent adaptation.
The Pay Per Use pattern derives its enormous potential from this new product-founded ability to gather and analyse information. Technologies to measure product usage have, of course, always existed, but thanks to falling IT costs, new applications to strong business cases are now possible.