Do Usage Based Pricing Models Make Sense?

from the not-for-the-customer... dept

Mon, Apr 7th 2003 3:37pm — Mike Masnick

Here's an odd opinion piece over at Telephony Online, saying that various service providers (mainly ISPs or wireless carriers) are making a mistake in offering flat-rate services. The guy's argument is that these service providers are leaving money on the table by not "taxing" users who do more on their networks, and he's hopeful that they'll change their policies in the future. This is backwards, short-sighted thinking that leaves out the most important part in this equation: the consumers. Consumers want flat-rate pricing. They don't want to worry about how many bytes of traffic they're using (or even what a byte is, in most cases). Putting toll booths and metering systems everywhere (1) discourages use and (2) makes the service much less valuable to end-users. So, while service providers might think they're getting more since they can track specific usage to revenues, it's a much riskier move. By lessening the overall value of the system, they risk making less money since customers can't be convinced to sign up.

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Michael Elling, 7 Apr 2003 @ 3:37pm

Flat vs usage-based pricing
The real problem with the telecom sector is that it is not configured to differentiate demand segments. Vertically integrated carriers attempt to be all things to all people. This is an impossible challenge. New service provisioning models need to evolve in order to balance supply and demand to achieve positive ROI. Furthermore, with respect to flat vs usage, pricing is but one component in satisfying demand.
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DV Henkel-Wallace, 7 Apr 2003 @ 6:28pm

Not necessarily bullshit
Although I too prefer all-you-can-eat pricing it's not clear that it's economically optimal for me or the provider. What really we (i.e. users) don't like is uncertainty. After all, why not price electricity at a flat rate per month up to a certain amount? Unless you buy an electric drill press I bet there's a good deal for you and for the electric company!

Check out the work of Jerry Hausman for some extensive and fascinating analysis in this area.

He's done interesting work on mobile phone pricing where he compares uptake and services in flat-pricing countries vs variable-pricing countries. He's also done it on broadband, comparing economics of korea vs, say, USA.

I don't agree with everything he says but he's pretty smart (not smart enough to move out of New England into some more hospitable clime, but that's his problem not mine).

Unfortunately his web site is screwed up but I sent mail to his admin and hopefully it will be rebooted and working OK to-morrow.
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