Abstract: When it comes to ways to monetize digital services, there are three popular models: freemium, subscription and fixed-price. In most cases, the consumer pays too much in relation to the actual consumption of a service. Overpayments are typical for this kind of pricing models. This issue can be solved by pay-per-x, a pricing model where only the actual consumption is charged.

The status quo

Most of the digital services in the digital area require either a monthly membership, its a freemium model or a free model (which does not mean it is really free — mostly you pay with your personal data).

It’s still very uncommon to have payment methods where only the actual consumption is charged. This leads to cost inefficiencies because the amount each user pays is fixed, regardless of how much of the service is actually consumed.

One way to solve overpayments is by introducing a pay-per-x pricing model, which scales with the amount of consumption. It is beneficial to both the consumer and the service provider. Service providers are enabled to charge for premium features even in smaller quantities. On the other side, users on low-budget get access to premium features without paying too much upfront.

The era of pay-per-x begins to emerge

The concept of selling smaller chunks of a product is nothing new at all. Many years ago for example the detergent producers Ariel and Surf Excel started to offer smaller package sizes of their products to enable also people with low income to purchase their products.

Package sizes of detergent powder sold in India (source of image in footer)

A simple equation of sales revenue reveals the benefit for the producer.

Sales Revenue = Units Sold x Sales Price

Assuming that the number of customers who can afford to buy the normal quantities remain the same, the additional influx of low-income customers who now can also afford to buy the products increase the overall revenue.

We can also draw a chart to explain it in a visual way using a supply and demand curve. Fees cause sellers to increase prices but at the same time less people can afford to buy, leading to reduction of consumption (from 10 to 5 units). Although seller has same revenue as before due to increased price (from USD 2.50 to USD 5), the low-income class are excluded from consuming the service (left hand side). On the right chart we see that removing fees increases buyers’ and sellers’ surplus.