In this article, we explore how innovative pricing models are becoming the new source of competitive advantage. The pay per use / wash / mile pricing model is used as an example to deep dive the topic. Several cases have been taken from the book “The Pricing Model Revolution” to present how companies of different industries and regions successfully applied the model to reach a competitive advantage. Dan Zatta (zatta.danilo@gmail.com) is management advisor and the author of several books, including “The 10 Rules of Highly Effective Pricing.” Connect with Dan on LinkedIn: www.linkedin.com/in/danilo-zatta/.

The Journal of Professional Pricing, June 2024

“Aligning price with use” is the essence of pay per use.

The strength of this approach lies in its ability to break down barriers to purchase and expand market potential, orienting companies and allowing them to do business by making innovations to existing models.

Once set up, pay per use determines a clear vision of how customers use their products or services. This, for example, generates a deeper understanding of how they can provide even better value, improving their offer according to a broader customer base and creating a platform for growth.

All of this allows for more accurate forecasts, value extraction and, in some cases, modification of product development to better satisfy demands.

Even though the pricing concept based on use is not new and many companies in different sectors adopt it (see Table 1), up until a short while ago the costs of the sensors and technology necessary for setting up pay per use for smaller or more dynamic increments were prohibitive.

Table 1: Selected companies that have introduced pay per use

Company	Product	Offer	Pricing model
Winterhalter	Domestic electrical appliances	Next Level Solution	Pay per wash
Rolls Royce	Aeronautic engines	Total Care	Pay per hour flown
Atlas Copco	Compressed air	Air Plan	Pay per m3
Zipcar	Mobility	Car Sharing	Pay per hour
Amazon Web Service	IT services	Cloud Computing	Pay per GB
Michelin	Tires	Michelin Effitires	Pay per mile
Samoa Air	Air transport	Intera offerta	Pay per kilo

Source: The Pricing Model Revolution (Wiley, 2022)

With the increase in digitization, big data, and artificial intelligence, the possibility of “winning” customers on an on-demand basis has become feasible.

Technological progress (high-speed Internet), a drop in the price of microchips, and the expansion of cloud-computing capacity make the offer economically sustainable, as well as monitoring and invoicing both for business-to-customer (B2C) and B2B businesses.

All these developments have favored a key factor in the spread of pay-per-use models, which is the ability to capture latent demand by reducing the initial cost associated with physical assets for customers with a low rate of use.

This triggers market expansion: new segments of customers who, using a traditional pricing model, would not have had the chance or intention to buy the product, can now afford to use it.

And there is more.

This phenomenon, combined with the product’s shorter life span, generates a further demand for flexible and scalable options at low risk compared to the “traditional” concept of ownership.

The pricing (alignment) of the product and its use can radically overturn and transform the industrial structures and strategies of a company’s go-to-market: both actual and potential customers reconsider how, where, and when a product is used. As soon as the products are available on request, with small increments and without having to sustain a large initial investment, more potential buyers will be available.

To unleash the market’s latent demand, a growing number of pay-by-use applications have been adopted by companies all over the world: pay per wash, pay per ride, pay per cleaned square meter, pay per exercise, pay per processing capacity, or pay per mile are just the beginning of what on-demand pricing can do.

Let’s take a closer look at some applications of this type of motivation.

Paying by “Cleaned” Square Meters

Facility management operators in general, and more specifically cleaning companies, traditionally operate at fixed prices.

They may, for example, offer cleaning services at a fixed price per structure: all the spaces regularly cleaned over an established period of time. That’s it.

But this sector, too, has experienced the advent of new pricing models: for example, the system that foresees paying per square meter cleaned.

Facility management companies are thus changing their revenue models. New technologies are namely revolutionizing facility management, making processes more efficient. Why should an unused office be cleaned? Sensors can tell operators which offices have been used and which haven’t. A complete set of equipment and detersives can be directly factored into the price per square meter cleaned, which also makes the life of the facility-management staff easier. In this way, only those offices that have been used are cleaned and payment is made per square meter cleaned. This speeds up and optimizes cleaning.

Kärcher, a German, family-run company, has become world leader in cleaning technology, with 100 subsidiaries in 60 countries. They call this trend “cleaning on demand.”

Paying According to Individual Exercise

Every time we enroll at a gym, we optimistically think the same thing: “This time I’ll work out every day.” And as usual, we overestimate ourselves. Then, as usual, the week before we start working out, we go on a spending spree: the whole Olympic athlete kit (!), including, of course, those white trousers we fancied and that professional T-shirt and even the elasticated supports to avoid strained muscles. Then something comes up, like a meeting, a supper date: “OK, just for today I’ll give it a miss.” Next time there’s an apéritif: “Shucks!” And bang goes the catch-up session, too.

No extra lengths and goodbye to your good intentions with trim belly and perfect abs included in the price. So, what you’re looking for is “pay per exercise” or “gym-as-you-go.” This form of payment, based on use rather than on a monthly subscription, links your enrollment to the actual use you make of it.

Technological progress has made this pricing model possible. Here’s how it works.

Near-field communication, a combination of communication protocols for two electronic devices – for example, a smartphone and a piece of gym equipment – allows subscribers to check in directly on the equipment they use for the workout.

The athlete is then charged for the time they use the equipment.

There is no charge for any subscription or membership, and those enrolled in the scheme can start or stop whenever they wish.

Today, an increasing number of machines are fitted with some form of built-in, short-range communication to allow those who enroll in a gym, for example, to follow their own training schedule, and this means the time is ripe for the application of this type of pricing.

On the one hand, the price lists provide an option for those who rarely work out to waste less money, and on the other hand, gyms manage to attract a different sort of easier-going customer less sensitive to a relatively high price.

In this way, gyms can also orientate the demand for certain machines that can be made constantly available through surge pricing, which is obtained when people request immediate access because they don’t have the time to wait around and are therefore willing to pay for the use of that specific piece of machinery.

This price model provides new horizons of demand management for gym operators: they can reduce prices at off-peak times to make attendance more uniform throughout the week and avoid overcrowding. Moreover, in this way gyms can get an immediate idea of which machines are the most popular and how intense their usage is. This allows them to adapt their range of equipment, for example, by purchasing more of the most popular machines, keeping up their maintenance, and even running targeted marketing campaigns on the basis of the workload.

Some gyms might be concerned about cannibalization. That is, losing income when members choose not to pay for subscriptions they fail to take advantage of in favor of à la carte prices. But where so many gyms compete with one another in the big cities, alternatives to monthly subscriptions can be a powerful means of distinguishing a business.

Paying for the Skill of Elaboration

By aligning the pricing of products and/or services according to their use, several of a customer’s requirements are satisfied, whether it’s a matter of flexibility or perhaps high growth, which makes it necessary to modify company policies according to the ups and downs of the market (as happened during the long period of the Covid-19 pandemic when gyms and swimming pools together with many other businesses remained closed for over a year) or any other unforeseen factors.

Managing to reduce the negative impact of this area, so greatly variable in the area of economics at least since the beginning of the financial crisis (which began in 2007 with the US subprimes), would be impossible in terms of cost for clients who had to face individual purchases of the infrastructures they needed to satisfy their requirements.

The European Space Agency’s Gaia Program is a good example.

This initiative came into being with the ambitious objective of creating the biggest and most accurate 3D map of the galaxy.

The prerequisite for this praiseworthy venture was the elaboration of satellite observations of over one billion stars. The investment necessary for creating the internal capacity sufficient for this sort of data elaboration was estimated to be over $1.8 million. Nonetheless, the agency only required this particular capacity for two weeks every six months.

To tackle this huge set of data, the European Space Agency chose to pay Amazon Web Services (AWS) for the elaboration of six years’ work and the observation of something like a billion stars, which resulted in spending less than half the sum allocated.

By means of a pay per use scheme, the products planned for purchase because they are essential for the infrastructures are “re-oriented” as services. The same goes for AWS, which offers cloud-computing, on-demand services to individuals, companies, and public institutions, and charges according to the gigabytes transferred.

Paying by the Mile

The alignment of pricing with usage generates benefits for those clients who use a product infrequently or unpredictably.

This fact has been acknowledged by insurance companies. Thanks to technological progress, the cost of developing small wireless devices capable of monitoring distance travelled by connecting them to the diagnostic port of an automobile has become negligible. And so, companies like MetroMile offer their customers car insurance on a per-kilometer basis, making it an economic proposition for occasional drivers to be able to enjoy full insurance strictly for the time they’re using the vehicle: the average saving according to MetroMile is 47%.

It should be noted that, in general, all the models of on-demand pricing allow for increasingly informed choices, thanks to which clients can test a product and get an idea of its use without a high initial outlay.

Another case of payment “according to mileage” is offered by Michelin, a leading producer of tires. After developing innovative tires for commercial vehicles, claiming to last 25% longer compared to those of its competitors, the company also realized that it could not apply a 25% increase to its price list. The sales division reacted by advising not to settle for the percentage-price correlation.

Michelin therefore decided to review the company’s monetization model: why not link the performance of the tire to its price? The shift from a price-per-tire model to one of price per kilometer involved a classic pay-per-use formula enabled by GPS technology directly connected to the vehicle, in which the entire added value of innovation could be monetized. The longer the tire lasted, the greater Michelin’s revenue would be in this case.

Over time, Michelin pushed further ahead. Today they provide complete solutions to companies in all sectors, with per-kilometer models for motor vehicles, number of landings for airlines, and tons transported in the sector of mining transportation.

Michelin has thus moved from being a simple provider of tires to a “provider of services for mobility” with an important range of telematic services and fleet management. This has made it possible to achieve customer fidelity.

Power by Hour

The reason why pay per use still leaves some big players perplexed can be found in the relative cost of the product, the purchasing cycles, and (again) in the pool of existing and potential customers, as well as the costs of making the change.

In the mid-1980s, Rolls Royce, followed by General Electric, introduced “Power by the Hour” in the market for reaction engines.

With Power by the Hour, the customers – airlines or air travel operators – paid for actual running time and availability of reaction engines.

Although today this can hardly be called a “new” pay-by-use model, at the time it had the (great) merit of re-aligning prices more with use than with sales.

Power by the Hour was not actually a big challenge – indeed most leading companies managed to adopt the model in their various sectors – and the reasons for this are to be found precisely in the concentrated customer pool on a market that had been poorly served until shortly before.

Every market challenge is a new frontier.

Pay-per-use pricing tends to come as a revolution in those markets where the customer base can expand drastically, whilst the airline industry – with its regulations and other fairly high barriers to entry – does not grow so quickly as other, bigger sectors with many more players and lower entry barriers.

Another example of payment according to units of time – hours, in this case – comes from Zipcar, a U.S. car-sharing company. Payment is made on the basis of the total number of hours the car is in use. It is not rare for customers to pay a fixed quota. Nonetheless, this sum tends to be significantly lower than the purchasing price a customer would have to pay for the vehicle. In the case of Zipcar, clients pay an annual quota of $60 for accessing the entire fleet – with a definite “plus effect” due to the perception of an ample choice – whilst they pay up to $8 an hour for using the car.

Paying by Cubic Meter of Compressed Air

Even a company founded in 1873, the biggest in the country in terms of size, as well as being a world leader, can take advantage of the opportunity of new approaches to pricing and revolutionize its approach to monetization to consolidate its competitive edge.

This is the case of the Swedish firm Atlas Copco, a leading producer of compressors. With its new AIRPlan offer, in practice the company asks their customers: “Why not leave the equipment in the hands of Atlas Copco?” With AIRPlan, the compressed air that is needed is obtained and payment is made on the basis of how much is consumed.⁹

In their presentation of this model, Atlas Copco responds to an indirect, rhetorical question:

“What is the difference to possessing your own compressors? Purchasing a compressed air plant makes a large impact on your fixed assets. As well as the cost of the investment, many other costs have to be factored in: administrative and capital costs, transport and installation, etc. With AIRPlan, there is no need for any kind of asset to be purchased. All the costs of the compressed air are part of operating costs. And … freeing up cash for other investments could bring new business opportunities.”

So comes payment on the basis of cubic-meter consumption.

At the time when Atlas Copco started on its path towards a shift in pricing, the trading mantra focused wholly on the evidence that equipment producers would be more competitive if they concentrated on producing the equipment and ignored all downstream activities such as contact with customers and assistance to distributors and retailers.

Nevertheless, Atlas Copco decided to concentrate on quality service and direct interaction with their customers instead of passing through distributors. This meant creating a direct network of sales staff and technical assistants who were to operate through a global “Customer Center” infrastructure and, in the long term, gradually convert indirect channels into direct ones. “We wanted to be sure we had our customer relations well in hand,” stresses Ronnie Leten, ex-President of the Compressors Division of the Atlas Copco Group in one of his interviews telling the story of the company. “That way, on the side of the delivery chain we basically depended on collaboration with our suppliers whilst our downstream business model was proving to be more or less vertically integrated with our customers. This ‘close contact’ with customers is a clear contrast to our competitors’ approach, which had a less forward integrated business model and operated through distribution channels.”

Once the branch’s infrastructure became operational, the service business started to grow, driven by customer demand. The customers demanded services and Atlas Copco responded!

But whilst, especially at the beginning, the demands were for simple, transactional assistance services, like everything else there was an evolution in demand which, in turn, encouraged the company to broaden its offer.

This is the virtuous cycle of good ideas which, like culture, knowledge, and good practices, are assets that, when shared with many others, increase instead of diminishing in value.

Another aspect of the value gained through this type of monetization was perhaps more difficult to quantify but equally tangible.

Closer customer relations for Atlas Copco meant being constantly faced with the client’s changing demands. In turn, on the company’s side, regular contact implied that it was the first to anticipate demands for additional products or services. Therefore, in practice, intimate knowledge of the client – combined with ongoing innovation – stopped competitors from being able to intervene.¹⁰ This is one of the many examples of how a perfect transition can be made from a product-centric to a customer-centric type of business, while at the same time managing to consolidate the company’s position through a “protection network” provided by its own competitive edge.

Payment by Weight

In air travel, the price is traditionally set per person, though always differentiated according to age, status, or similar criteria.

The Polynesian company Samoa Air has proposed a completely different pricing standard.

Prices are set according to the passenger’s weight: a fixed price is paid by kilogram, varying according to the length of the flight route.

Samoa Air’s tickets vary from $1 to around $4.16 per kilogram. Passengers pay for their weight combined with that of their baggage. For example, around $1.00 per kilogram of body weight is charged for a flight from Samoa to Faleolo.

Samoa has the world’s third highest rate of overweight people, far above the United States, which makes this pricing standard is a natural choice. Even though some may see a discriminatory logic in it, in reality this is the logical application of personalization according to user.

Chris Langton, CEO of Samoa Air, was the keenest promoter of this pricing standard. “There are no extra costs in terms of excess baggage or anything else – it’s just a kilo and a kilo is a kilo,” he explained. “The smaller the airplane, the fewer variations can be accepted in terms of weight differences between passengers. What’s more, people are generally bigger, broader, and taller than 50 years ago.”

With the new price model, some families with children would actually pay less for their tickets.

Logic speaks for the system. After all, the passenger’s weight and not their age or status is the cost factor here.

And, developing the logic behind all this, we calibrate systems according to the same measurements we create to control them. If goods transportation is invoiced according to weight, why then shouldn’t the same be true for people? This is what Samoa Air’s managers asked themselves.

Langton also suggested that the move contributed to promoting awareness of the islands’ state of health. They have one of the highest rates of obesity in the world. The 2021 UN Report shows that 84.7% of Samoa’s population is overweight. Translated into numbers, only 31,000 out of a population of around 200,000 inhabitants are “normal.”

Be this as it may, for the moment this pricing model has merely been an experiment with a time limit, perhaps because of the discriminatory implications. In any case, what is happening now is that some American airlines ask passengers who are severely overweight to buy two tickets when a flight is full.

Summary

Pay per use, or payment for usage, is payment to the supplier for a product or service according to its actual usage.

Compared to renting or leasing, which typically give the consumer complete rights of usage for a limited period of time, use-based payment closely links payment to the customer’s patterns of usage. This makes pay per use more attractive to consumers who do not use a product so frequently. Thus pay-by-use models make it possible to access quality resources without any significant capital outlay.

With the rapid growth in cloud computing and technological progress in general, as well as in data management, payment for use is spreading in a number of sectors. The Winterhalter case in the sector of domestic electrical products, Rolls Royce in that of aeronautic engines, Atlas Copco in that of compressed air, and Zipcar in mobility are only a few of the numerous sectors in which it is being applied.

The introduction of pricing models based on payment for use may occur for different reasons: the need for greater flexibility, generation of cash flow, economic accessibility, customer satisfaction, or to avoid the burden of ownership.

When set up correctly, they make it possible to remove the barriers to purchasing and monetize the value provided to the customer according to a precise target. Innovative businesses that adopt payment for use can benefit from important scale economies, even winning a substantial market share from players who continue to limit their offer to the sale of goods.

Interested in deep diving this topic? You will find more details in the book “The Pricing Model Revolution” that you can purchase on amazon or in the best book shops.