What is Pay-Per-Use?
Pay-per-use is a monetization model that can be applied to software where value can be effectively parceled into saleable units. It may sound familiar from pay-per-view media in the broadcast and streaming technology world.
Enterprise software companies have been evolving to offer 'pay as you consume' models that challenge the costs of paying upfront licensing, maintenance and installation. For on-premises software, embedded software and Software as a Service (SaaS) deployment models, pay-per-use and subscription models are increasingly commonplace.
Pay-per-use can loosely be defined as metered use of a product or service, where users are charged for the access.
Customers typically authorize an agreement that initiates a payment every time they use the software, and it's important to communicate such software licensing terms clearly and learn from user engagement over time to align price with value.
For SaaS companies, pay-per-use makes the value relationship clear to customers and aligns revenue to the cost of scaling the product. Because there is no minimum commitment or startup cost involved, enterprise customers that may take months to weigh up purchasing decisions may be encouraged to try the SaaS service sooner. Pay-per-use also benefits the user by providing granular, use-by-use data for the product or service usage, helping to refine their SaaS purchasing decisions and ongoing relationships with the software vendor.
The pay-per-use pricing model
Advantages of a pay-per-use pricing model for software include: a clear value proposition on usage that customers easily understand, and the ability to disrupt the market or gain significant market share in high margin areas.
Challenges of pay-per-use include: needing to keep a careful watch on fixed and variable costs to maintain per-use profitability, and the potential for an unpredictable business model that's too dependent on lead generation sales and marketing efforts.
The pay-per-model: customer pros and cons
Advantages for customers or a user of a pay-per-use model include: paying only for usage unlike a subscription model, helping to control costs when demand is variable or likely to be under expectations; and no upfront setup costs or outlay to pay.
Challenges of pay-per for customers include: high costs during peak usage periods; the total cost of ownership (TCO) may not be reduced compared to other models; and there's little upfront expense to pay and put on balance sheets.
Driving business revenue per use
There are plenty of examples of businesses deriving significant revenue from a pay-per-use or pay per model. Amazon Web Services (AWS) meet the needs of startup customers by providing modular, build-to-buy server infrastructure in an innovative business model where customers prefer to only pay for the minimum they use. Before, servers had extortionate upfront setup costs. By using pay-per-use, AWS have made infrastructure a digestible, easy to like operating expense that can be easily scaled up or down.
Similarly, the Internet of Things (IoT) – a network of internet-connected objects – is heavily reliant on the cost per use payment model to drive revenue.