Repository logo
 

Product selling vs. pay-per-use service: a strategic analysis of competing business models

Accepted version
Peer-reviewed

Type

Article

Change log

Authors

Ladas, K 
Kavadias, Stylianos  ORCID logo  https://orcid.org/0000-0002-9769-2642

Abstract

We present a model that suggests possible explanations for the observed proliferation of “pay-per-use" (PPU) business models over the last two decades. Delivering “fractions" of a product as a service offers a cost advantage to customers with lower usage but requires extra delivery costs. Previous research focused on information goods (with negligible production costs) and predicted that PPU, when arising as a differentiation to selling in equilibrium, fundamentally achieves lower profits than selling. We extend the theory by covering goods with any production cost, in duopolistic competition. We show that PPU business models can be more profitable than selling (especially at mid-range production costs), as long as their delivery costs are not too high, a requirement that is more easily fulfilled as new technologies reduce these costs. Moreover, if firms are imperfectly informed about their customers' usage profiles, PPU's effective pricing of customers' varying usage offers an additional advantage over selling. This requires companies to employ accounting methods that do not inappropriately allocate production costs over stochastic usage levels. If PPU service provision suffers from queueing inefficiencies, this does not fundamentally change the relative profitability of the PPU and selling models, provided that PPU providers can attract sufficiently high demand to benefit from pooling economies.

Description

Keywords

pricing strategy, usage-based pricing, pay-per-use, business models

Journal Title

Management Science

Conference Name

Journal ISSN

0025-1909
1526-5501

Volume Title

Publisher

Institute for Operations Research and Management Sciences

Rights

All rights reserved
Relationships
Is derived from: