So when I was a kid, I was really fascinated by these video games.
So I used to borrow some money from my mom.
And the pricing model was super simple.
You just buy a token, play the game, and maybe repeat the process if you want.
And that reminds me of our interesting pricing model, that is pay as you go pricing model.
So, hey, everyone, my name is Navdeep.
And in this video we're going to talk about pay as you go pricing strategy.
This pricing strategy is used by multiple digital apps and cloud computing platform.
Now, pay as you go pricing model is also known as your usage based pricing or consumption based pricing
or maybe transaction based pricing.
Now, these different companies use this pricing model in different ways.
And that's why in this video we're going to talk about the different types of pay as you go pricing
model.
But before that, let's understand what exactly is as you go pricing strategy.
So in pay, as you go pricing model, a user pay based on how much they consume.
So if you are consuming more of a service, you end up paying more amount.
Now, let me give you example of all the companies that are using pay as you go pricing strategy.
The first example is AWS.
AWS is also known as your Amazon Web service.
It's a cloud computing platform from Amazon.
And if you are a developer or if you are into tech, I'm sure you have heard of this company.
Now, AWS will charge based on the amount of storage or cloud computing power you are using.
Now, similarly, your phone carrier, like AT&T or let's say if you are using any other company, their
build amount is based on the amount of minutes that you are using.
And similarly, the third example is Stripe or Square.
So these two companies are a payment gateway provider and they will take 1 to 2% of commission on every
single transaction.
Now, apart from these cloud computing platform and these payment gateway provider pay as you go pricing
model is also used by software companies.
So let's look at a few benchmark on how these software companies are using different pricing strategy
and business model.
So this benchmark is from a report published by and C 5000.
So they were analyzing 5000 software companies.
So 42% of those 5000 companies are using per seat subscription pricing model, 37% Companies were using
flat rate pricing model and 21% companies are using the usage based pricing model.
That's your pay as you go pricing.
So you can see that apart from flat rate and per seat subscription pricing model, some companies are
also using pay as you go pricing.
And these are all the companies that are charging their customer based on the amount of usage they have.
Now that you understand what exactly is pay as you go pricing.
Let's talk about the different types of pay as you go pricing plan.
So broadly, we have two different types of pay as you go pricing plan.
We have consumption base and credit base.
So in consumption base, you will get a bill based on your consumption.
So if you are using more of a service, you will get a higher bill in credit based, you have to purchase
some credit and then you can use in whatever way you want.
Let's talk about consumption base.
Now.
You can divide consumption base into three main categories.
You have transaction base, storage base and bandwidth base.
And let's understand these with the help of few example, if I'll give you a simple example of a transactional
base pay as you go pricing, you can understand this by looking at the business model of stripe or Square.
So Stripe is a payment gateway provider and if you wanted to use their service, they take 2.9% on every
single transaction and $0.30 as their transfer charge.
So whether you do ten transaction in a month using Stripe or let's say 10,000 transaction, they will
charge 2.9% commission on every single transaction with this additional 30 cent as a transfer charge.
Then you have storage, base consumption pricing.
Now a really good example of this is Amazon Simple storage service, also known as Amazon S3 Bucket.
So if you are using a software or a digital app, then chances are you might be storing some of the
media assets into that app.
And there is a very high probability that those guys are using Amazon S3 Bucket to store all the media
asset or document of their user.
And if more and more people store their document or media asset, then those companies have to pay a
higher amount to Amazon.
And that's the storage based pricing.
Third one is bandwidth based pricing.
And this pricing model is used by Gimlet, and I used to work for this company.
It's a video streaming platform so you can ingest your media asset and if other people will stream your
video, then you have to pay for the charge.
So it's a bandwidth based pricing.
If you are using more of their bandwidth, you have to pay a higher price.
Then we have credit based pricing, and this pricing strategy is used by companies like Audible.
So in audible, you will get some credit and people can use this credit to listen to these different
types of audiobooks on the platform.
Now, while we are discussing about pay as you go pricing, you may have one question in mind that why
there is a need to introduce pay as you go pricing when you already have.
Subscription pricing or a flat rate pricing.
Let's understand this with the help of one example.
So let's say you have taken a Netflix subscription for your family members or let's say a microsoft
Office subscription for your family.
And let's say less than 50% family member is using that subscription.
In that case.
The amount of value that you are getting from that subscription is less than the cost.
So you literally have to convince all your family member to use that subscription so that your value
will exceed your cost.
And that's the problem with subscription business model and subscription.
You literally have to use the product so that your value will increase your cost.
Otherwise, your cost will be higher than the value.
But in pay as you go, you are getting the value from your product from the very start.
If you are using one GB of service, then you are paying for just that one GB.
If you are using maybe one terabyte of service, then you're paying for one terabyte only.
And that's the beauty of pay as you go pricing model.
So let's talk about some advantage of using P as you go pricing over subscription.
The first advantage is low barrier to adoption.
Now, because you are not paying a flat subscription fees, you don't really have to think twice before
you start using the product that is using pay as you go.
I mean, you can simply add your credit card and if you find the product interesting, they will charge
for the amount of usage you have.
Unlike in subscription, if you add your credit card and if you're not using the product, you still
have to pay a specific amount.
The second advantage is that you end up capturing the latent demand for subscription.
Let's say your brand have so many competitor and few of them are using a subscription business model.
Now, all those customer who don't really want to pay a specific amount every single month will come
to you because now you are using pay as you go instead of subscription.
So you end up capturing the latent demand for subscription.
The third advantage is that you will have strong customer retention, not the biggest problem we saw
in the subscription is that people were canceling their subscription because they were not using the
service.
In pay as you go.
They don't really have to cancel the subscription.
I mean, if you're not using, we will not charge you as simple as that.
So in pay as you go, you will have a strong customer retention because you're only charging for the
amount of service they are using.