Usage-based pricing is becoming a business model that creates successful companies and changes entire industries. Under this framework, products and services are monetized via unit consumption rather than flat fees.
While this pricing structure has long been the norm in a small handful of industries, we’re beginning to see it explode into virtually every business arena, including telecommunications, software, energy, and even frozen yogurt.
Insurance companies are also embracing usage-based policies on an increasing basis. MetroMile, for example, offers policyholders a per-mile auto insurance plan based on data gathered from a device attached to a vehicle’s diagnostic port.
The momentum is clearly building toward wide-scale adoption of usage-based pricing. However, it still may not be immediately clear whether this option is accessible to businesses of all types — or if it’s worth the investment.
Why Usage-Based Pricing?
Usage-based pricing provides economic benefits to all involved parties.
For businesses, it can be extremely difficult to budget and remain within risk thresholds when the variability of a used resource is great. Usage-based pricing mitigates this risk, allowing companies to forecast everything from supply, demand, and revenue with more accuracy than ever. It removes much of the guesswork from the equation, leading to a clear future outlook and better fiscal planning.
On a consumer level, the perks of usage-based pricing are both financial and psychological. More money ends up in customers’ wallets because they only pay for what they use — not a traditional flat monthly rate. For example, someone who decides to ride her bike to work every day for a month will end up seeing a lower auto insurance premium than she usually does. And in the end, the transparency and fairness of this pay-for-what-you-use model boosts her overall satisfaction with her provider.
Usage-based pricing is certainly an appealing option for middle-market companies of all types, but there’s an undeniable technological investment associated with it that often limits a business leader’s excitement. Current systems and infrastructure need to be updated in order to accommodate this pricing model as the collection and analysis of consumer-level data becomes an essential business function.
Thankfully, innovations through the Internet of Things are making usage-based pricing affordable, accessible, and highly lucrative for any and all businesses. Here are the three main ways it’s doing so:
- Enabling Easy Partnerships
IoT solutions are developing in such a way that companies can now partner with solution providers that have fully baked, deployable applications. A usage-based pricing strategy can essentially be licensed or rented, making the required time and capital investments much less of a hurdle.Progressive Insurance, for example, partnered with automobile dongle manufacturerZubie to create devices that attach to cars and beam usage data to the provider’s headquarters. This plug-and-play partnership easily granted Progressive the technology it needed to gather data and offer usage-based policies with minimal investment.
2. Lowering Costs
Thanks to IoT, connectivity costs and coverage have evolved to the point where it finally makes sense to transition to a usage-based model. Wireless footprints are broadening, and a host of more affordable connectivity options beyond satellite and cellular allow cost-effective solution deployment.
Cellular connectivity is in the $20 to $50 range per device, per month, and satellite connectivity costs upwards of $100 per device, per month. A network designed specifically for low-power, wide-area machine connectivity can do so at a much lower price — only a few dollars per device, per month. Additionally, a machine-centric network does not compete with other higher bandwidth (and higher monthly revenue) devices on the same network.
3. Opening New Revenue Streams
IoT offers much more than just insight into a specific case or customer. Analytics are becoming more and more advanced, allowing companies to monetize data to create supplementary revenue streams in countless creative ways.
For example, a municipality that monitors its parking meter availability via the IoT could share its data with consumers — resulting in additional revenue due to the better usage of parking spaces — andwith the police department —who would no longer need to pay an officer to check for expired spaces. The turnover in spaces would be significantly more efficient, and the processing of parking violations would be automated, leading to more revenue and saved money for all parties.
As you read this, more and more IoT data-gathering devices are hitting the market, and more and more companies across various industries are utilizing them. Get in on the ground floor today, and begin exploring the many ways usage-based pricing can unlock new doors for your company.