The pay-as-you-go business model enables consumers to make a one-time purchase of a product or service without having to subscribe to a regular payment. The pay-as-you-go business model has become an important companion and alternative, to subscription-based business models. Where users that don’t want to pay regularly for a service, can opt into a pay-as-you-go-plan. For cloud business models, an hybrid (subscription and pay-as-you-go) is often the standard.
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Understanding the pay-as-you-go business model
For whatever reason, many consumers are reluctant to migrate to a subscription plan from a free product. Unless the product is supported by a revenue stream such as advertising, there can be little scope for the business to make money.
One alternative is the pay-as-you-go (PAYG) business model, which minimizes costs for the consumer since they only need to pay when they require access and can afford to do so. As a result, this model may appeal to budget-conscious consumers who are infrequent or temporary users of a product or service.
There are two ways this model can be implemented:
The customer purchases a certain amount of credits for a fee, with the credit balance decreasing as they use the product or service. Once the credit balance reduces to zero, the customer no longer has access and must purchase more credit.
The customer is billed for the number of resources they use over a predetermined period. Resources may be data, user, feature, storage, or time-based.
Note that some companies will utilize a mixture of both approaches.
Examples of the pay-as-you-go business model
Consumption-based pricing models can be found in many industries, including:
Telecommunications
Most smartphone and internet providers offer prepaid data to consumers for a fee. Once the data has been used, some providers revert to dial-up speeds or require the consumer to purchase more.
Internet advertising
Google and Facebook make money by selling prepaid advertising credits for their respective pay-per-click (PPC) platforms.
These platforms tend to charge clients based on the resources they consume, including the number of messages sent or the amount of storage used in gigabytes.
Cloud infrastructure
Similarly, companies selling access to cloud infrastructure may charge based on storage costs, API calls, or bandwidth, among other things.
Utilities
Power and water companies bill customers according to how much power and water they use. Some may also offer consumers credit to put toward future bills if they pay the current bill before the due date.
Strengths and weaknesses of the pay-as-you-go business model
There are several clear and important strengths of the pay-as-you-go business model for consumers and businesses. These include:
A smaller barrier to entry – for the low-income consumer, the model makes products and services once out of their reach more accessible. Accessibility is also increased for the consumer who prefers not to commit to a subscription. For the business, this increases the size of the total addressable market.
Better tracking – since the consumer is only paying when they use the product, the business can better manage its cost-per-use. Products and product features that deliver the best returns will become evident over time and the business can gain a deeper understanding of consumer buying and usage patterns.
Let’s now take a look at some of the weaknesses:
Lack of customer retention – by its very nature, the pay-as-you-go business model does not favor customer retention. Without an established and consistent opportunity to build a relationship, the business may find it difficult to keep consumers engaged.
Unpredictable revenue – it can also be problematic to predict revenue because consumers are purchasing the product or service on their schedule. Revenue may fluctuate to such an extent that cash flow may be impacted.
Key takeaways:
The pay-as-you-go business model enables consumers to make a one-time purchase of a product or service without having to subscribe to a regular payment.
The pay-as-you-go business model is found in many industries, including telecommunications, advertising, software-as-a-service, cloud infrastructure, and utilities.
The pay-as-you-go business model lowers entry barriers for consumers and enables the business to determine the products delivering superior ROI. However, the model does not favor customer retention and revenue is difficult to predict.
Key Highlights
Definition of PAYG Model: The pay-as-you-go business model allows consumers to purchase a product or service with a one-time payment, without committing to a regular subscription fee. It’s an alternative to subscription-based models and is particularly appealing to users who want flexibility in payment.
Hybrid Model: In many cases, businesses adopt a hybrid approach, combining subscription and pay-as-you-go elements. This is common in cloud-based services.
Consumer Perspective: PAYG caters to budget-conscious consumers who use a product or service infrequently and prefer paying only when they need access.
Implementation Methods:
Credit-Based Model: Consumers purchase credits and use them as they access the product or service. When the credit balance reaches zero, they need to purchase more to continue using.
Resource-Based Model: Consumers are billed based on the resources they consume over a specific period. Resources could include data, features, storage, or time.
Industries Using PAYG Model:
Telecommunications: Prepaid mobile and internet plans where users pay for a set amount of data.
Internet Advertising: Platforms like Google and Facebook sell prepaid advertising credits for their pay-per-click (PPC) services.
Software-as-a-Service (SaaS): Charging clients based on the resources they use, like the number of messages sent or storage consumed.
Cloud Infrastructure: Charges based on factors like storage, API calls, and bandwidth in cloud services.
Utilities: Billing customers based on their consumption of power and water.
Strengths:
Accessibility: Lowers the barrier to entry, making products/services accessible to low-income consumers and those who prefer non-committal options.
Better Tracking: Businesses can analyze cost-per-use and gain insights into consumer behavior and preferences.
Total Addressable Market: Expands the potential customer base by catering to a wider range of users.
Weaknesses:
Customer Retention: Lacks inherent mechanisms for customer retention as there’s no ongoing commitment. Building relationships can be challenging.
Unpredictable Revenue: Revenue fluctuates based on when consumers choose to make purchases, impacting cash flow predictability.
C3 AI is a cloud-based Enterprise AI SaaS company. It built a set of proprietary applications (known as the C3 AI suite) that offer its clients the ability to integrate digital transformation applications with fast deployment and no overheads. C3 AI makes money primarily via its subscription services and professional fees.
Microsoft Azure
The AI Ecosystem has generated a multi-billion dollar industry, and it all starts from data. Going upward in the value chain there are the Chips (GPUs) that allow the physical storing of Big Data (a dominant player is NVIDIA). That Big Data will need to be stored on platforms and infrastructures that SMEs can’t afford. That is where players like Google Cloud, Amazon AWS, IBM Cloud, and Microsoft Azure come to the rescue. At a large scale, a few corporations control the Enterprise AI market; while nations like China, the USA, Japan, Germany, the UK, and France have widely bet on it!
As you can see from the visualizations above, cloud players are manufacturing models and algorithms, that becomes an integrated part of their cloud-based offering and platform. This is what attracts more AI developers and companies to become part of the ecosystem, thus, in turn, consuming more cloud infrastructure.
Google Cloud
In 2019, Alphabet’s (Google) Cloud Business was an almost $9 billion unit within Alphabet’s Google overall businessmodel; to gain a bit of context; Microsoft intelligent cloud netted nearly $39 billion and Amazon AWS $35 billion in the same year.
Amazon AWS
Amazon AWS follows a platform business model, that gains traction by tapping into network effects. Born as an infrastructure built on top of Amazon’s infrastructure, AWS has become a company offering cloud services to thousands of clients from the enterprise level, to startups. And its marketplace enables companies to connect to other service providers to build integrated solutions for their organizations.
IBM Cloud
Started in 1911 as Computing-Tabulating-Recording Company (CTR), called then International Business Machines by 1924. IBM primarily makes money by five segments (cognitive solutions, global business services, technology services, and cloud platforms, systems, and global financing) with also innovative products such as IBM Watson and IBM Blockchain.International Business Machines Corporation (IBM) is an American multinational technology company. It was founded in New York as the Computing-Tabulating-Recording Company in 1911 by Charles Ranlett Flint. IBM is a diverse company with a similarly diverse portfolio of products and services. It produces and sells hardware, middleware, and software. It also offers hosting and consultancy services in nanotechnology and mainframe computers. What’s more, IBM has a strong culture in research and development, filing the most U.S. patents of any business for the past 28 years.
An effective business model has to focus on two dimensions: the people dimension and the financial dimension. The people dimension will allow you to build a product or service that is 10X better than existing ones and a solid brand. The financial dimension will help you develop proper distribution channels by identifying the people that are willing to pay for your product or service and make it financially sustainable in the long run.
Business model innovation is about increasing the success of an organization with existing products and technologies by crafting a compelling value proposition able to propel a new business model to scale up customers and create a lasting competitive advantage. And it all starts by mastering the key customers.
Digital and tech business models can be classified according to four levels of transformation into digitally-enabled, digitally-enhanced, tech or platform business models, and business platforms/ecosystems.
A digital business model might be defined as a model that leverages digital technologies to improve several aspects of an organization. From how the company acquires customers, to what product/service it provides. A digital business model is such when digital technology helps enhance its value proposition.
A tech business model is made of four main components: value model (value propositions, mission, vision), technological model (R&D management), distribution model (sales and marketingorganizational structure), and financial model (revenue modeling, cost structure, profitability and cash generation/management). Those elements coming together can serve as the basis to build a solid tech business model.
A platform business model generates value by enabling interactions between people, groups, and users by leveraging network effects. Platform business models usually comprise two sides: supply and demand. Kicking off the interactions between those two sides is one of the crucial elements for a platform business model success.
A Blockchain Business Model is made of four main components: Value Model (Core Philosophy, Core Value and Value Propositions for the key stakeholders), Blockchain Model (Protocol Rules, Network Shape and Applications Layer/Ecosystem), Distribution Model (the key channels amplifying the protocol and its communities), and the Economic Model (the dynamics through which protocol players make money). Those elements coming together can serve as the basis to build and analyze a solid Blockchain Business Model.
In an asymmetric businessmodel, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus have a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility.
In an asymmetric businessmodel, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus having a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility. This is how attention merchants make monetize their business models.
While the term has been coined by Andrew Lampitt, open-core is an evolution of open-source. Where a core part of the software/platform is offered for free, while on top of it are built premium features or add-ons, which get monetized by the corporation who developed the software/platform. An example of the GitLab open core model, where the hosted service is free and open, while the software is closed.
Cloud business models are all built on top of cloud computing, a concept that took over around 2006 when former Google’s CEO Eric Schmit mentioned it. Most cloud-based business models can be classified as IaaS (Infrastructure as a Service), PaaS (Platform as a Service), or SaaS (Software as a Service). While those models are primarily monetized via subscriptions, they are monetized via pay-as-you-go revenue models and hybrid models (subscriptions + pay-as-you-go).
Open source is licensed and usually developed and maintained by a community of independent developers. While the freemium is developed in-house. Thus the freemium give the company that developed it, full control over its distribution. In an open-source model, the for-profit company has to distribute its premium version per its open-source licensing model.
The freemium – unless the whole organization is aligned around it – is a growth strategy rather than a business model. A free service is provided to a majority of users, while a small percentage of those users convert into paying customers through the sales funnel. Free users will help spread the brand through word of mouth.
A freeterprise is a combination of free and enterprise where free professional accounts are driven into the funnel through the free product. As the opportunity is identified the company assigns the free account to a salesperson within the organization (inside sales or fields sales) to convert that into a B2B/enterprise account.
A marketplace is a platform where buyers and sellers interact and transact. The platform acts as a marketplace that will generate revenues in fees from one or all the parties involved in the transaction. Usually, marketplaces can be classified in several ways, like those selling services vs. products or those connecting buyers and sellers at B2B, B2C, or C2C level. And those marketplaces connecting two core players, or more.
B2B, which stands for business-to-business, is a process for selling products or services to other businesses. On the other hand, a B2C sells directly to its consumers.
A B2B2C is a particular kind of business model where a company, rather than accessing the consumer market directly, it does that via another business. Yet the final consumers will recognize the brand or the service provided by the B2B2C. The company offering the service might gain direct access to consumers over time.
Direct-to-consumer (D2C) is a business model where companies sell their products directly to the consumer without the assistance of a third-party wholesaler or retailer. In this way, the company can cut through intermediaries and increase its margins. However, to be successful the direct-to-consumers company needs to build its own distribution, which in the short term can be more expensive. Yet in the long-term creates a competitive advantage.
The C2C business model describes a market environment where one customer purchases from another on a third-party platform that may also handle the transaction. Under the C2C model, both the seller and the buyer are considered consumers. Customer to customer (C2C) is, therefore, a business model where consumers buy and sell directly between themselves. Consumer-to-consumer has become a prevalent business model especially as the web helped disintermediate various industries.
A retail business model follows a direct-to-consumer approach, also called B2C, where the company sells directly to final customers a processed/finished product. This implies a business model that is mostly local-based, it carries higher margins, but also higher costs and distribution risks.
The wholesale model is a selling model where wholesalers sell their products in bulk to a retailer at a discounted price. The retailer then on-sells the products to consumers at a higher price. In the wholesale model, a wholesaler sells products in bulk to retail outlets for onward sale. Occasionally, the wholesaler sells direct to the consumer, with supermarket giant Costco the most obvious example.
The term “crowdsourcing” was first coined by Wired Magazine editor Jeff Howe in a 2006 article titled Rise of Crowdsourcing. Though the practice has existed in some form or another for centuries, it rose to prominence when eCommerce, social media, and smartphone culture began to emerge. Crowdsourcing is the act of obtaining knowledge, goods, services, or opinions from a group of people. These people submit information via social media, smartphone apps, or dedicated crowdsourcing platforms.
In a franchained business model (a short-term chain, long-term franchise) model, the company deliberately launched its operations by keeping tight ownership on the main assets, while those are established, thus choosing a chain model. Once operations are running and established, the company divests its ownership and opts instead for a franchising model.
Businesses employing the brokerage business model make money via brokerage services. This means they are involved with the facilitation, negotiation, or arbitration of a transaction between a buyer and a seller. The brokerage business model involves a business connecting buyers with sellers to collect a commission on the resultant transaction. Therefore, acting as a middleman within a transaction.
Dropshipping is a retail business model where the dropshipper externalizes the manufacturing and logistics and focuses only on distribution and customer acquisition. Therefore, the dropshipper collects final customers’ sales orders, sending them over to third-party suppliers, who ship directly to those customers. In this way, through dropshipping, it is possible to run a business without operational costs and logistics management.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
