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What is Pay-As-You-Go Pricing?
Pay-as-you-go pricing is a pricing model that lets customers pay based on how much they use a product or service. With pay-as-you-go, the only parameters are the unit of usage (e.g., GB of storage) and the amount charged for each unit.
Unlike flat-rate pricing, customers don’t have to subscribe to a set rate or pay for additional features they don’t need. Instead, they pay as their usage changes from month to month.
Companies using a pay-as-you-go strategy offer prepaid or postpaid plans, or a mixture of the two.
- Prepaid: Customers pay for a set amount of usage in advance. The advantage to prepaid plans is that customers know exactly what their expenses will be each month, while businesses don’t have to worry about chasing down customer payments after the usage period.
- Postpaid: Customers use a product or service and receive an invoice at the end of the billing period. This model is ideal for customers who may have unpredictable usage patterns or for businesses that need to be flexible with their pricing structure.
- Both: Many companies bill after the usage period as a standard, but offer prepaid packages to attract more customers or standardize the billing process.
The pay-as-you-go model is flexible, which makes it easy to scale up or down while giving customers more control over their spending. It also directly attributes the amount of value to usage patterns, so some believe it is a fairer value exchange.
That said, there are times where pay-as-you-go isn’t the best representation of a company’s value proposition. Some customers find its variability difficult to budget for while others find that the cost per unit adds up quickly.
- Consumption-based pricing
- Pay-as-you-go model
- PAYG model
- Usage-based pricing
- Metered usage pricing
How Pay-as-You-Go Pricing Works
Pay-as-you-go pricing is more complex than other payment models because it has several steps. Since it relies on triggers to initiate billing terms and payments, it also requires subscription billing software — traditional invoicing practices won’t cut it.
- Establish the unit of usage. The provider needs to decide how it will measure consumption, such as GBs of storage used or hours worked on a project. Drawing the line establishes the billing metric for pay-as-you-go pricing and tells the system where to charge for an additional unit of usage.
- Set the cost per unit. Based on the established unit, the provider needs to set a per-unit cost. This is usually based on some combination of market rates (competitive pricing), internal costs (cost-plus pricing), and service level (tiered pricing) but providers can also use it as an opportunity to differentiate themselves from competitors.
- Monitor usage. To make sure customers don’t exceed their allowance or incur charges they weren’t expecting, the software continuously tracks usage against billing metrics. The business will add usage thresholds or alerts to give customers a heads up when they’re approaching their limit. If any overages apply, the software will automatically begin billing them at the higher rate.
- Trigger billing events. Once the customer reaches the end of their payment period (typically monthly), the software triggers a billing event and sends an invoice. If they set up auto-pay, payment will automatically come out of their account. If not, the invoice will initiate a payment funnel.
- Receive payments, apply credit, and track it all. For pay-as-you-go pricing to work correctly, the business needs an efficient payment system that can accept payments from different sources (credit cards, bank transfers, etc), provide credits for unused units of usage, and accurately track invoices and payments over time.
Value Provided by the Pay-As-You-Go Model
Pay-as-you-go is a pricing strategy both customers and providers benefit from.
For customers, pay-as-you-go provides flexibility and control over their spending. They don’t have to commit to an ongoing subscription or pay for features they won’t use. Instead, they just pay for what they actually need.
For providers, the model brings in more revenue with less effort since it relies on automation to track usage and trigger payments. It also helps them align their pricing structure to more accurately reflect the value they are providing.
No Commitment Required
Although it’s in a business’s best interest to lock customers into contracts — and some pay-as-you-go businesses do, such as telecom providers — the vendor and customer benefit equally in a pay-as-you-go exchange.
For customers, it’s easier to start using a product or service when there’s no long-term commitment. At the end of each billing cycle, most pay-as-you-go models permit users to cancel their usage plan.
When a product or service is easier to say “yes” to, it increases the likelihood of customers trying it and potentially sticking around for the long haul. In a well-executed pay-as-you-go strategy, businesses enjoy better initial conversion rates and a higher customer lifetime value (CLV).
Since customers can control their usage with the PAYG model, they can adjust their consumption to fit their budget. This makes it easier for customers to pay for what they need on an ongoing basis, rather than having to save up a lump-sum payment or subscribe to a service that doesn’t meet their needs.
The affordability of the model also opens up services and products to those who wouldn’t otherwise have access due to price constraints (or who wouldn’t need the product enough to justify a higher cost).
It’s worth noting that there is an affordability threshold with some pay-as-you-go plans. When usage continually runs up when usage is continuously heavy, customers usually prefer a flat-rate price.
Uber, for instance, is a relatively low-cost option for getting around town. If the ride length is longer than two hours, it becomes more economical to take a train or a flight than an Uber. That’s when the flat-rate option starts to make more sense.
Better User Experience
Aside from the financial aspect, customers appreciate how easy pay-as-you-go is to use. With automatic billing and seamless integration into payment systems, customers don’t have to worry about forgetting their payments or dealing with tedious paperwork.
Since it’s built on usage consumption metrics, businesses can start tracking customer behavior in real time and adjust pricing accordingly (for example, giving them a better rate for higher consumption).
Pay-as-you-go pricing also helps businesses better manage their resources since they can adjust plans and features to meet customer demand. If usage spikes during certain periods of the year, providers can quickly increase capacity or add more users without having to start from scratch with new customers.
When customers receive itemized bills that break down their product usage, there’s no discrepancy in what they’re paying for and how much they owe. The billing system also accurately captures all associated fees and taxes so customers can be sure that their bill is accurate.
Pay-as-you-go pricing simplifies the invoicing process for businesses, too. When everything is automated, the provider doesn’t need to manually send out invoices or keep track of payments.
And if customers opt-in for auto-pay, businesses don’t have to worry about overdue invoices or payment errors.
Stable Cash Flow and Revenue Growth
Pay-as-you-go pricing creates a more stable revenue flow because companies receive payment for their products or services as customers use them. Especially in the case of prepaid PAYG plans, this significantly reduces the risk of bad debt and helps companies plan their cash flow.
For businesses that are just starting out, the PAYG model is a great way to establish a customer base and grow revenue incrementally as customers consume more of their product or service. It also helps reduce churn — customers learn to trust the provider and see value in their offering on an ongoing basis.
Subscription Model vs. Pay-As-You-Go
It’s possible to run a subscription business with pay-as-you-go, but it’s important not to confuse pay-as-you-go with “paying as you go,” which is what most subscribers do.
With pay-as-you-go, customers purchase a service or product and are billed automatically for each usage event. With subscriptions, customers typically pay a flat fee on a regular basis (monthly, quarterly, etc.) in exchange for access to an unlimited amount of services or products.
So while the two models have similarities — both charge customers for as long as they use them — the key difference is in the payment structure.
With pay-as-you-go, users are charged for their immediate needs and only pay for what they consume. Although subscribers pay each month for access to the subscription’s services, they pay the same rate regardless of what they actually use.
PAYG is, in that sense, the opposite of subscription. It’s based on usage, not time.
There is some overlap in the types of businesses operating under each model, though. SaaS companies, for instance, frequently use subscription-based pricing because their customers often require ongoing access to the service and the provider wants to lock them into a contract.
A software vendor would use PAYG instead when customers need access to the service only during certain periods of time, or when they use it in small bursts.
Pay-as-you-go models are better suited for businesses with variable usage or frequent upgrades/add-ons (such as cloud storage services). They also work when customers require a short-term solution, such as using a rental service (e.g., cars, Airbnb) or ordering delivery.
PAYG Business Model Examples
The pay-as-you-go model works in a variety of applications, but most commonly it’s used in the telecom, software-as-a-service (SaaS), and cloud services industries.
The telecom industry is an interesting application of the PAYG model because it telecom providers (e.g., AT&T, Verizon) have a natural monopoly over their industry.
They use PAYG to keep customers from switching carriers and ensure that customers only pay for the services they use — such as phone plans, data packages, and roaming fees.
However, they tend to offer flat-rate plans that are more “all you can eat” than PAYG or incorporate features like rollover data and family plans that incentivize customers to stay with the same provider while maintaining a PAYG model.
SaaS companies sometimes use pay-as-you-go models because it allows them to better manage their resources, ensure customer satisfaction, and accurately track revenue growth.
- Rideshare services like Uber and Lyft charge riders based on ride distance and duration.
- Payment processors like Stripe and Square charge businesses a flat-rate percentage of each transaction.
- Zapier charges overages on top of its flat-rate subscription plan for teams that exceed their allocated task limits.
- Mailchimp charges per email, and users can purchase as many email credits as they’d like.
- Clearbit bills customers each month based on how many API calls they make.
Cloud providers are similar to SaaS businesses (because they are SaaS businesses), but pay-as-you-go is more of a requirement for them.
- Snowflake charges based on credit usage (i.e., to run queries or perform a service) with credit pricing dependent on whether the customer uses the Sandard, Enterprise, or Business-Critical product edition.
- Azure bills customers for VMs on a per-minute basis. They only pay for the time a VM instance runs.
- AWS customers pay for the compute and storage resources they use, as well as data transfer fees when uploading or downloading files.
Since cloud infrastructure entails unpredictable capacity requirements in almost all cases, the PAYG model is the only viable pricing method these companies can use.
Technology Trends in PAYG Pricing and Billing
The biggest trend in pay-as-you-go pricing is system integration. The more integrated PAYG is in the overall tech stack, the more accurately a company can bill its customers and maximize revenue.
Companies achieve this by integrating the following business tools:
Customer Relationship Management (CRM)
A company’s CRM system is the heart of its technology infrastructure. It helps them keep track of customer data, sales activities, and other information required to manage the customer lifecycle.
Integrating CRM with billing brings forth insights about data usage for individual customers, customer segments, and how certain types of customers contribute to the company’s bottom line.
Since more and more subscription businesses are adopting at least a few elements of the PAYG model, subscription management platforms have started to add automation features that make it easier to implement usage-based billing.
These platforms enable businesses to track customer subscriptions, view usage details in real-time, and automatically charge customers for overages. Organizational leaders use all this data to gain insights into customer behavior and inform product decisions.
Configure, Price, Quote (CPQ)
CPQ software helps sales reps (or, in many cases, the buyers themselves) configure and price a product or service during the sales process.
The software also automates complex pricing calculations, enabling businesses to accurately charge customers based on usage and other variables (e.g., discounts, promotions, long-term usage commitments).
It’s especially helpful for businesses that allow their customers to prepay for service access or purchase product/service bundles.
Subscription companies typically have billing software built into their subscription management platform. Other business models require a separate billing platform to accurately charge their customers for usage.
Billing platforms enable businesses to track customer usage data, set thresholds for overage alerts, and seamlessly collect payments from customers through a variety of payment methods.
People Also Ask
What is the difference between pay-as-you-use and pay-as-you-go?
Pay-as-you-use is a pricing model that charges customers based on the resources they use, while pay-as-you-go bills customers for specific services or usage amounts. Utilities, for example, use pay-as-you-use models to charge customers for electricity, water, and gas.
What are the advantages of pay-as-you-go?
Pay-as-you-go models benefit businesses with variable usage or frequent upgrades/add-ons, such as cloud storage services and telecom providers. They also work well when customers require a short-term solution, such as using a rental service or ordering delivery. Additionally, PAYG models ensure customers only pay for what they use and reduce the risk of bad debt.