Pricing on‐demand services: Alternative ways of combining usage and access fees

Manish Gangwar and Hemant K. Bhargava

Production and Operations Management, 2023, vol. 32, issue 1, 11-27

Abstract: Many firms are adopting an “everything or anything” as a service—“XaaS”—model to sell goods and value‐added services. Buyers for such goods are heterogeneous both in the number of units they desire and the valuations for each unit. Suppliers designing such revenue models can offer either a usage‐based per‐unit fee or an access‐based per‐period fee, often combining them both as a nonlinear two‐part tariff plan that imposes both types of fees on all buyers or let buyers self‐select from a menu of per‐unit and per‐period plans. We develop a theoretical model to analyze the economic implications of alternative designs for mixing per‐unit and per‐period fees. Our analysis produces the following practical insights on these plans' profitability and market coverage. First, the menu is generally a better way of combining access and usage fees for a firm selling digital goods with zero variable costs. Second, the preferred design switches to a two‐part tariff if the firm's production environment resells or runs on top of a back‐end infrastructure or data service provider that imposes nonnegligible variable costs. Third, we show that the revenue advantage of these two designs (which employ both fees) over a simple plan that employs only one fee (best of per unit and per period) is most significant when the rate of change in marginal valuation is relatively similar across buyers.

Date: 2023
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