You hear the terms “subscription economy” and “subscription commerce” all the time. And with good reason. Subscription-based monetization is transforming business as we know it. But what about usage? Where’s the “consumption economy”? Turns out, it’s all around us.
When most people think of usage-based billing, the example that probably comes to mind first is metered public utilities — water, gas and electric. Phone services, especially mobile, might come next. Then maybe taxis. And that’s about as far as most of us get before we scratch our heads. What else is there? Plenty. In this post, we take a look at several market niches where pay-per-use options are already the norm and why they work.
Vacation rentals. Last year, a couple I know traveled around the world — all the way around. It took eleven months. They visited every continent but Antarctica. A big reason they could afford the trip? Airbnb. With this disruptive room booking service and a laptop, they were able to stay in comfortable private homes almost everywhere they went — and for a fraction of the cost of hotels.
There’s nothing new about the monetization strategy behind vacation rental services like Airbnb. It simply takes advantage of unused capacity (spare rooms, in this case) and offers it for purchase on a usage basis. And the idea is catching on. Zipcube (office space) and Airtask (task outsourcing) are just two examples of the many companies that are profiting from the monetization opportunities in a new high-growth arena called “collaborative consumption.”
Auto Insurance. Traditional car insurance premiums are an example of a subscription-based service. You pay an annual or semi-annual fee and you’re covered no matter how much or how little you drive. In the past couple of years, Allstate, State Farm, the Hartford, Progressive and others have begun offering an alternative to standard premiums. They’ve introduced consumption-based pricing as a means to build customer loyalty in a notoriously competitive industry. With these new pay-as-you-drive policies, also known as “usage-based insurance,” customers are billed only for the time they actually spend behind the wheel. For many, usage-based insurance can lower premiums by up to 50%.
Personal transportation. Zipcar is an innovative example of applying a subscription plus usage monetization model to carve out revenues in an underserved market niche – urban transportation. Prior to Zipcar, if you lived in a large city and didn’t own a car, the only way you could get around was on public transportation. If you wanted the privacy and convenience of a car, but for just a few hours, your only option was to rent one for a whole day. You also had to get yourself to a rental location and then fill out forms once you got there before you got a key. For a low monthly fee and low cost per hour, Zipcar drivers can be on their way in just minutes. The cars are located within walking distance and the keys are waiting inside. Drivers pay only for how long they drive. Ownerless car services like Zipcar are springing up across the globe.
Healthcare. Medical equipment is notoriously costly. That may be one reason why pay-per-use arrangements have been a fixture in healthcare for years. It’s the only way many hospitals and clinics can afford the equipment they need. In fact, nearly two-thirds of all medical devices are financed, mainly through leasing, according to data compiled by the Equipment Leasing & Financing Association (ELFA). For eight out of the past nine years, healthcare has occupied the top rung on ELFA’s annual list of “What’s Hot” in equipment leasing. Medical equipment makers like Medtronic and GE Healthcare continue to extend their use of consumption-based monetization, especially in areas of advanced diagnostics systems.
As a side note, other industries at the top of ELFA’s hot list include construction, trucking, rail and oil and gas — all of which require very expensive equipment. These industries rely heavily on usage-based payment mechanisms to help their customers lower capital and operating expenses and minimize total cost of ownership.
Online and cloud services. GE Healthcare provides cloud-based storage solutions for medical imaging on a usage basis. It’s just one of hundreds of services that are taking advantage of the convenience and affordability that utility-based pricing delivers. Utility pricing is employed in everything from NearlyFreeSpeech.NET, which pioneered “pay for only what you use” web hosting services, to Microsoft Azure to Amazon Web Services to data storage company Box. Consumption billing is ideal in these instances because what people are buying, whether it’s virtual space on a cloud server, CPU cycles or data bandwidth are fluctuating commodities they require — and consume — on demand.
Usage-based monetization, already well ensconced, is headed for enormous expansion in the coming years. Its adoption is accelerating in such fast-growing areas as the Internet of Things (IoT), collaborative consumption and the sharing economy. For companies seeking to maximize revenues, consumption-oriented pricing deserves thorough exploration.