How to charge in servicizing: Per period or per use?

Abstract

In a servicizing business model, the service provider sells a product’s functionality, not the product per se. This study aims to find the best profit-maximizing pricing strategies for this business model that can also yield the highest consumer welfare with minimal environmental impact. This approach identifies win-win-win strategies satisfying profit, planet, and people objectives. As providers charge consumers based on usage (pay-per-use) versus a regular flat fee (pay-per-period), the economic, environmental, and welfare implications of such strategies remain unclear. We tackle this problem using a stylized game-theoretic model where the service provider first designs the pricing schemes, and consumers react by adjusting use. When offering a single product, we observe that pay-per-use policies outperform pay-per-period when the service provider is cost-inefficient or small-scale. Also, where per-use consumers are not very sensitive to payment frequency, service providers tend to exclude low usage-valuation users. Outperformance also prevails when the proportion of low-use consumers is sufficiently low. Our results show that a win-win strategy can be achieved by offering a pay-per-use policy to high usage-valuation consumers, however, a win-win-win strategy is never possible. We also analyze the problem for a situation where the service provider offers a product line including green and regular products. Then, we characterize possible win-win-win strategies that hinge on environmental impact from different phases of a product’s lifecycle. We extend the models to allow SP i) influence the size of market segments and ii) decide on product greenness levels in different phases of its lifecycle.

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