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  • Milos Dunjic

Case For Offering Pay Per Use Alternative To Subscriptions

Let's get one thing out of the way right from the start - I personally do not like subscriptions. Netflix and Amazon Prime are the only ones I had tolerated having so far. For everything else - I usually say "thanks, but no thanks". Online digital content subscriptions are a hassle to manage and keep track of, and in my personal view, as such, they may not be generating desired level of competitiveness between digital content providers. Most of them, unfortunately seem to be happily counting on customers forgetting about their subscriptions.


Subscriptions can also be a significant financial burden for many. For example, if customer wants to read articles from 20 different digital newspapers, in order to get different prospectives on the same set of issues or developments, they literally need to cash out $52 CAD / year for each subscription separately. That's princely sum of over $1000 CAD each year, just for ability to occasionally read articles from each of those digital newspapers.


There you go. Whether you might agree or disagree with my view, I personally think digital content providers shall consider offering pay per use payment options in addition to subscription and charge per single article, song, movie, concert or sport event broadcast, etc., without asking us to subscribe long term.


Sure, subscriptions are still fine as an alternative, but ONLY IF WE CHOOSE to switch to subscribing from pay per use model, which should be always, in my opinion, offered as default. I strongly believe that vast majority of us would more be willing to start paying sub-dollar amount per digital content item, and decide how many we really need to buy at the time, than to commit upfront to every digital service provider I might want to deal with.


Isn't Cost Per Transaction Prohibitive For Pay Per Use To Work Profitably For The Merchant?

Merchants are required to pay credit card transaction fees on every online sale. Those fees are usually composed of fixed fee component (30c on average) + variable fee component (on average 2.5% to 3% of the transaction value). These may not be exact numbers, as they always vary with type of card (premium reward card or basic credit card, etc) and card brand, but they are representing well the challenge the online merchants are faced with and is good enough for illustration purposes.


Now, regardless how small amount merchant may decide to charge consumer for a single newspaper story or sport event broadcast, their transaction cost can not go below 30c, which is the fixed component. If customers are willing to pay 90c per article, i.e. similar price they pay for single iTunes song, then merchant would incur transaction fee of 32c (30c fixed + 2c variable as 2.5% of 90c) and be left with net amount of 58c, with effective transaction costs representing 35.5% of their sale. No CFO would like to see that, I am sure.


Is There A Way To Enable Pay Per Use Model?

Even with these levels of transaction costs, there may be a way to make digital content sales profitable enough for the merchants, and be able to offer pay-per-use model. The technique is called transaction aggregation. Don't just take my word for it, as Apple clearly believes in the same model. They have been using it very successfully on their iTunes store, for over a decade. Here is how it works at the high level.


Digital content providers, instead of charging customer's credit card (which they have on file) for a full subscription upfront, could use it in a following way:


  1. On a very first digital content item sale (let's say merchant decides to charge 90c per digital content item), online merchant submits pre-authorization for, let's say $10, which just reserves the amount, without actually charging the customer's credit card account. Pre-auths on credit cards are valid for at least couple of weeks (possibly even longer), so this effectively acts as 'short term virtual subscription', allowing customer to buy up to 11 digital content items from that merchant in the next two weeks.

  2. for every repeat purchase during the current aggregation cycle of two weeks, merchant maintains running total of digital content item sales for the customer, and as long as the customer's running total is less or equal to $10, customer get access to the content to consume it.

  3. whatever hits first - either customer running total of digital purchases reaches $10 before the end of two weeks cycle OR two weeks cycle expires before running sales total reaches $10 - merchant submits capture (completion is the alternative name) for the amount equal to the final total of digital purchases customer made in the current aggregation cycle. At this point, the current aggregation cycle ends, customer's credit account gets charged and merchant gets paid (minus transaction fee of 30c + 2.5% of capture amount). NOTE: If customer purchased 1 < N <= 10 digital content items, then merchant transaction cost of (30c + 2.5%) is nicely spread across N sales, i.e. the total transaction cost would be reduced N times. Higher the N (repeat sales by the same customer), better the economics per transaction for the merchant.

  4. At this point, merchant waits for the next purchase from the same customer, and simply re-starts brand the brand new transaction aggregation cycle from step 1

This seems more fair for the customers, especially those unwilling to commit for full yearly subscription. They are only paying for the digital content WHEN and HOW MUCH they want to consume. Of course, consumers may start with pay per use, and then evaluate overtime, which mode of payment is more appropriate for them, based on how many digital content items they usually consume per week from that digital content provider, and go with that.


On the merchant side, if customer buys 10 digital content items during the period of two weeks, the merchant total sales would be $0.9, with effective cost per transaction being 3.2c. If customers purchases 5 digital content items, merchant sales total would be $0.45 and the cost per transaction would be 6.4c. Clearly a lot better than 32c, when each sale is processed as a separate credit card transaction. Clearly if the volume of repeat purchases is high enough during the aggregation cycle, cost per transaction improves, as it is clearly demonstrated in case of Apple.


Conclusion

It is clear to me why many digital content providers may prefer subscriptions, since it is definitely more stable and predictable revenue stream than charging per single article. However, I also believe that majority of potential customers, who are currently unwilling to subscribe, would likely be happy to consume, if offered ability to pay per item. Digital content merchants currently earn zero revenue from customers unwilling to subscribe, so why not try to tap into that segment, by giving them the ad-hoc payment alternative and let them decide over time, whether to switch to subscribing?


Pay per use model would also force digital content providers to become lot more competitive, and keep their content high quality and relevant, so that it generates repeat purchases. It would also allow customers ability to consume digital content from many different providers, for a lot less.


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