February 15, 2005

Advantages of Flat Rate pricing

Tom Evslin writes on the attractiveness of "flat-rate" or "all you can eat" pricing to both consumers and service providers:

If you can find a way to price a service at a flat monthly rate, you can make a better profit per customer and attract more customers than if your pricing is based on reading a meter. You also save a fortune in detailed billing, dispute resolution, and issuing credits...

...When we started AT&T WorldNet Service, we borrowed that idea and popularized it with the still hugely powerful AT&T brand behind it. Some said we’d go broke; others that we would ruin the Internet.

To hedge our bets, we also offered a metered access plan. We didn’t want to lose out on people who planned to spend less that $19.95 per month. To our surprise, people typically converted themselves from metered access to subscription when their monthly bill was around eleven or twelve dollars. And their usage didn’t spike after conversion. People were paying a premium for predictability and simplicity. With a subscription plan, they didn’t feel they had to keep track of minutes to make sure they weren’t being overcharged and they weren’t worried about surprises...

...There are two good arguments against subscription pricing:

1. If the subscription rate is high enough to return a profit for customers with typical use, it will be too high for customers with low usage so you will lose them.

2. Some customers will “abuse” the fixed price and overuse the service; perhaps even resell it.

Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.