Re: [hackers-il] Fixed-price vs. per-use price
- On Sat, 28 Sep 2002, Nadav Har'El wrote:
> But I guess I was wrong, and the guy from Yediot was right. In O'Reilly'sactually, payment for software is different then payment for a service.
> Peer-to-Peer book  I found a reference to research [2, 3] by Fishburn and
> Odlyzko from AT&T Labs, which seems to explain why content bundling and
> fixed-price plans actually bring a monopoly more profits than per-use price
> plans, and also discuss companies who are in competition.
> Interestingly, consumers also seem  to psychologically prefer flat-rate
> schemes. So we're not likely to see many companies voluntarily convert to
> per-use pricing schemes. Ever wonder why there has been a lot of talk of a
> pay-per-use word processor but one never materialized? Maybe that's because
> Microsoft know that they will profit more from their current system, where
> you buy their software and use it as much as you want?
> Perhaps pay-per-use pricing isn't as "evil" as I always thought.
the service provided would charge you a _yearly_ (or monthly) fee - not a
single life-time one-time fee. for software - you pay for it once, and use
for a _long_ period of time. now, microsoft _Assumes_ that you replace
your software every X years, and thus buy an upgrade. so now they offer
you to rent this software on a yearly bases, with a price such that you'll
pay the full price of the software after 3 years of usage - but will be
entitled for free upgrades during those 3 years.
that sounds fair, but only if you are overlooking an important factor:
people buy new software now less often then they did in the past, and its
likely that they'll upgrade even less often in the future. the same thing
happened in the hardware arena, btw - in the past, people replaced their
PCs every 2 or so years - and then they did every 3 years, and now this
figure is rising. thus, by offering a fixed rate price now, microsoft
perceives that the software upgrade rate is going to drop in the future.
by renting you software instead of selling it now, they ensure you'll keep
paying at the same rate as you did before - cause you will _have_ to.
this issue is true, actually, for services that give you some service with
a payment of 3 years in advance (i.e. various cellular providers in the
past). the idea is that they _assume_ that prices till drop during those 3
years - but not for those you have agreed to commit to the deal for 3
years, and thus will have to pay a penalty if they quit the service in the
middle of those 3 years - pure extra profit for the provider.
>this is indeed true - and most people don't seem to estmate properly how
> After I found this evidence, the claim that fixed-rate price plans are
> better for the seller actually make some sense.
> For example, how many people who use Bezek's 99-shekels-per-month fixed
> price for Internet phone calls actually would have paid more on the pay-per-
> minute plans? Not many, I presume. I'm a relatively heavy modem user
> (about 2-3 hours a day, on average). And still, these calls cost me as
> little as 50 shekels a month.
much they want to use a given service - and fall for these traps. many
people simply don't perform the simple mathematical calculation, or do not
guess the variance of their usage.
but there is another reason why providers would take flat fee rates - this
is because it makes their income more predictable, thus making it easier
to decide how much to spend on various operations - just like you, as a
singular user, would rather pay a flat fee and know, in advance, that you
would be able to sustain the spending, then pay a per-usage, and then find
that your sun over-used the service and you have to pay a fortune. or that
osmeone stole your internet password, and used your account for a large
ammount of hours, and now you need to argue about this with the provider -
you wouldn't have to do that, with a flat fee service.
finally, there is one more (socialistic) reason for charging a flat fee -
subsudizing the heavy users. suppose that you give some service, that a
most people want to use only moderately, but a few users want to use very
very heavily. if you charged a per-use price, those heavy users wouldn't
be able to afford their heavy use, and would look for a provider that
charges a flat-fee, and (ab)use their service. you'll stay with only the
low-use clients, which cost you more in support and with 'steady costs'.
if you charge a flat fee, you can afford having those heavy users, while
the low-usage clients cover the loss you have from the heavy users. now,
why would you want to have those heavy users in the first place, if they
make you lose money? the reason is that these heavy users are the people
that the low-use clients refer to, for recommendation of a service. thus,
the losses on the heavy users actually turn into very low expanses
advertisement costs. each such heavy user is likely to bring quite a few
low-user clients, that will earn you extra income that'd justify having
this heavy-user in the first place.
"For world domination - press 1,
or dial 0, and please hold, for the creator." -- nob o. dy