As an entrepreneur, your objective is to generate revenue by meeting your target customers’ needs. Your role is to ensure that customers have an opportunity to access your products and services at ease and without much challenge. Also, you need to serve customer needs and interests.
Your business will only be successful when you align these aspects with your goals. For this reason, you must come up with a business approach that will enable you to achieve these objectives. The utility or Pay as You Go is one of these business approaches.
If it is your first time to hear about it, you might be wondering: what does it involve, how does it work, and does it have any benefits.
In this article, we cover all the aspects of the utility business model from the definition, how it works, and then go down further to the pros and cons of the model. Therefore, please continue reading to learn more about this business model and how you can utilize it in your venture.
What is the Utility Business Model?
The utility business model is among the oldest approaches company offering basic services have been employing. The approach involves charging customers for what they use. It is different from a subscription where you remain tagged on service whether you use it or not. For utility or pay-as-you-go, you only pay for what you have used.
Many utility service providers use this approach. For instance, you pay your utility bills depending on how much you use for a particular period. You do not pay a flat amount for your electric, water, or telephone utility bills. Instead, your rate of use in that month will determine how much you will pay.
With digital platforms becoming popular, businesses are moving to pay-as-you-go aspects. These businesses are allowing customers to use their services based on this model. So, customers do not need to pay an entire subscription or purchase fee.
Rather, they pay for the services they need for a given time. Some of the players using this model use software as service (SaaS) to manage their transactions and service provision.
How Does Utility Business Model Work?
As the name suggests, you pay as you go. This model involves a service provider and consumers. The service provider is the creator of a given service or product that they offer to consumers. Instead of selling it to consumers by charging a one-time cost. They hook up the customers on their services. However, it is not a subscription where customers pay a constant fee whether they use or do not use the offered services.
As business owners using this model, you charge the customer a registration fee and they continue using your services and pay according to their rate of use. You do not tire customers on your services as the subscription option does. This means your customers will only pay a fee for the amount of service or products they use.
Example of Utility Business Model
All utility business you know applies this approach. For instance, you have a water meter that shows the amount of water you used in a particular period. You only pay for that amount and it varies from one month to the other. The electric bill follows the same principle. You do not pay bills beyond your energy consumption rate.
With the birth of the internet of things and Google Maps, pay as you go is becoming a common model in many fields. Businesses can now track and charge for miles traveled instead of one-time payments. A good example of the business applying this model is online taxi apps like Uber.
When you hire a taxi, it will assess the distance you will be traveling and charge you based on it. You do not pay more for services you didn’t use. Upon reaching your destination, your business connection ends there until you need another ride next time.
Pros and cons of Utility Business Model
The utility business model helps people to get services they couldn’t afford if they were to pay the whole price. There are many other benefits and disadvantages of this model. Here are some of them:
Pros
Opportunity to attract more customers
The utility approach offers customers an opportunity to control their usage. They do not need to commit to a service that they do require or use. By offering customers the freedom of usage management, you are likely to attract a high number of them. With quality service provision, you will keep these customers using your services or products which guarantees a regular income.
Enhance cost and inventory management
Cost management is a crucial principle in every venture. You need to have effective and efficient cost management to generate the desired profits. With pay as you go model, you can align your costs with the rate of consumption. This aspect enables you to track and manage the cost per use. So, it is easy for you to have real-time inventory that corresponds to the current customer demand.
No post-service negotiation
This model allows your customers to use your products and services based on their needs. Your customers will use your products when they need them. you will not need to renegotiate the terms of use or price in the future as is the case with a subscription. As such, you’ll earn more from a customer when they decide to scale up their rate of use.
Cons
Hard to predict your income
In this model, customers use your products and services when they need them. They have no commitment to what you offer. With this aspect, it is impossible to predict the amount of cash you will generate in a given period.
No customer retention guarantee
Without commitment, the number of customers using your products depends on the quality it offers to them. If the customer feels it is insufficient, they will move to the next. So, the utility model has zero guarantees on customer retention. You need to do extra work to convince customers to keep on using your products or services.
Conclusion
In other words, the utility (pay as you go) business model is a good way to enhance sales in your venture. The model allows you to hand over the usage control to customers. With this aspect, many customers are likely to consider your services and products. However, you cannot predict revenue as there is low customer retention.
