Pricing Services Subject to Congestion: Charge Per-Use Fees or Sell Subscriptions?

Manufacturing and Service Operations Management, vol. 13, No. 2, pp. 244-260, 2011

Posted: 6 Sep 2018

See all articles by Gerard P Cachon

Gerard P Cachon

The Wharton School - Operations, Information and Decisions Department

Pnina Feldman

Questrom School of Business, Boston University

Date Written: October 30, 2011

Abstract

Should a firm charge on a per-use basis or sell subscriptions when its service experiences congestion? Queueing-based models of pricing primarily focus on charging a fee per use for the service, in part because per-use pricing enables the firm to regulate congestion — raising the per-use price naturally reduces how frequently customers use a service. The firm has less control over usage with subscription pricing (by definition, with subscription pricing customers are not charged proportional to their actual usage), and this is a disadvantage when customers dislike congestion. However, we show that subscription pricing is more effective at earning revenue. Consequently, the firm may be better off with subscription pricing, even, surprisingly, when congestion is intuitively most problematic for the firm: e.g., as congestion becomes more disliked by consumers. We show that the absolute advantage of subscription pricing relative to per-use pricing can be substantial, whereas the potential advantage of per-use pricing is generally modest. Subscription pricing becomes relatively more attractive if consumers become more heterogeneous in their service rates (e.g., some know they are “heavy” users and others know they are “light” users) as long as capacity is fixed, the potential utilization is high, and the two segments have substantially different usage rates. Otherwise, heterogeneity in usage rates makes subscription pricing less attractive relative to per-use pricing. We conclude that subscription pricing can be effective even if congestion is relevant for the overall quality of a service.

Suggested Citation

Cachon, Gerard P and Feldman, Pnina, Pricing Services Subject to Congestion: Charge Per-Use Fees or Sell Subscriptions? (October 30, 2011). Manufacturing and Service Operations Management, vol. 13, No. 2, pp. 244-260, 2011, Available at SSRN: https://ssrn.com/abstract=2516934

Gerard P Cachon

The Wharton School - Operations, Information and Decisions Department ( email )

Philadelphia, PA 19104
United States

Pnina Feldman (Contact Author)

Questrom School of Business, Boston University ( email )

Boston, MA
United States

HOME PAGE: http://https://www.bu.edu/questrom/faculty-research/faculty-directory/pnina-feldman/

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