Online-to-Offline Platforms: Per-Use versus Subscription Pricing

Abstract

Online-to-offline (O2O) platforms such as Groupon and ClassPass match excess offline capacity with online demand but are struggling for profitability in practice. We analytically study two commonly observed O2O pricing approaches, per-use pricing and subscription pricing. We examine how each approach functions and which one is better under various market conditions. The framework incorporates four salient characteristics of the O2O business (capacity constraint, two channels, intermediary, consumer heterogeneity). The novel setting allows us to generate new insights that are qualitatively different from those in the literature. Specifically, the presence of two channels enables subscription pricing to “lock in” consumer revenues through a new mechanism, and segment and serve different consumer types to two channels. Therefore, subscription pricing can be preferred in a monopoly setting and when capacity constraint is present, in contrast to the conventional finding that per-use pricing is preferred. We also demonstrate how capacity moderates pricing approach comparison and how intermediary serves as a third pricing motive in addition to consumer heterogeneity and capacity. We use the framework to illustrate why O2O platforms suffer from various concerns in practice and how consumer type uncertainty and peer effect influence the relative advantages of the two pricing approaches.

Keywords: online-to-offline platforms, per-use pricing, subscription pricing