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

Abstract

Online-to-offline (O2O) platforms such as Groupon and ClassPass are online marketplaces that match excess offline capacity with online demand. These platforms are struggling for profitability, and academic work on the business model of O2O platforms is scant. To understand why this is so, we study two commonly observed O2O business models, a per-use pricing approach and a subscription pricing approach. We develop a game-theoretic framework to understand how each pricing 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, three-tier supply chain, consumer heterogeneity). The novel setting allows us to generate a set of new insights that are not present in the extant literature on per-use versus subscription pricing. Specifically, subscription pricing allows for revenue “lock in” through a new mechanism in the presence of two channels; its “two-component pricing” feature also allows for consumer segmentation by channel. Consumer heterogeneity, besides benefiting per-use pricing as in the literature, can also benefit subscription pricing in our setting. Merchants’ total capacity moderates how consumer heterogeneity impacts the two pricing approaches. Finally, a platform's role as an agent crucially impacts whether the two pricing approaches can properly function. We use the framework to explain why existing O2O platforms suffer from various concerns in practice. We further study two model extensions and illustrate how various market conditions (merchant total capacity, platform revenue share, consumer type uncertainty, consumer peer effect) affect the relative advantages of the two pricing approaches.

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