An Analysis of Usage‐Based Pricing Policies for Smart Products

Abstract

This contribution concerns itself with the potential of Usage‐Based Pricing policies for smart products. We develop an analytical model of a supplier of machines and a customer that allows us to compare Usage‐Based Pricing to a traditional scheme with fixed prices, and to determine optimal solutions for both parties. Based on these findings, we discuss the value of Usage‐Based Pricing on an operational as well as on a strategic level. The main conclusion that can be drawn from our research is that Usage‐Based Pricing does not provide any additional value that could not also be achieved by information sharing and joint price optimization. From a more strategic perspective, however, we find that the transfer of demand risk from the customer to the supplier implied by Usage‐Based Pricing might be used as a strategic tool to attract new prospects and to enter new markets, but only to a lesser extent as a means to keep existing customers.

Keywords:

• pricing
• sensor technology
• ubiquitous computing
• smart products
• revenue management
• yield management