Optimal pricing strategy for a service provider in the presence of repetitive usage

Pay-per-use (PPU) pricing and long-term contract (LTC) pricing are widely adopted in access service industries. PPU pricing charges a fee for each service requirement, while LTC pricing allows consumers to subscribe to an unlimited use of the services in a given period. This study aims to reveal the link between consumers' choice and these two types of pricing schemes to determine the optimal pricing strategy for a service provider (SP). We propose a model with consumer usage that follows a compound Poisson process to analyze consumers' choice and calculate the expected revenue of the SP. Our analysis shows that covering the entire market is always optimal for the SP. Moreover, the SP should set the PPU fee high, and adopt the LTC scheme in the presence of the PPU scheme. If the SP is patient enough, then adopting both schemes will bring more revenue than only adopting the LTC scheme.

Automated summary

The study reveals the link between consumers' choice and PPU pricing and LTC pricing, determining the optimal pricing strategy for a service provider. Adopting both schemes can bring more revenue if the SP is patient enough.