"Pay as You Go" or "All You Can Eat"? Pricing Methods for Computing and Information Services

This paper examines the ubiquitous "Pay as you Go" (per unit pricing) and "All you can Eat" (buffet pricing) schemes widely adopted for SAAS and other computing services, and compares these against three-part tariff (3PT), widely used in cell phone industry. We establish the conditions under which one plans works substantially better than other. The 3PT dominates when usage heterogeneity is low and value heterogeneity is high. Under normal conditions, a single 3PT produces higher profit than even a menu of per-unit and buffet plans. The per unit plan is best on market coverage, but buffet pricing generally creates the highest consumer surplus.