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Flat rates

27 Dec 2000

I’ve been noticing a fair amount of talk recently about new-economy pricing structures, particularly the coming demise of the flat rate. What interests me is applying non-flat-rate pricing to the “real world” of services other than ASPs. For instance, the fast-growing cybercafe chain easyEverything that I recently used in Amsterdam and Munich. In these stores, there is a giant LCD screen hanging in the front of the store displaying the current cost for internet time. This cost is dynamically updated, based on the number of users currently in the store. So, if a given store has 700 PCs (which they do, and it’s an amazing sight) and only 50 are being used at a given moment, the cost for an hour of time might be one dollar. If you come back to find 600 users there, you might only get 10 minutes of time for the same dollar. As you’re sitting at the terminal, the rate is dynamically calculated and your remaining time is displayed, based on your remaining credit. Traditionally, there are inherent inefficiencies in changing the price of a product or service, which economists call menu costs. But in the case of services like internet time, there’s no disincentive to changing the price every sixty seconds. The supply and demand forces can interact in real time and set the price point with no friction at all. Any capitalist should love it, and to me, it’s a Good Thing. But will customers buy it? The Standard doubts it:

University of California at Berkeley professor Hal Varian conducted a study of how people buy Internet access, giving people the option of a variable rate or a flat rate. The result, he says, was that “they were willing to pay about a 30 percent premium for the simplicity of the flat rate, so they don’t have to worry that some month they might run up a big bill, so they don’t have to hear the clock ticking.”

This is understandable, but when the issue has become merely one of customer perception, subtle changes to the situation can often reverse the trend. For instance, customers are resistant to mobile phone pricing structures which are charged per minute, because it is very difficult to predict monthly phone usage. But in the case of easyEverything, customers appreciate the variable rate, because 1) the time is pre-paid and 2) the current rate and remaining credit is always known.