I have been told that this is a distinctly American fascination, but I am a big proponent of all you can eat (pay a flat price for unlimited usage) products and services. Many of the services that I consume, such as broadband Internet, DVD rental, wireline phone service, and digital cable are all available in all you can eat packages. It seems to take a lot to get companies to move to all you can eat pricing packages, but I believe that such pricing plans are a key ingredient to driving adoption of new products and services.
The tension in launching an all you can eat service is fairly straightforward. The service provider has two things to fear. First, there is a risk that the service provider will underprice its service and will need an incredibly large user base to turn a profit (if profitability is even an achievable outcome based on the underpricing). The second fear is the fear of adverse selection, namely that the only customers who sign up for the service will be those who really can consume enough of a given service to make them unprofitable. Consumers, for their part, tend to believe that they will be able to consume enough of an all you can eat service to at least make it worth their while.
While both of these notions make sense in the abstract, I don’t actually think that this is what happens in the world of services. There are three things that I think are true of all you can eat services:
Adverse Selection is always a problem at the beginning – Adverse selection is endemic to the world of new services. If you offer an all you can eat alternative to a service which people are used to consuming in a metered fashion, it is logical that those who stand the most to gain by switching (those who consume large quantities of the metered service) will be the ones most eager to switch. The only consolation that I can offer service providers is that these early power consumers often become de facto external marketing departments who talk up the benefits of the service to anyone who will listen.
Most services have a fairly small number of “power consumers” over the lifetime of their relationship with a service provider – Think about the last time you purchased an all you can eat service. From what I have observed, most people follow a predictable pattern. In the initial period of using the service, they consume great quantities of the service as they are eager to “get their money’s worth” and to explore the bounds of the service offering. Over time, however, most customers tend to end up consuming a much more reasonable level of the service. Take Netflix for example. Most new Netflix customers I know start off watching many DVDs per month. Over time, however, they tend to revert to the level of consumption that they enjoyed before the all you can eat service was introduced.
Most of the profits will come from customers that the provider acquires in the middle to latter portions of the adoption cycle – Because power consumers will be the earliest adopters, those customers who sign up for a service later in the cycle tend to be those who are not as aggressive consumers of the service. This is driven by two factors. First, over time the option of metered access might disappear (as it essentially has for dial-up Internet access) and any customer with an interest in the service must pay the mandated all you can eat service regardless of consumption. Second, customers who sign up for the service later in the cycle could be customers who assign lower overall value to the service as they do not consume it as much.
What all of this says to me is that if you want to launch an all you can eat service, you need to have some serious cash on hand because you know that your early customers are going to be power consumers and that profitability will be elusive until you begin to acquire those customers who are less interested in power consumption.