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Take-off with amortisation

amortisation

A plane that never takes off or lands? Andre Smith looks at standardised pricing and amortisation.

It has often been said that the two most difficult parts of any project, especially technology-led projects, are getting it started and getting it completed. Pilots will tell you that flying a plane is three hours of peace book-ended by three minutes of stark raving panic. Customers of plane travel might be tempted to conclude what they are paying for is the “flight”.

The customer’s interpretation emphasises efficiency. The pilot responds with pragmatism. There can be no flight without a takeoff and a landing. This debate is now a central feature of many discussions of price and value.

On one side of the debate are people who will sincerely tell the world greater efficiency is not only possible, but also necessary no matter what the application. On the other side are the pragmatists who pursue efficiency, but only so far. They point out efficiency has a cost which is often greater than what is being replaced.

“Why can’t we pay only for what we need?” ask the customers of technology solutions. A fair question, but it is possible it makes over-simplified assumptions about the technologies and the details of their deployment.

Going back to the aircraft flight example, it is clear the majority of a pilot’s skills are employed to safely get the plane off the ground and back again. Unless there are acrobatics or traumatic weather patterns on the flight plan, the rest of the trip only requires occasional pilot attention. Without stretching the metaphor too far, the question the “only pay for what we need” crowd is asking is “why can’t we just pay for the time in the air?”

At this point, it is no longer a fair question for obvious logistical reasons. But what if there are models that would work on a per-minute basis? Everyone knows phone calls have been billed by the minute for over 100 years. Why can’t that model be more generally applied?

Amortisation
The answer is it can, provided the “take-offs and landings” can be amortised over the purchases of all customers paying on a per-minute basis. Phone service is a perfect example because by and large, the process of connecting a phone call is the same for nearly every mobile phone or landline phone user.

On the other hand, if every call required custom background music, a specialised ringtone and a paid moderator, the possibility of charging by the minute would rapidly fade. The reason is fairly simple from a business standpoint: unpredictable costs must be paired with flexible pricing, or the company could find itself losing money on every sale.

Installing technology is one kind of product that would be fairly lucrative from a pay-per-minute standpoint. It would be valuable to the installer if they could make a single upgrade and rent it out by the minute. On the other hand, services like project management make more sense for the purchaser. One-time services don’t match an ongoing billing arrangement.

The value in a pay-per-minute billing structure depends on an ongoing exchange of value. Project management is something that requires additional work at regular intervals. The value matches the billing, so this service is one that would likely benefit from and even enhance the idea of a pay-per-minute billing structure. It’s always a good idea to try and balance value and price if the product is going to be competitive.Where Pay-Per-Minute Works

Nevertheless, there are examples of per-minute products. Ziferblat, a Russian cafe chain, charges its customers 3p a minute while they are inside. They even provide those customers with an alarm clock to carry around with them. Everything else in the cafe is free.

We’ve all seen people who spend a great deal of time in coffee shops and restaurants, working remotely on wireless connections with their mobile devices or PCs. Ziferblat’s idea of what they call a “coffice” (coffee-office) would turn this working time into a profit centre. They have plans to expand worldwide soon, so it won’t be long before we know if the model they have turned into a success so far will continue to grow.

Customisation Requires Flexibility
The difference between this example and a product like customised web hosting or custom application development for business-to-business product sales is the start-up and wind-down time and expense. A product must be understood before it can be built, and when the start-up costs reset to zero each time a new customer decides to make a purchase, the seller finds himself in a situation where he not only has to build a suspension bridge, but also has to re-discover physics and invent steel too.

The pay-per-minute model relies on a commodity product like time in a cafe rather than a custom product like a business sales application. The question of “why can’t we pay for just what we use?” fails to take into consideration the fact that no other customer can buy your takeoff or landing or the time your pilot invests in them for their plane flight. When you buy the groundwork for your product, you are paying for what you use. Nobody else can use it.

The Power Example
National Geographic recently addressed this issue in their who make use of the energy grid despite their reduced bills. Like most energy products, electricity is billed on time as well as by volume. Utilities contend that infrastructure must be paid for and that by paying less, solar panel-equipped homes are shifting the burden to other customers.

This is an example of paying by the minute, except in reverse. Solar equipped customers are paying less over the same time interval. According to the utility, they have the same financial responsibility as other customers for the grid and power plants, but they are paying a different rate. This throws another variable into the question. Can this model work if two customers pay different by-the-minute rates?

It’s a very good question, because it turns what was a commodity product into a custom product. The general customer needs basic power from the same plant and grid. The solar customer doesn’t. Once you add a new class of customer, the pay-per-minute model becomes questionable.

Conclusion
It remains to be seen if new kinds of products and management strategies will improve processes to the point where standardised pricing can be combined with customised products. In the meantime, analysis like this is crucial to knowing where we are on the road to innovation, and what our options are for future progress.