Pricing Services Subject to Congestion: Charge Per-Use Fees or Sell Subscriptions?

Should a …rm charge on a per-use basis or sell subscriptions when its service experiences congestion? Queueing-based models of pricing primarily focus on charging a fee per use of the service, in part because per-use pricing enables the …rm to regulate congestion raising the per-use price naturally reduces how frequently customers use a service. The …rm has less control over usage with subscription pricing (by de…nition, with subscription pricing customers are not charged proportional to their actual usage), and this is a disadvantage when customers dislike congestion. However, we show that subscription pricing is more e¤ective at earning revenue. Consequently, the …rm may be better o¤ with subscription pricing, even, surprisingly, when congestion is intuitively most problematic for the …rm: e.g., as the industry moves to a standard of faster service, or as congestion becomes more disliked by consumers. We show that the absolute advantage of subscription pricing relative to per-use pricing can be substantial whereas the potential advantage of per-use pricing is generally modest. Furthermore, the relative attractiveness of subscription pricing is enhanced if the …rm is able to earn third-party revenue from each transaction (e.g., if the …rm acts as a platform in a two-sided market). We conclude that subscription pricing can be e¤ective even if congestion is relevant for the overall quality of a service.