All-You-Can-Eat Pricing

Most firms sell their goods individually. Some businesses, however, offer all-you-can-eat specials, where for a fixed fee you can have as much of their product as you want. Which pricing strategy is more profitable?

Imagine that you run an Internet company that sells news articles. You currently charge customers 10 cents a story. Say that one customer, John, buys 1,000 articles a year from you at a total cost of $100. How much would John pay for the right to read an unlimited number of your articles per year? He would definitely be willing to pay more than $100. We know that John is willing to pay $100 for 1,000 articles. Consequently, he must be willing to pay more than $100 for the right to read an unlimited number of articles. It’s almost inconceivable that if John had already read 999 articles, he would pay 10 cents to read one more article but wouldn’t pay more than 10 cents for the right to read, say, 1,000 more articles. Since it presumably costs you nothing to let John read as much as he wants, you would seem always to be better off selling John an all-you-can-read special.

If you didn’t know how much John valued your product, however, you might be better off charging him per article. When you charge John per article, he will automatically pay more the more he values your product. Thus, you can be completely ignorant of how much John likes your goods and still set a good price when you charge per article. Setting one fee for unlimited access is riskier. If the fee is too high, John won’t use your service. If it’s too low, you will miss out on some profit. Consequently, the greater your ignorance about John, the greater the benefit of charging per article. Of course, since John will value your services more if he has unlimited access, charging per article reduces the value of your product to him and reduces the maximum amount of money you could get from John.

All-you-can-eat pricing plans naturally cause your customers to consume more of your product. Consequently, the main danger of all-you-can-eat plans for most goods is that they will cost you too much to supply the items. These plans are therefore best suited for products that are cheap to replicate. Therefore, as information goods become more important to our economy, I predict that these types of plans will proliferate.