interweb freedom

(formerly Stop Usage Based Billing)

Usage Based Pricing: Why The Buffet Analogy Doesn’t Work

Posted by Laurel L. Russwurm on August 29, 2009

It seems that some American ISPs are also trying to promote the idea of Usage Based Billing. In fact, I just read an interesting post written by a guy named Buck on the Occam Networks Blog. It’s a very well written column in support of American Usage Based Billing.

No Usage Based Billing

No Usage Based Billing

American Flag

The problem is Buck’s premise is based on a seriously flawed analogy.

Comparing the internet to a Buffet Restaurant, Buck talks about how some people eat more at a buffet and some people eat less. He tells us it isn’t fair that the people who eat less at a Buffet Restaurant are subsidizing the ones who eat more. The idea seems to be that the ones who eat more are greedy, and that they are taking advantage of the people who don’t eat much. He says it’s not fair to the Restaurant because they might go out of business if too many people want to eat too much.

Which begs the question:

If all of this is true, why do buffet restaurants exist?

The answer of course is that the restaurant business doesn’t work that way. Like every other type of restaurant, the Buffet Restaurant buys and prepares the food they estimate they’ll need. They balance what they spend with how much money they need to take in. If it they find they are throwing out too much food, they buy less food. If they aren’t making enough of a profit, they might raise their prices. If they raise their prices too high, they might lose their customers. A Buffet Restaurant deals with the very same business issues any restaurant does. The fact that some customers eat little and some a lot doesn’t comes into it.

In a traditional restaurant the light eater pays for food they don’t eat which is thrown out. In the Buffet Restaurant the light eater wouldn’t even have scooped the food they won’t eat onto the plate. In a traditional restaurant a heavy eater may not get enough to eat. Which makes them less likely to become a repeat customer. At the buffet, they can be sure they will get what they need.

A Buffet Restaurant is not like the Internet

A Buffet Restaurant is not like the Internet.

Buck goes on to offer us an alternate scenario where he instead offers a “Mongolian barbecue” where the customer gets a big plate and can take what they want. Instead of paying one price, they are indiscriminately charged for everything they have taken by weight. Buck suggests that:

“The effect is that diners will take whatever food they want but are not as likely to overeat. Since the average eater is not paying more than their share in order to compensate for the big-eaters, the average eater pays less at a “per ounce” buffet than they would for an equivalent meal at a flat rate all-you-can-eat buffet. On the other hand, the heavy eater’s price for a comparable meal goes up, maybe even double what they would pay at a smorgasbord. These are the patrons that may be upset at the new pricing. Some will see the fairness in it and maybe curb their gluttonous ways while others will take their patronage to another restaurant. One could argue that these are good customers for the competition to have!”
writes Buck in the Occam Networks Blog

So, it would appear that in Buck’s model, the intent behind this pricing is not to make money for the restaurant, but instead to modify the customer’s behaviour. That is certainly an interesting business practice. Sadly, in modifying the behavior of his customers in an attempt to deliver them from their bad choices, it would seem that Buck’s ignorance of both human physiology and nutrition will certainly cause more harm than good. It would also seem to indicate that Buck is fortunate enough not to understand the correlation between poverty and obesity. Lucky Buck.

Errors of logic aside, the analogy is simply not… analagous.

Because the internet is NOT at all like a Buffet Restaurant.

When people access the internet they do not use it up. There is a finite amount of food in the restaurant which can be prepared and served at the buffet. When it is eaten it is gone. That doesn’t happen to the internet. Internet content isn’t finite. It doesn’t matter how many people visit a website, the content doesn’t get used up. In fact, websites want high traffic. The reason that they provide content is to attract an audience. They WANT high traffic.

In Buck’s analogy food is the content. Which brings to light another problem with this analogy. A restaurant offering a buffet has paid for the food. Yet the bulk of internet content is provided free of charge to the consumer, without any cost at all to the ISP.

Baked Beans

Baked Beans

Lobster Thermidor

Really the only way to make Buck’s analogy work would be to say that the internet is not a Buffet Restaurant, it’s a neighborhood potluck supper being held in a rented Banquet Hall. The food is freely provided by the neighbors who attend, but somebody has to pay for the hall. That is the cost which needs to be portioned out.

It makes no difference to the owner of the Banquet Hall what the neighborhood group eats. Nor should it matter to the landlord how much any of the food cost to purchase, or how much time or effort was necessary in the preparation. The food is freely provided by neighbors for neighbors. The landlord set the price for the rental and the neighbors agreed to pay. Everyone is happy.

Until the night of the potluck when the landlord sees what the neighbors are laying out for the potluck dinner in his Banquet Hall, his attitude changes. These people aren’t serving Tuna Casserole, Baked Beans or Macaroni and Cheese, they are setting out Rack of Lamb, Chateaubriand and Lobster Thermidor.

Suddenly the landlord isn’t happy anymore. He could have charged them a lot more!

So the landlord decides to charge the neighbors for the food they ate at the potluck dinner in addition to what they agreed to pay as rent for the Hall, and we have finally achieved a good analogy for Usage Based Billing.

Hardly fair.


And let’s not forget:
http://dissolvethecrtc.ca/

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5 Responses to “Usage Based Pricing: Why The Buffet Analogy Doesn’t Work”

  1. james ellis said

    i think you have your interpretation of bucks analogy wrong. the food isnt internet content but available bandwidth on a second per second basis, which is finite. the lines can carry only so much data at once. not the fault of the consumer that the core isp’s didnt buy more

    • I didn’t say it’s a good analogy. What it is is the soundbite analogy that the big telcos have been selling from the beginning. They say UBB is necessary because “bandwidth hogs” eat at the expense of everyone else.

      It’s a strong picture, and an easy sell, which is why the fallacy is so persistent. Many smart people buy into it because it sounds as though it makes sense.

      Available bandwidth is finite— that is how much food the telcos have bought. And you’re right, it isn’t the consumer’s fault they’ve not bought enough.

  2. […] The Misinformation War #7. Usage Based Billing #8. Confusing Canadian Ownership: Who Owns Who #9. Usage Based Pricing: Why the Buffet Analogy Doesn't Work #10. How will they bill the "Usage" in Usage Based […]

  3. […] The Misinformation War #7. Usage Based Billing #8. Confusing Canadian Ownership: Who Owns Who #9. Usage Based Pricing: Why the Buffet Analogy Doesn't Work #10. How will they bill the "Usage" in Usage Based […]

  4. I would like to point out the common fallacy in cost based argument and trying to allocate costs per user either in a restaurant, mobile phone or internet service
    If you closely look at costs of restaurants, buffet or otherwise, the food costs are not determined per plate. Based on past history and expected demand, they buy for the day (or week). So it is all fixed cost and is sunk by the time the restaurant opens the door for the day. Restaurant’s goal is (or should be) to maximize revenues for the day (maximize traffic and maximize spend per table). Buffet places maximize revenues by setting an optimal price based on demand schedule. Of course it is not a static demand schedule, the attraction of all food varieties and all you can eat brings in new customers. You can now that it is immaterial how much a single customer consumes as long as the total revenues for the day is higher than total food and labor costs for the day, and the operation as a whole is profitable (after paying for rent, license etc).

    Pricing for the service should start with segmentation and value to segments. There is room for both subscription based and usage based pricing, as long as these versions are designed in such a way that the segments self select themselves to the version most appropriate to them.

    -Rags

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