Chapter 15

Flat Rate

‘All you can eat’ – unlimited consumption at a fixed price

The pattern

With this business model, customers purchase a service or a product for a lump sum and then use it as much as they wish. The main advantage for them is unlimited consumption with full control of their costs (WHAT?). It remains financially sound for the business too, if customers who exceed the normal rates of use are balanced out by those who use the service only sparingly (VALUE?). In a few cases, companies have to set upper limits of consumption in order to protect themselves from exorbitant costs, and while this goes against the basic principle of unlimited use, it is the only way to ensure that the transaction can remain profitable.

The origins

Buckaroo Buffet, originating among the casinos of Las Vegas, was the name of the first restaurant to make use of the ‘all you can eat’ concept. Customers pay a fixed price to eat as much as they want, regardless of their actual consumption. Given that there is a physical limit of food that a person can consume in one meal, the prices are based on an average. Profits come from the many customers who purchase an all-you-can-eat ticket and eat less than average.

We know relatively little about the history of the Flat Rate business pattern, but it has doubtless existed for a very long time. Switzerland’s national railway company, Swiss Federal Railways (SBB), introduced an annual season ticket based on the Flat Rate concept in 1898, which is still operative over a century later. Passengers buy a single ticket for a fixed sum (the Travel Pass) allowing them unlimited travel (in respect of time, train type and route) for a year. Such an arrangement makes travelling by train more appealing, and passengers who use public transportation intensively are cross-financed by less-frequent users. Annual tickets also create a more reliable and steadier revenue stream than the normal Pay Per Use pattern (#35). In addition, SBB created something of a status symbol for itself by introducing the yearly ticket.

The Flat Rate business model was adopted by the tourism industry in the 1980s. In this context, the term ‘all-inclusive’ is used to refer to package deals where all meals and beverages during a vacation are included. The founding father of this concept is Gordon Stewart, who opened the first all-inclusive hotel called Sandals Resorts in Jamaica in 1981. His goal was to attract tourists who had been reticent to visit the island on account of political unrest. Today, the hotel chain Sandals Resorts and its offshoots have made Stewart one of the most influential hoteliers in the Caribbean.

The innovators

Aside from the above examples, the Flat Rate business model has also led to some exciting innovations elsewhere. In the 1990s, the telecommunications industry recognised the possibilities of Flat Rate plans for mobile telephony; customers are able to make unlimited calls to all their contacts within a predefined network for a fixed monthly price. Such plans have indeed become commonplace today, but they originally served as an important way for companies to differentiate themselves from others in a newly deregulated telecommunications market.

Netflix, founded in 1999 as the first on-demand Internet streaming media provider, also serves as an important example of a Flat Rate business model innovation. For a monthly fee of around US $10, customers gain unlimited access to over 100,000 films and TV shows. With over 150 million subscribers worldwide, Netflix’s business model is regarded as a great success.

Flat Rate: all-you-can-eat philosophy of telecommunication services

The Swedish company Spotify presents a mix between the Freemium (#18) and Flat Rate business models: the company offers a commercial music streaming service providing digital-rights management-restricted content from record labels including Sony, EMI, Warner Music Group and Universal Music Group. Founded in 2006, the company had approximately 10 million users in 2010, one quarter of whom paid a monthly subscription fee. As of 2018, Spotify boasts 207 million users, more than 96 million of whom paid a fee in addition to advertisement income. Upon account registration, or first login with a Facebook account, the free music streaming service is activated, allowing users to listen to an unlimited amount of music supported by visual and radio-style advertising. Given its free subscription plan, Spotify is able to stand up to Apple’s comparable fee-based product – Apple Music.

A novel way of using the Flat Rate business model was introduced by Sony in 2014 with the launch of PlayStation Now: a monthly subscription service for games. Users pay a flat rate of US $19.99 per month, or US $99.99 per year, to receive unlimited access to a library of over 800 games. Gamers can choose whether they want to download the games or simply stream them directly to their Play Station 4 or PC. A similar product is Apple’s 2019-introduced game Flat Rate service Apple Arcade, for which subscribers pay a flat rate of $4.99 per month to get unlimited access to more than 100 games without advertisement.

When and how to apply Flat Rate

Flat Rate will likely work for you if you can meet one or more of the following criteria. First, you need to have manageable costs, e.g. you are an Internet business with low marginal costs. Second, your customers are exposed to diminishing marginal utility: that is to say, that with every additional slice of the pie your customer eats, his or her desire for another one decreases. Third, billing customers Flat Rate would be more cost-efficient for you than billing them for every outlay.