investiledysfunction

Recently, car insurance companies have begun offering insurance rates based on how much you drive and how well you drive - a pay as you go model.  So the more you drive, the more you pay.  If you break abruptly or drive fast, your insurance goes up.  Instead of an actuarial model determining typical behavior for a 18 year old, the companies can now offer more precise pricing and as a result, the responsible 18 year old is rewarded and the aspiring Nascar driver pays more.

This is an innovative way to price insurance and so this got me thinking about the pay as you go model or more generally, pay for behavior models.  Here are some examples of pay as you go models that I appreciate:

1. Google - The old model was advertiser shows ‘impressions’ or ‘views’ and hopes that this translates into desired behavior but never knows.  Google only gets paid when they make a desired behavior happen.
2. ZipCar - This is a great service that lets you rent cars in short increments (a couple of hours) so to do errands around NYC, it’s great.  Why rent a car for the full day when you don’t need it?
3. Yips Chinese - Unless you live in NYC, you prob don’t know Yips but it’s a dive Chinese restaurant chain that sells pretty good Chinese food.  And it sells its food by the pound.  It’s a great concept actually because it seems cheap but they’ve tapped into the “your eyes are bigger than your stomach” phenomenon so every time I’ve gone there expecting to get a deal, I leave having purchased a $13 lunch.

Beyond its current applications, there are probably many other places where pay as you go or pay for performance could work.  Flights for instance?  Should smaller, thinner people pay less?  Presumably, they are lighter as are their clothes/luggage and so they require less jet fuel. The possibilities are endless but the model is a great step forward in many instances of aligning the customer and vendor’s objectives and in incentivizing the appropriate behavior.

Tags: google, pay as you go insurance, yips chinese, zipcar

This entry was posted on Friday, July 18th, 2008 at 12:06 pm and is filed under Business Strategy, Innovation. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.