Volumetric pricing is a

pricing strategy A business can use a variety of pricing strategies when selling a product (business), product or Service (economics), service. To determine the most effective pricing strategy for a company, senior executives need to first identify the company's p ...

frequently used by the

public utilities A public utility company (usually just utility) is an organization that maintains the infrastructure for a public service (often also providing a service using that infrastructure). Public utilities are subject to forms of public control and r ...

(e.g.,

water Water (chemical formula ) is an inorganic, transparent, tasteless, odorless, and nearly colorless chemical substance, which is the main constituent of Earth's hydrosphere and the fluids of all known living organisms (in which it acts as a ...

and

power Power most often refers to: * Power (physics), meaning "rate of doing work" ** Engine power, the power put out by an engine ** Electric power * Power (social and political), the ability to influence people or events ** Abusive power Power may a ...

tariffs) where the

fixed costs In accounting and economics, 'fixed costs', also known as indirect costs or overhead costs, are business expenses that are not dependent on the level of goods or services produced by the business. They tend to be recurring, such as interest or re ...

of the service are recovered proportionally to the amount of use. For example, under this approach a per-

kWh A kilowatt-hour (unit symbol: kW⋅h or kW h; commonly written as kWh) is a unit of energy: one kilowatt of power for one hour. In terms of SI derived units with special names, it equals 3.6 megajoules (MJ). Kilowatt-hours are a common bil ...

pricing of an electric utility includes a small share of the monthly fixed cost of the utility, fixed (say, monthly) charges for the service are either absent of inconsequential. The volumetric pricing, in addition to the easy-to-understand structure, encourages the customers to lower the use of the resource. For example, if the (very significant) fixed costs of the electricity service were recovered through the monthly fixed payments, then the per-unit price would have been much lower thus encouraging additional consumption. Conversely, the volumetric price disincentivizes the utility from investing in conservation: if the customers will use less of the resources, the utility sales and will shrink, reducing the fixed-cost portion and causing the ''lost revenues'' and under-investment. Therefore this pricing strategy is typically coupled at the regulatory level with an annual rate adjustment mechanism (also known as ''revenue- decoupling'' policy). Volumetric pricing requires metering that can be expensive to implement, especially in the case of

irrigation Irrigation (also referred to as watering) is the practice of applying controlled amounts of water to land to help grow Crop, crops, Landscape plant, landscape plants, and Lawn, lawns. Irrigation has been a key aspect of agriculture for over 5,00 ...

, alternatives include: *

flat rate A flat fee, also referred to as a flat rate or a linear rate refers to a pricing structure that charges a single fixed fee for a service, regardless of usage. Less commonly, the term may refer to a rate that does not vary with usage or time of us ...

; * ''per-area pricing'', coupled with

tiered pricing Price discrimination is a microeconomic pricing strategy where identical or largely similar goods or services are sold at different prices by the same provider in different markets. Price discrimination is distinguished from product differenti ...

; * a system of

water rights Water right in water law refers to the right of a user to use water from a water source, e.g., a river, stream, pond or source of groundwater. In areas with plentiful water and few users, such systems are generally not complicated or contentious ...

or quotas; * ''input pricing'' as a percentage of the cost of certain input(s), e.g., seed; * ''output pricing'' as a percentage of product sales. For the electricity services, the number of alternatives is larger, Borenstein provides a review of the ways that can be used by the electric utilities to recover the fixed costs.

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* * {{marketing-stub Pricing

See also

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