Outcome-Based Pricing for Precision Agriculture Services

Problem definition: Precision agriculture technologies (PAT) have been introduced to address the ongoing challenge of food shortage. To incentivize small farmers to adopt PAT service, agricultural firms, such as Bayer, are piloting outcome-based pricing, where a firm refunds the service charge to a farmer if the farmer’s PAT adoption is unsuccessful and takes a share of the upside when the adoption is successful. In this paper we investigate the implications on the welfare of all parties involved when a service provider switches from uniform pricing to outcome-based pricing. Methodology/results: We develop a two-period game model considering that the service provider can learn and improve performance from previous experience of PAT service. We consider two types of learning: fixed learning, with a constant performance improvement, and experience-based learning, where improvement is influenced by the volume of adoption. We find that, compared to uniform pricing, outcome-based pricing always benefits the service provider and increases PAT adoption rates and the value of PAT. While seeming risk-free for farmers, outcome-based pricing may negatively impact their payoff. Furthermore, government intervention, even zero-expenditure policies that use taxes collected from the service provider to subsidize farmers, can lead to a win-win situation, where both the service provider and farmers benefit from outcome-based pricing. We further examine the impact of outcome-based pricing and zero-expenditure policies through practical PAT examples. Managerial implications: Our paper contributes to the literature of agricultural operations by capturing the unique characteristics of outcome-based pricing in the agriculture sector. We also fill the research gap by investigating the impact of the PAT service provider's learning on outcome-based pricing. Furthermore, our paper addresses practical questions related to outcome-based pricing for PAT and provides policymakers with general guidelines for implementing government intervention under outcome-based pricing