What Is Usage-based Billing?

Usage-based billing is a pricing model in which the customer pays according to the consumption of the service or product. It is also known as meter billing, where the customer pays according to the meter reading that represents the amount of service consumed. This enhances transparency while avoiding overpayment.

Usage-Based Pricing for SaaS

Usage-based pricing models are worthwhile in the SaaS industry. By adopting this model, these industries can reduce upfront commitments and keep customer relationships healthy for the long term.

The following are the major benefits of Pay-Per-Use for SaaS companies:

• SaaS companies can increase their revenue because this model helps to increase customer lifetime value.
• UBP is a flexible and affordable pricing model that customers like more than a fixed-price model. This directly impacts business growth by attracting new customers.
• Consumption-based billing helps the customer keep aligned with the cost. This maintains proper transparency and does not lead to confusion and disputes.
• SaaS businesses can compete with other competitors under the UBP model. This is because it offers more flexibility than subscription models. Hence, it helps you to gain more customers.

Various types of SaaS companies that adopt usage-based billing models are as follows:

Application SaaS

Such companies offer software applications that are charged based on specific feature access. Dropbox’s storage and Zendesk’s customer interactions are some examples of it.

Middleware SaaS

Companies that act as middleware SaaS offer services that integrate with other applications. Here, communication services, automated tasks, and the volume of transactions are some cost-deciding factors.

Infrastructure as SaaS

Companies of infrastructure SaaS provide foundational cloud services. The cost-deciding factors are data transfer, AWS’s computing, and Snowflake’s data processing.

AI Companies

Companies that offer AI-driven solutions charge based on use. In this case, application-based AI providers like Jasper charge for specific functionalities like content generation. On the other hand, foundational AI providers like OpenAI charge for accessing their language models.

Some of the well-known SaaS companies that got benefits by incorporating usage billing are as follows:

• Datadog
• Hubspot
• Snowflake
• Twilio
• AWS (Amazon Web Services)

Who Should Use Usage-Based Billing?

After knowing what usage-based billing is? Let’s define who should opt for this billing model. Consumption-based pricing models are best for specific businesses. Companies and businesses should utilize this model.

Companies that Offer Cloud Services

Companies that offer cloud services charge users on the basis of the amount used for data storage. This is an ideal concept for startups and other businesses where demands vary with time. It’s because data storage needs may change for users or businesses, and this model allows them to scale with the same.

Software-as-a-Service (SaaS)

Many SaaS companies adopt usage-based billing and take payment based on the features they offer to the customer. This is a good option for SaaS businesses that have launched new software. Many companies offer usage-based billing software for better customer convenience.

Companies Offering Streaming Services

Usage-based billing is also applicable to those businesses that offer streaming services. Here, users are charged based on the number of movies watched, but not on a flat monthly fee.

Telecommunication Companies

Usage-based billing is a valuable thing for the telecommunication sector. Here, users pay corresponding to the exact number of minutes talked.

Utility Services

Consumption of water, electricity, and gas is not fixed and always fluctuates. In this case, consumption-based billing is the best solution as it offers a flexible billing structure that deals with customer consumption in a better way.

Vehicle Rental Companies

Companies that offer scooters or bikes on rent use usage-based billing models and charge customers on the basis of their usage. This enhances the company’s revenue by attracting more customers.

Data Suppliers

Software companies can charge by the number of API calls when providing application programming interfaces (APIs) for data. Usage-based pricing is a good approach for businesses with variable needs.

What Are the Types of Usage-Based Pricing?

The consumption based pricing models are of different types.

1. Tiered Pricing

Based on usage, prices are divided into tires in a tiered pricing model. The pricing levels are different as per quantity, features, or any other criteria. It offers flexibility while catering to the needs of customers.

2. Per-Feature Pricing

This pricing model reflects pricing as per the features utilized by the customers. This approach is mostly suitable for software companies. Usage-based billing software offers a cost-effective approach to users.

3. Per Unit Pricing

It is also known as the pay-as-you-go model. It is one of the most popular pricing models that enables customers to pay per unit of consumption. Hence, it is one of the most simple and common pricing models that businesses use.

4. Variable Pricing

This model is most suitable for companies providing utility services. Here, billing adjustments are done based on the consumption of water and electricity.

5. Volume Based Pricing

In this usage-based pricing model, the same rates are applicable to all the units. However, when more units are used, the price per unit drops. AWS is the best example that follows this pricing model.

6. Dynamic Pricing

In a dynamic pricing model, businesses quickly adjust pricing based on some factors in a real-time scenario. For instance, a taxi service company may charge more during the peak hours.

7. Freemium Pricing

In this kind of usage-based pricing model, companies offer the basic version of the service or product for free or cost. Later on, charges the amount as applicable for free after a certain time. The best example is the free trial that usually many SaaS companies offer.

8. Overage Pricing

This usage-based pricing model is also often used by SaaS companies. Companies allow customers to access higher usage of data but charge lower rates at defined thresholds.

How Usage-Based Billing Works?

Usage-based billing is a flexible pricing model and works based on the following points:

Monitoring and Metering

Usage-based billing follows a metered billing system to track an accurate user’s consumption. This concept helps to find out accurate billing.

Determining the Rate

In the usage-based pricing model, businesses finalize a fixed rate for consumption units that tells what a specific rate customers need to pay per unit of consumption. For instance, if a cloud storage provider is charging $10 per gigabyte of data stored, then customers need to pay this amount to utilize 1GB of space.

Billing Cycles

Consumption-based billing also has billing cycles likewise to traditional billing methods. This could be based on daily, weekly, or monthly.

Dynamic Invoicing

The next step is to generate an invoice when consumption is calculated for the billing cycle. Here, the total consumed unit is multiplied by the unit rate. So, the invoice is different for each user according to individual usage.

Sending Notification

When companies exceed certain thresholds of consumption, they send notifications or alerts to the user. It allows them to manage and track their spending.

Payment Methods

Companies offer multiple payment options to their users. It includes digital wallets, credit cards, and bank transfers.

Disputes and Adjustments

There should be a high level of transparency while billing on a usage-based pricing model. Also, companies should resolve disputes and make adjustments where necessary.

Merits of Usage-Based Billing

1. Clarity and Transparency

Usage-based billing is more prone to clarity and transparency because users only need to pay as per the usage amounts. With the right billing system, customers have a clear picture of the usage data. Hence, usage-based billing offers full transparency that keeps customer bonding healthy.

2. Flexible

Pay-per-use offers flexibility to the user and enables them to have full control of their usage and expenses. This flexibility serves as an excellent solution for businesses to maintain customer engagement.

3. Adhere to the Changing Market

Usage-based billing models are also adaptable to the changing market. Hence, it helps businesses to stay updated with current marketing trends in terms of pricing.

4. Cut Down Financial Waste

Usage-based billing helps reduce the losses typically associated with flat-rate services. It aligns costs directly with consumption and enhances better resource utilization and management.

5. Refine Customer Retention

Establishing a good customer relationship is a valuable factor for the business. The usage-based billing pricing model is one of the important terms on a list of factors for enhancing customer retention. While offering full flexibility, this model keeps assuring customers that they are spending the right amount to receive valuable services in return.

6. Increasing Revenue

Businesses avail of high revenue chances when providing usage-based billing services. It opens doors for clients to try out new services or features. This directly relates to overall business income.

7. Scalability

A use-based pricing model offers scalability for startups and small businesses. Professionals can easily adjust their prices according to the demand and current market scenario.

What Are the Challenges in Usage-Based Billing?

A few challenges associated with the usage-based billing pricing model are as follows:

1. Difficult to Predict Revenue

Usage-based billing models follow the real-time consumption of the service. This leads to unpredictable cash flow for the supplier because consumption may fluctuate. Also, it is difficult to predict monthly revenue.

2. Suitable for Certain Businesses

The pay-per-use model is not a versatile pricing model that can be applied to every business. It is not suitable for businesses whose goals are long-term revenue growth.

What Factors to Consider When Opting for Usage-Based Billing?

Businesses need to take care of a few factors when choosing a usage-based model. Below listed points are crucial to consider in usage billing.

1. Nature of the Business or Your Service

Don’t ignore the nature of your business or the type of service you are offering before finalizing usage-based billing. Also, keep the metrics of the product or service in mind because they vary from type to service. For example, telecommunications service is based on calls per minute, whereas charges for cloud computing are based on the price per gigabyte of storage.

Some common metrics in the usage billing are as follows:

• API calls
• Seats
• Minutes used
• Product usage
• Text messages sent
• User clicks
• Number of downloads

2. Pricing Structure

Business professionals must be clear about pricing structures. Whether it’s a simple model or a tiered pricing model, choose the right model and set prices accordingly.

3. Scalability

Scalability is another crucial factor when choosing usage-based billing models. Scalable billing software helps the business to get flexible when growing and expanding needs.

4. Customer Portal

Look for usage billing software that offers a robust customer portal. It enables customers to easily monitor and pay their utility bills. Additionally, this portal is also useful for your business to get insight into metrics like the amount of data users are using and the type of device they are using for the same.

Best Practices to Follow for Usage-Based Billing

Pay as per as-per-use model is a good approach and it brings many benefits to the business and customers. Companies should also be aware while implementing this model and following the below practices:

1. Review the Pricing Strategies

Keep an eagle eye on current pricing when you offer a usage-based model. Additionally, it includes industry standards, and competitors’ pricing and determines whether the customer is satisfied with billing or notes.

2. Guide Customers

When you follow usage-based billing, you can conduct webinars or Q&A sessions. This will present all the information and clear out doubts regarding the usage-based billing process. Teach them about how usage-based billing is beneficial to them.

3. Showcase Detailed Breakdown

Focus on transparency in your billing before sharing an invoice with your clients. Introduce them to more details about their usage data or service. You can include the time when usage was at a peak, any particular service that customers used frequently, and the duration of usage. This helps to keep things within a proper framework and reduces the chances of disputes.

4. Values Customer Feedback

Don’t limit yourself to sharing billing and charging. You must be aware of the customer’s view of the pay-per-use model. What do they think of this model? Are they happy with it or not? What new improvements must be made? These are some questions you can consider while surveying the usage-based billing model.

5. Choose the Best Tracking System

Tracking systems help business professionals to get a detailed insight into the data. Moreover, tracking software also presents details on customer usage patterns. Hence, professionals can make better decisions.

6. Offer Self-Monitoring Tools

You can level up your usage-based billing approach by enabling your customers to monitor the usage by themselves. This tool can be either on a web dashboard or application. The other benefit of this approach in a usage-based pricing model is that it will reduce the burden on the customer support team.

Final Touch

Usage-based billing is good for businesses and users. This pricing model brings flexibility to the customer and lets the business enhance revenue and retain customers. It has many advantages over subscription models but does not apply to all businesses. Before applying these pricing models, consider your business type and nature. We are now ending our words on what is usage-based billing.

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