Credits and entitlements are two terms that are often confused. While they may seem similar at first glance, they serve different purposes and can significantly impact how you manage your billing and pricing strategies.
You encounter scenarios where you need to incentivize customer adoption, reward usage, and provide flexible pricing options. This is where credits and entitlements come into play.
Credits, on the one hand, are a way to provide value or financial incentives to your customers. They can be in the form of free usage units, discounts, or specific currency amounts. Think of them as a way to say "thank you" to your customers for their loyalty or to encourage them to explore more of your product's capabilities.
Entitlements, on the other hand, are like keys that unlock specific features or functionalities within your product. They are typically tied to pricing plans or prepaid commitments and allow you to gate access to certain aspects of your offering based on the customer's subscription level or purchased entitlements.
Let’s look at them in detail in the blog and see where they’re applicable.
What are Credits?
Credits are a form of currency incentive provided to customers by a business. Credits can be used to reward customers for any usage-based metrics you choose. With credits, you have the flexibility to set expiry dates, determine when a particular credit should lapse, and define pricing terms accordingly. This allows you to create targeted promotions and incentives that align with your business goals.
Imagine a popular ride-sharing company like Uber or Lyft. They frequently offer new users a $10 credit to encourage them to try their service. This credit is added to the user's account and deducted as they take rides. The company can set an expiry date for the credit, ensuring that users are motivated to use the service within a specific timeframe.
Applying Credits:
Credits can be applied differently, they can either be a discount (or) promotional offer, a grant at a line item level, for an entire invoice, add-ons, or for an entire invoice amount. Credits can either be recurring or time constrictive or one-off depending on the requirement and business goals.
Say for instance you offer 100 calls every month for $200. This gets renewed monthly and every month the customer will be getting 100 calls added to their portal. Irrespective of whether the customer uses 50 or 100 calls, they will be getting charged $200 every month. Credits can lapse within a specific period. This is an example of how credits are used to incentivize customer adoption and reward usage.
Additionally, you can also offer your refunds as credits for customers, making them use your product during downtimes or off-peak periods ensuring a steady stream of revenue.
Entitlements
Entitlements, on the other hand, are essentially pricing plans or prepaid credits with specific usage restrictions. Entitlements involve three steps: Togai (the billing software provider), the company, and their customer. When a customer requests a credit, the company sends a request to Togai to check if they have a balance. Togai will respond with a 200 status code if credits are available or a 502 error code if there are no credits. The company then sends the verification to their customer, confirming whether they can use the credit or not.
Entitlements are particularly useful for gating specific features or bundles that have defined limits. For instance, as a startup, you might not require all the features in a higher tier. With entitlements, you can assign limits on how much of a particular feature can be used. Once the limit is reached, the customer can either wait until new limits are added or refreshed, or they can purchase additional limits to continue using the feature.
Read more about Togai’s entitlements here >>
Here’s a simplified version on how entitlements work:
- The client triggers an action - a request to use the product/feature to the company’s API against their customer_id.
- The company’s API will hit Togai’s API to check for availability to see if the customer can use the credits or if they need to wait for their next recharge or they need to purchase additional units.
- Togai will generate codes 200 (which means credit limit is available) or 502 (which is an error code/no credit limit left) to the company.
- The company will then send the output from Togai to the client saying if they can use the triggered service.
A startup might choose a basic plan with limited features, knowing they can scale up as their needs grow. If the startup exceeds its entitlement limits, it can automatically transition to an overage rate, maintaining service continuity without the need for immediate plan changes.
With entitlements you can also monetize features that are gated behind higher tier, thereby not only increasing revenue, but also showcasing their value for the customer.
Conclusion:
Understanding the differences between credits and entitlements is crucial for effectively managing your billing and pricing strategies in a usage-based billing tool. Credits provide a way to reward customers, offer promotions, and incentivize usage, while entitlements allow you to gate features and bundles with specific limits.
By leveraging credits and entitlements strategically, you can create flexible and customer-centric pricing models that align with your business goals. Whether you're looking to attract new customers, retain existing ones, or drive revenue growth, credits and entitlements are powerful tools in your arsenal.
Consider how credits and entitlements can be incorporated into your pricing strategy. Experiment with different configurations, monitor customer behavior, and iterate based on data-driven insights. With Togai’s revenue simulator, you can also model your pricing to see the revenue you’ll be getting without disrupting your current workflow.
Read more on Revenue Simulator here >>
