TL;DR
- Metered Billing is a flexible pricing model where you pay based on your consumption, similar to how you're billed for utilities like electricity or water.
- Discover the importance of quantifiable products, customer understanding, value metrics, and the impact of consumption on costs before implementing Metered Billing.
- Explore four Metered Billing pricing models: Per Unit, Overage-based, Volume-based, and Tiered Usage, each with unique benefits and examples.
- Understand the top benefits of Metered Billing for you and your customers, including increased Customer Lifetime Value (CLV), customer satisfaction, cost control, higher revenue, and valuable customer insights.
- Be aware of potential challenges such as revenue unpredictability, non-compatibility with certain products, and cost-related conflicts.
- Metered billing's role in modern applications across various industries highlights its widespread applicability and relevance.
- Learn best practices for implementing Metered Billing, like providing clear-tiered billing, establishing beneficial usage metrics, offering incentives, and choosing the right pricing model.
An Introduction to the World of Metered Billing
Metered Billing: The term may not sound familiar, but you have likely paid many electricity and telephone bills structured under this billing model.
Whatever the commodity is- water, electricity, telephone, or even milk- metered billing works the same way: The customer is billed periodically, and the bill amount depends on how much of the product or service they have used.
By definition, metered billing is a pricing model where customers pay for the amount of product or service they consume. Metered billing typically involves customers subscribing to a package that includes a base price for a certain amount of usage. For every additional unit of consumption over this threshold, customers are charged an additional fee.
Examples Of Metered Billing
Metered billing is more appropriate for subscription-based billing scenarios where single users consume more and increase overheads. In this billing model, each consumption unit (water, electricity, or telephone calls) costs a set price per unit.
To better understand this concept, take, for example, cloud-based applications. They are structured to calculate charges based on customers’ usage levels and patterns. A classic example would be businesses that provide cloud storage services. Customers opting for the basic plan can use 10 GB of cloud storage for $5 per month. Overage charges are applied if a customer's storage usage exceeds 10GB.
Metered billing is far ahead in terms of flexibility and agility when compared to pay-as-you-go models. As we already know, users pay only for the resources they have already used without spending on pre-purchased consumption units. This flexibility with metered billing allows them to respond to the fluctuating demand without worrying about wasting money on unused resources.
Obviously, metered billing sounds like a win-win situation for your business and your customers. Yet, like all other billing models, metered billing needs a strategic approach that can’t be implemented on a whim.
There are several factors to set straight before proceeding with your metered billing plans.
4 Aspects to Consider Before Choosing Metered Billing Model
1. How quantifiable your product is.
To implement metered billing, you need to have a way to measure and quantify the usage of your product in specific units. This measurement should be easy to understand and identify for your customers. You also need to determine a value metric that reflects the value of your service and enables you to monetize the product based on customer usage. Having a clear value metric allows you to:
- Charge customers only for what they use
- Compare the costs of different services
- Track and understand customer usage over time.
- Optimize your services to meet customer demands.
2. Your customers’ understanding of metered billing.
Your customers must understand that they are charged only for what they use. This basic understanding will allow them to make better decisions about how and when to use your products or services. It will also ensure they are not caught unawares by unexpected bill amounts. The onus is on you to make the model easy to understand for all customers.
3. Your value metrics.
The term refers to the metric determining how your product will be monetized. Value metrics vary according to your business and the products and services you offer. In metered billing, the most common value metrics are:
- Number of users
- Volume of data
- Number of events
- Number of API keys
- Number of sessions
- Number of calls
Tracking key value metrics is how you maximize the value of your service. SMS API products, for example, provide value every time they send a text message. Let’s assume the API sends a batch of 100 messages in one API call. Essentially, the service's value is a multiple of the API calls sent. When this value metric is attached to a customer's bill, they are paying for what the service is actually worth.
4. Impact of customer consumption on your costs.
Metered billing makes sense if customer consumption of your products or services positively impacts your operating costs. Single customers might not impact your overall operation costs, but the collective customer base can have a significant effect.
For example, if a large customer base is using a lot of bandwidth or electricity, then your operating costs will be higher than if the customer base is smaller. Metered billing allows you to track how much each customer consumes more accurately, so you can adjust your pricing accordingly and ensure that your operating costs are kept in check.
At this juncture, it is also essential to understand that Metered Billing is a pricing strategy with several pricing models that depend largely on your offerings, products, and services.
4 Commonly Used Metered Billing Pricing Models With Examples
1. Per Unit Pricing
Under this pricing model, customers are charged on a per-unit basis. Let’s assume a customer is charged only $10 per month for a single product or service user. The charge will be $10 x 100= $1000/month if they have a hundred users. Amazon Web Services, Uber, Lyft, and other carpooling services are classic examples of per-unit pricing.
2. Overage-based Pricing
In this metered billing model, users get a fixed quantity of units at a special price. Once they have exhausted those units, they can purchase extra units, for which they will be charged an overage fee. Here, users have the freedom of usage control and the freedom to choose whether they want additional offerings.
A great example of overage pricing is Matomo. This web analytics platform’s pricing model is based on the number of page views per user. Additional page views carry extra overage charges.
3. Volume-based Pricing
In this model, charges per per-unit are determined by the overall volume of usage at the end of a specific period. Customers opting for volume-based pricing have two advantages:
- They gain access to the same features irrespective of how much volume they use.
- The per-unit cost decreases when the volume of consumption increases.
To better understand volume-based models, let’s take a look at Ford. The automobile company had introduced an auto subscription service with volume-based pricing as its core component. The value metric here was the number of miles driven. This was their pricing strategy:
- First 500 miles- Free of cost
- Additional 360 miles- $0.10 per mile
- Additional 750 miles- $0.09 per mile
The logic here is that the more the user drives the car, the less they spend for each mile.
4. Tiered Usage Pricing
The concept of tiered usage pricing is this: The billing is based on the quantity of usage per tier. The tiers are defined in advance, and each tier has a different cost associated with it. As the user's usage moves from one tier to the next, the price per unit of usage increases.
Zapier uses tiered usage pricing where each tier specifies the number of tasks included in that tier. According to the company, a task is "the act of taking action when a Zap moves data for you.".
In recent times, metered billing has been used for numerous applications across diverse industries. This billing strategy is no longer confined to staples like water, electricity, or gas. Customers and companies benefit from metered billing, which is one of the main reasons it is a top preference.
Metered Pricing: 5 Top Benefits You & Your Customers Gain
1. Customer Lifetime Value (CLV)
SaaS companies leave no stone unturned when tracking and driving customer lifetime value or CLV. Metered billing allows customers to pay for only the resources they use, making them more likely to return and purchase more resources. Customers who see value in the company's services are more likely to stick with it.
There are two important reasons why metered pricing and CLV work in tandem:
- Customer behavior monitoring
- Improved customer-related data
By tracking customer behavior, companies can better understand their customers and make sure they are receiving the services they need. This can also help to identify opportunities to upsell and cross-sell services, resulting in higher CLV.
2. Customer satisfaction
The fundamental concept of charging customers only on the actual usage of your offerings is what makes this billing strategy a success. At least 98% of your customers are comfortable knowing what they are paying for. With metered billing, there are no hidden costs. Everything is transparent: If you use it, you pay for it. This is the basic fact that makes users feel very much in control of their expenses and also leads to good customer retention.
3. Cost Control
Generally, customers are not big fans of subscription plans because they do not like being locked into contracts that make it harder for them to switch to other plans.
Companies like internet service providers are well aware that customers are wary of signing up for extended-term contracts. That’s why they sweeten the deal with free offers or discounts.
In such scenarios, companies can make customers feel empowered by implementing metered billing. Since the pricing is entirely transparent and does not tie them down to lengthy contracts, users have more control over their usage and expenses.
4. Higher revenue
Clubbing subscription billing with metered billing has worked wonders for several SaaS companies because it creates additional revenue along with their standard billing model. Here’s how this works: The subscription model ensures a steady stream of monthly income, and the metered model brings in revenue based on user consumption. It is a brilliant way to ensure two steady revenue streams in one go.
5. Customer insights
The metered billing concept allows you to understand what works well for your users and what doesn’t. By collating granular usage details, you can identify the highly preferred features and customize your products to suit their needs. The only challenge here is how you will collate accurate data. But once you figure it out, these customer insights and behavioral analytics can be enormously useful for your future development.
And yes, there is also a flipside to implementing metered billing. Hence it’s best you know both sides of the coin.
Downsides of Using Metered Billing: Why It Could Be a Challenge
- Revenue Unpredictability
Unlike subscription billing, which gives you a steady monthly revenue and allows you to accurately predict your income, metered billing does not make matters that simple.
With metered billing, you have to estimate how much usage the customer will have and how much they will pay each month, making it more difficult to predict your revenues.
- Pricing Model Non-Compatibility
Metered billing is based on the idea that you can accurately measure the amount of usage of a product or service based on user activity. If you cannot accurately measure the usage, you cannot assign a monetary value to it. Without value metrics, this pricing strategy is of no use.
- Cost-related Conflict
Metered billing relies on accurately measuring usage and charging customers accordingly. You should be able to track and measure the exact actions taken by the customer and assign an appropriate monetary value to each action. Hence, you should consider your company's expenses to determine whether this is the most efficient and effective charging method. If your costs are fixed, this may not be the best option.
One of the most important things to understand about metered billing is this: It does not work for complicated products or services that cannot be broken down into measurable usage units.
But let’s look on the brighter side of this strategy: A metered billing system is the best choice if your overhead costs are directly proportional to your customer's usage. If your business ticks this criteria, you can start rolling out your metered billing plans.
We wrap up our blog with tips for implementing metered billing and gaining maximum benefits.
Best Practices to Successfully Implement Metered Billing
- Provide clarity with tiered usage billing.
If you opt for a tiered billing model, the best way to go about it is by defining the tiers in crystal clear terms. You can:
- Explain how the model works in simple, uncomplicated language.
- Provide flexibility by creating tiers based on usage levels.
- Establish usage-based value metrics.
Value metrics vary according to your product and business model. For instance, music streaming services can charge for one hour of music or the number of songs played in one hour. Another example is credit card processing, where users are charged a percentage for each transaction they make.
Unless your tier usage pricing is transparent and user-friendly, it may not have many takers.
- Ensure it is beneficial for everyone.
Any pricing model has to work both ways for long-term profitability and sustainability. The same goes for metered billing. Metered usage with metered billing should encourage customers to use resources more efficiently. When customers become more aware of how much they are using and are incentivized to reduce their usage in order to save money. This can result in lower costs for the company or service provider in the long run, as customers will use less of the resource and thus require less supply.
- Be generous with incentives and discounts.
All customers have an affinity for incentives and discounts. It is impossible to go wrong with this practice when it is done correctly. There are some reasons why we emphasize incentives with metered pricing. The apparent reason is that it brings more customers into your fold.
Next, think about the risks you face in terms of revenue unpredictability. Incentives and discounts can help break that unpredictability and bring in revenue. The next risk is your partner selection. You need an expert team to handle configurations and customizations. Offering incentives may ease the process for you.
- Determine the suitable pricing model.
We’ve already listed the best metered pricing models in this blog. Your choice must be firmly founded on:
- Customer-generated data, such as their preferences and behaviors.
- Evaluation of each pricing model’s pros and cons.
- Guidance from experienced billing professionals.
In other words, do not choose your pricing model on a whim because it will only be a waste of your resources if it does not work well.
Wrapping Up
It makes sense to pay only for what you use. This is the simple concept behind metered billing. At the outset, it may seem complex to implement, but it is very straightforward, profitable, and efficient.
For professional guidance about metered billing, reach out to our Togai team. Call us to Schedule a demo.
