TL;DR
- You'll find that usage-based billing, or 'pay-as-you-consume' billing, is a flexible and fair pricing strategy that charges customers based on actual consumption.
- Usage-based billing is gaining traction, offering transparency and cost savings, and is able to attract a wider audience.
- Learn about different usage metrics, such as volume, time-based, tiered, and dynamic pricing models, with examples from Dropbox, WeWork, Netflix, and Uber.
- See how New Relic's shift to usage-based billing significantly improved its financial performance, attracting major clients and increasing revenue.
- Understand the best practices for implementing usage-based billing, including clear communication and providing tools for customers to track usage.
- Consider the challenges of usage-based billing, such as complexity and revenue fluctuations, and how a robust billing platform like Togai can help overcome them.
- Recognize the future potential of usage-based billing in various sectors, especially with the growth of IoT, and how it aligns costs with actual usage.
- Understand Togai's role in facilitating the transition to usage-based billing for businesses, offering a flexible and integrated billing solution.
Usage Based Billing Definition
Usage-based billing is also known as 'pay-as-you-consume' or called 'metered billing'. It is a financial model where customers are charged based on their actual consumption of a service or product. Instead of a one-size-fits-all fee, users pay precisely for what they consume, ensuring a direct alignment between usage and expenditure.
As companies cater to increasingly discerning and varied customer needs, the traditional "one-size-fits-all" pricing approach no longer holds water.
Usage-based billing is a billing model that promises
- Flexibility,
- Transparency, and
- Fairness.
What is Usage-Based Billing?
Usage-based billing, as the name suggests, is a pricing strategy where customers' usage is billed based on their usage of a product or service. Instead of paying a flat rate, users are charged according to the amount or level of service they consume.
This pricing model can be seen in various sectors, from utilities (like water or electricity) to digital services (like cloud storage or streaming services).
See examples of companies that went from subscription-based billing to usage-based billing and saw success.
Why is Usage-Based Billing Gaining Popularity?
The appeal of usage-based billing lies in its inherent fairness and flexibility. Let's delve into its advantages for SaaS companies:
- Transparency: Customers appreciate knowing that they're only paying for what they use. This transparency fosters trust between the business and its customers.
- Flexibility: Usage-based billing models allow customers to adjust their consumption according to their needs and budget constraints.
- Cost Savings: For many users, especially those with fluctuating needs, this model can lead to significant savings as compared to flat-rate pricing models or recurring billing models.
- Attracting a Wider Audience: By offering a pay-as-you-go model, businesses can cater to a broader range of customers, from heavy users to occasional ones.
Types of Usage Metrics Collected
There are multiple ways to implement usage-based billing, depending on the nature of the product or service:
Volume Pricing Model:
Customers are charged based on the volume of service they consume. For instance, a cloud storage provider might charge users based on the amount of storage space they use.
Dropbox is a company that does volume-based billing. Users are charged based on the amount of storage they need.
For example, their basic plan might offer 2GB for free, but if users need more space, they might upgrade to a premium plan that offers 2TB or more.
Time-Based Pricing Model:
In this model, users are billed for the time they spend using a service. Think of car rentals or hourly consulting services.
WeWork is a great example of time-bound usage pricing. WeWork provides workspaces and services for startups, freelancers, and businesses.
Customers can rent a workspace by the day, week, or month. The longer they use the space, the more they pay.
Tiered Pricing Model:
While still based on usage, this model has different price points or tiers. As users consume more, they may move to a higher (or lower) pricing tier.
Let’s take an example we all know Netflix. Netflix has different pricing tiers based on the number of screens you can watch on simultaneously and the quality of streaming (SD, HD, Ultra HD).
Each tier has its own price point. If a user wants to watch on more screens or in higher quality, they would need to move up to a higher tier and pay a higher subscription fee.
Dynamic Pricing Model:
Prices change based on demand and supply. For instance, ride-sharing apps might charge more during peak hours.
Uber uses dynamic pricing, often referred to as "surge pricing." When the demand for rides exceeds the number of available drivers in a particular area, prices go up.
This can happen during peak hours, bad weather, or special events. The price can fluctuate in real time based on the usage demand and supply of rides.
Example of Usage-Based Billing
New Relic's transformation in 2020 stands out to the power of adaptive usage pricing. Recognizing a massive gap in the market, with an estimated 25 million engineers worldwide either lacking streamlined data on their system performance or being ensnared by outdated tools, New Relic took the bull by the horns. Their strategy? An integrated platform tailored to every engineer's unique requirements.
The strategic pivot to a usage based billing strategy were glaringly evident in their fiscal performance:
- Their Q2 fiscal '23 revenue soared to an impressive $226.9 million, a jump of 16% year-over-year.
- The number of active customer accounts swelled from 14,300 to 15,300 in a mere year, with accounts exceeding $100,000 in ARR shooting up from 1,011 to 1,171.
- Attributing a significant chunk of this success to their revised pricing strategy, CEO Bill Staples highlighted that this innovative approach was pivotal in clinching deals with industry heavyweights.
Their partnership with European tech enterprise Tibber, specializing in intelligent electricity consumption, was particularly noteworthy. Tibber saw immense potential in New Relic's usage-centric business model, valuing its scalability in tandem with its expanding cloud framework and coupled with its predictability as it scaled operations.
Source: New Relic Investor Deck with revenue date
A shift to a usage-based pricing model has even improved the financials for New Relic, as shown in this 2023 investor deck.
A glance at their Consumption Run Rate (CRR) reveals major industry players ramping up their investments:
- A leading streaming platform escalated its final usage pricing from $4.6 million to $5.9 million within a quarter.
- A telecom giant's final usage volume leaped from $5.7 million to $7.9 million.
- A renowned beverage brand climbed from $3.1 million to $4.0 million.
- An e-commerce powerhouse jumped from $8.8 million to $10.8 million in the same period.
Staples poignantly summed up New Relic's journey amidst challenging market conditions, stating,
"Even as larger market challenges loom, New Relic's consumption-based model shines as a beacon, distinctly setting it apart from other pricing models."
As a 2021, research points out, companies using a usage based billing model are said to grow faster and efficiently compared to the top 50 publicly traded SaaS companies.
Implementing Usage-Based Billing: Best Practices
As with any pricing model, the key to successful implementation of usage-based billing lies in careful planning and consideration of customer needs. Here are some best practices to keep in mind:
Clear Communication:
Ensure that your customers fully understand how they will be billed and how they will be charged on their usage.
Regular Monitoring and Reporting:
Provide users with tools to track usage. To track usage data, API calls need to be confirmed. Your usage billing provider should ensure you have everything in place for tracking your usage metric. Regular reports or dashboards can help them manage their consumption and expenses and also will help increase customer satisfaction.
Flexible Payment Options:
Offer multiple payment processing methods to cater to varied customer preferences. Your usage-based billing platform should support different payment providers and strong native integrations with multiple tools.
Robust Support System:
A dedicated support team can help address queries and concerns, ensuring a seamless customer experience.
Also read: 7 Best Practices for Implementing Usage-Based Pricing
Challenges and Considerations of Usage-based Billing
While usage-based billing offers numerous advantages, it's not without its challenges:
- Complexity: Implementing a usage-based system can be technically challenging. It requires robust infrastructure to monitor and bill accurately.
- Predictability: Some customers prefer the predictability of a flat fee. They might be wary of potential cost escalations with a pay-as-you-go model.
- Revenue Fluctuations for Businesses: Unlike fixed-rate models, where revenue is more predictable, usage-based billing can lead to revenue fluctuations and how they charge customers.
- Accuracy of Usage Data: Some businesses can vary of how accurate the usage data is. This can be due to multiple third-party tools that monitor usage but don’t report it accurately. Also, if the usage data is siloed in a third-party system and is disjointed from the subscription software’s billing data, it can lead to confusion and manual intervention.
Businesses considering this model should weigh the benefits against potential challenges and decide if it aligns with their goals and customer needs.
All these challenges can be overcome with billing software that is flexible and lets businesses experiment with any pricing model be it usage-based billing or regular licenses/subscriptions. The usage-based billing model offers unparalleled flexibility and can be a lucrative choice for businesses, especially where the product is solely based on usage or consumption metrics and customers pay for usage.
What should your Usage-Based Billing System Do?
In the rapidly evolving world of subscription billing, having the right software is paramount. Your ideal billing solution should:
- Offer Flexibility: Be it fixed, tiered, or usage-based, the software should support diverse billing models.
- Ensure Accuracy: With varying rates and consumption metrics, accuracy in billing is non-negotiable.
- Provide Predictive Analytics: This will help businesses forecast revenue, especially crucial in a usage-based billing system.
- Be Scalable: As your customer base grows, the software should seamlessly handle the increased volume of usage transactions.
- Integrate Easily: A good usage-based billing system should easily integrate with other systems and platforms in use.
How do Billing Platforms like Togai Help Implement Usage-Based Pricing for SaaS businesses?
- Tailored for Modern Needs: Togai is engineered to address the challenges of today's billing landscape, offering both the flexibility of usage-based billing and the stability of fixed models.
- Sophisticated Infrastructure: Togai's robust billing system ensures accurate monitoring and billing, no matter how complex the usage patterns. Also you can implement any billing cycle you want depending on when your customers start their pricing.
- Implement Hybrid Pricing Scenarios: Togai’s billing model helps you implement any pricing models or combinations that you wish. You can combine any usage-based pricing data with a flat fee, implement seat-based pricing, provide entitlements, experiment with new pricing tiers, anything under the moon! This ensures you have all the billing and invoicing data you need within a single billing platform.
- Predictive Insights: Togai enables businesses to tap into predictive analytics, ensuring they're never caught off guard by revenue fluctuations.
- Customer-Centric Approach: Recognizing the importance of predictability for some customers, Togai offers the tools to communicate usage-based pricing costs transparently, building trust and loyalty.
- Seamless Integration: Togai's platform integrates effortlessly with a range of other systems, ensuring a smooth, unified workflow.
If your product has a set fee and a usage fee, your billing platform should handle both. Testing different prices can help a company match what customers want and increase sales.
Usage-Based Billing Model: The Future
As technology advances and consumer preferences shift, usage-based billing is on the rise, especially in sectors like telecommunications and SaaS businesses. The growth of the Internet of Things (IoT) further broadens the scope for this billing model, creating scenarios where cars are billed by road usage or fridges automatically order and pay for groceries.
In essence, usage-based billing offers a fairer, adaptive pricing model, aligning costs with actual usage. Despite its challenges, the advantages for businesses and consumers are significant, positioning it as a cornerstone in the future digital economy.
