Another name for usage-based billing is pay-as-you-go pricing, meaning as a customer, you need to pay based on your consumption volume in a billing cycle as opposed to a recurring fee for availing an ongoing service.

Usage-based billing is a win-win for all.

As a customer, you are allowed to take advantage of only those features that you really need and as a service provider, your products/services enjoy a higher chance of being accepted, since they’re now more affordable and accessible.

If you have not yet implemented this SaaS pricing model, it’s time you should. But before that, it’s better to gather an informed idea about all that it is.

Content of the article

• Definition of usage-based billing model
• Is this model new?
• When customers are charged under usage-based billing?
• Benefits of usage-based pricing
• Cons of usage-based pricing
• Challenges associated with the model
• Who is this model for?
• Infographic – Key components of usage-based billing
• Conclusion
• FAQs

All about usage-based billing

Definition: Usually, in subscription-based pricing, consumers need to pay a fixed recurring fee for availing their desired products and/or service – no matter how ‘more’ or ‘less’ often they use it. But this pricing model has its lows. If a customer decides not to renew the subscription, then the company has nothing much to do but to see wasted revenues.

In contrast, usage-based billing or metered services as sometimes it is referred to as, gives customers the freedom to pay based on what s/he actually consumes. So, this SaaS billing model eliminates recurring charges for ongoing service. And why SaaS, this model has very much been in existence since a long time in different industries. SaaS is perhaps the newest to follow the suite.

Is this model new?

If you pay electricity bill, cooking gas or water from public utilities, chances are you’ve already paid in this billing model. You must not have paid a fixed, unaltered fee every month. Instead, all you paid is what you have used. Isn’t it? This is exactly what is called usage-based billing. These days, many software as a service (SaaS) companies are introducing this model to simplify their billing cycle and encourage more opt-ins for their customers.

Quite often customers also readily go with this billing system since it allows them to understand different aspects of the product/service, and then they can choose to pay based on what they’ve used, rather than paying anything upfront when they are still not sure about the returns from their investment.

When customers are charged under usage-based billing?

Under usage-based billing, as a user you are charged at the end of a billing period. It could be daily, weekly, monthly or beyond, depending on the type of services availed, typically charging at the concluding part of a month is most popular.

Benefits of usage-based pricing

Scaling advantages – Your customers can test the product and if they want, can try out more features and pay accordingly. So no matter the budget – they can stay with you. Budget – no matter how small, is not a constraint any longer. And your business can scale up as you grow your customer base. Quality of product/services will ultimately decide the fate of your success. This takes us to the next advantage.

Race for Quality – Use-based pricing model means in order to retain customers, your assurance and claims would not work. Ultimately you have to provide value. This creates a healthy competition for all brands in the market and the end result is: high quality product and service on the strength of better support.

Psychological advantages – No customer would ever want to feel forced to pay or liable for a long-term contract. Usage-based billing allows customers to feel at home, and don’t experience the ongoing payment burden, resulting in a better business ecosystem populated with happy customers.

Diversify your offerings – Some users may want to avail more than others, some may not think twice to shell out more money for more features. With usage-based billing, companies can diversify their offerings based on customer types and preferences, and set their products up for grab in the market.

And then, this model has a low barrier to entry. Customers even on a shoestring budget can start using your products/services without having to pay anything whopping fee upfront.

Is it all roses with this pay-as-you-go billing? Not apparently!

Cons of usage-based pricing

No billing model is perfect. The same goes with usage-based billing. As you can guess, this model actually suffers from a few downsides. It’s harder to predict any fixed revenue outcome.

Sometimes, customers do not understand the inherent maths behind the model. They want a simplified answer as to how much they need to pay. But when you are charging based on usage, you are putting some extra effort on the shoulder of your customer to do the pricing maths, for example why they need to pay $0.001 per usage on a given month and not $100 monthly.

Challenges associated with the model

Companies need to develop a solid mechanism to onboard customers, provide a flexible pricing system securely, and simplify authorization in order for this model to work seamlessly.

What if a customer wants to change their billing cycle before they complete one month of being a customer?

How to add new features to existing services and adjust the billing?

How to develop unique metered pricing model work for different types of business?

How to automate the dynamic pricing based on usage?

These questions need to be solved. And for that, companies should use a reliable billing service platform that accommodates their evolving challenges and help them navigate the issues.

Who is this model for?

For Scalable service and product, for products where customers don’t need to opt for all the features. Usually, most SaaS based products are good to go with this model.

Key components of usage-based billing

FAQ

Is usage-based billing good?

It depends on the business you’re referring to. Most SaaS based products are shifting to the model because of its advantages

Should I replace my existing billing model with usage-based billing?

Please examine the consequences and take action based on what seems logical. Generally speaking, you can start the new model afresh, at the launch of a new product and /or service, after informing your customers. But then it depends on your business.