The idea of metered billing is hardly new since it represents a pricing model where the customer is billed according to the consumption of the product or service. It is how consumers pay for their water, gas, heating, and bandwidth, among others.
Even so, the potential of metered pricing hasn’t entirely made its way across the subscription landscape just yet. That is to say, software as a service, over-the-top content, subscription boxes, Internet of Things devices, and more.
The concept of subscription billing has changed drastically in recent years. Customers are more accustomed to being billed with subscription models. The adoption of metered pricing models could very well be the next evolution for the billing process.
Table of contents
- What is metered billing?
- Examples of metered billing
- How metered billing benefits businesses?
- 5 things to consider before choosing metered billing?
- Metered billing challenges
What is metered billing?
Metered billing is a billing model in which clients pay for a product or service depending on how much they use it. It implies that your company may charge clients depending on their use during the billing period rather than expressly specifying preset quantities with metered usage.
Metered billing is ideal for firms where client usage significantly influences running expenses. Especially if you supply products and services on a continual basis.
Customers will often subscribe to the product plan via metered model, including a base payment for a defined use limit. Customers who exceed this limit may be charged an additional fee for each subsequent usage unit.
Examples of metered billing
Metered invoicing typically includes a unit of consumption and costs a set price per unit. For example, the cloud-based application must detect customer usage levels and automatically determine a charge that matches the customer’s usage levels under a metered-billing pricing model.
Unlike alternative pricing models such as multi-year licenses or even typical pay-as-you-go models, metered billing allows for significantly more agility and flexibility in resource utilization, allowing for on-the-fly capacity provisioning without incurring unnecessary expenditures.
How metered billing benefits businesses?
Well, it allows businesses to accurately charge their customers based on how much they use their products. That helps companies better manage the costs that come with providing those products and services.
IoT manufacturers, for example, can leverage metered billing to pay for the server space they need to maintain their services.
It also allows customers to pay for only what they use, so they don’t feel like they’ve wasted their money.
5 things to consider before choosing metered billing?
This sounds like a great win-win situation, but the only way for a business to succeed with this billing model is to take a strategic approach to the whole thing.
Here are five things that every company must consider when deciding whether to implement metered billing structures.
1. Whether companies product is suited to a Metered Billing Structure
Can the product/service you provide be broken down into individual units? If it can, then what elements or components are the select units based on? Customers must understand those elements easily so they aren’t shocked when they receive their first bill.
2. How well do your customers understand Metered Billing?
Metered billing can only work well when customers understand what it means and meet their expectations. If businesses bill their customers based on the resources they use, then they have to ensure customers understand how the different resources are defined and how their consumption affects prices.
Imagine a streaming service that uses usage based billing. While it makes sense to charge by data used, customers may feel that they should be charged by how many videos they watch or songs they listen to.
Customers may be confused about how their bill matches what they have consumed.
If you have difficulty explaining a metered billing system to your customers, then you should go for a traditional subscription billing model. Of course, it’s entirely possible to combine the two approaches.
Several businesses have already done this by charging base prices through subscription fees and then adding usage-based rates for overage charges.
It’s also possible to create tiers by grouping products and usage terms into categories, with each tier having its price. This gives users some flexibility while ensuring they get billed in a way they understand.
3. How does customer consumption affect your costs?
How much can a single customer affect overall operation costs? What about the entire customer base? Are your customers directly responsible for a heightened electricity bill or for using more bandwidth?
Metered billing is a good fit for businesses if you continuously deliver products and services. Where customer consumption has a drastic impact on operating costs.
4. How often do customers make purchases?
If the average customer makes one purchase within a set time, then you probably can’t sustain metered billing. You would have to stagger customer payments to give you a predictable monthly recurring revenue to stay on top of cash flow.
That’s a strategy you can be sure the customers won’t like or agree to.
With that said, a business can thrive with metered billing if customers regularly purchase your products or access services. The precise frequency of usage where metered billing makes sense is unique for each business.
Subscription billing experts like Tridens can help you understand when the metered model would help increase revenue and help determine the best price for units.
5. How many units of your products do customers use?
Metered billing is best when usage between customers varies a lot.
People who use your product or services a little will pay less than those who use a lot, which leaves everyone feeling like they’ve spent a reasonable price for what they’ve consumed.
If customers tend to use the same amount of product consistently, it makes metered billing systems less effective. Customers can feel like they are getting a fair price for what other people, not them, have consumed.
Metered billing challenges
The subscription model has a lot of advantages, one of which is that it allows you to correctly anticipate your monthly recurring revenue (MRR) depending on the number of active subscribers you have.
This is a little more challenging with metered billing model. It’s difficult to forecast revenue because you don’t know how much your consumers will use the product.
Metered billing won’t function unless you can regularly determine consumers’ specific actions and then attribute a monetary amount to them. Consider your company’s expenses to decide whether this is your business’s best and most effective charging strategy.
It could not be a good fit if your costs are set.
For example, if they do not alter with changes in consumer consumption.
We predict that metered billing will only become more popular with consumers demanding greater flexibility from subscription services. Tridens Monetization, the go-to subscription billing software, can help you create the best billing structure for your business.
Whether you need subscription plans, metered-based billing, or some combination of the two, you can count on us.
Want to get more information about Tridens Monetization? Leave a comment below or schedule a free demo!