Of the multiple different approaches to usage-based pricing models, different companies see unique advantages. SaaS and companies that operate on a subscription model are the leading proponents of user-based pricing. By offering a cost model that allows consumers to avoid paying a set cost, they give customers the chance to only pay for what is actually used. Ranging from streamed minutes to distance traveled, this model has proven to both increase customer loyalty as well as increase profits.
In terms of customer loyalty, it fosters ongoing relations in a twofold manner. The first is a matter of trust-building. Since consumers are only charged for the services they use, they, in turn, feel more responsible for the purchase and grateful for a perceived discount. Secondly, consumer relationships are improved simply via repeated contact methods. When modeling usage-based pricing with repeated payments, the business maintains communications with the customer on a long term basis. This reinforces the relationship in the customer’s mind while also facilitating positive brand awareness.
When considering the benefits to the company, a usage-based price model, while variable, induces faster business growth. Without employing this tactic, it is a binary choice between a customer obtaining your services or choosing against it. Ultimately, this is a 50:50 set of odds that increases your attrition rate overall. In limiting the risk to consumers by providing a usage-based cost model, you open a third option whereby customers can opt for the service without having to pay a set amount. Another key benefit is that it allows you to directly quantify user data. Giving you the metrics needed to perform relevant analyses, businesses gain a thorough understanding of what their consumer bases use and when. In using this information properly, a company can streamline marketing efforts and focus on services that are the most effectively received by their target market.
An established method of driving business success, usage-based pricing drove growth for companies with over $25,000 gross annual revenue by an alarming 21%. In essence, this means that businesses that were inherently profitable, to begin with, were able to see staggering growth in users. A logical approach prevents businesses from missed opportunities for spikes in consumption. Instead of missing the opportunity to profit from a potential increase in service, companies that opt for a user-based pricing strategy stay ahead of the competition.
Methods of Pricing by Usage
Whereas the method of approach to usage-based pricing is as diverse as the sky is blue, there are six common solutions to these models.
Particularly if you are new to this pricing structure, you can gain great insight and advantage from:
- Unit-Based Pricing: More commonly known as a pay-per-use, this structure has various benefits and downsides. It is when a set fee is billed each time a service is used. Typically, billing occurs right after the service is utilized. While this is a simple structure that simplifies supply chain management, it also runs the risk of limiting growth potential. It provides an opportunity for steady growth and easy tracking. Also, if you have a limited supply of what you are selling, this allows a level of direct supply and demand control over your market.
- Pricing Based on Overages: Most of society recognizes this type of pricing model as it is iconic to cell phone companies and mobile data providers. The customer is given a limited amount of the service with their payment, such as GB of internet per pay period. When the customer goes over the amount provided with the service, they incur an overage charge, which is then applied on a unit-by-unit basis. It allows for significant profits while also controlling the amount you supply. However, it can work as a negative branding reinforcement as customers can see the charge as a penalty.
- Volume Focused Pricing: Another common approach, this is essentially a method of pricing with variable costs based on quantity. It allows you to encourage further spending by charging less as the customer consumers more. Since this is typically conducted on a by-unit basis, companies can also charge for more than what was used without that becoming customer perception.For instance, if a phone service charges $15 for the first set unit of calls, it is already using a volume model. Additionally, to further drive revenue, subsequent calls are charged at a lower rate, say $10. Especially when you have used analytics data, you can set the volume amount to make the savings on larger volumes more elusive to customers. Conversely, companies are also known to take the opposite approach and structure the increasing volumes at higher fees. Typically, this approach is taken when there is a limited supply of the service, or where excess usage would risk a slowdown in function.
- Multi-Tiered Pricing: A very useful approach, tiered cost models apply an incremental fee in tandem with the volume increases noted above. Effectively a subset of volume pricing, this method takes a tabulated approach to determine the proper price. Usually, this is done in conjunction with a recurring payment subscription. The base fee for the subscriber is applied for using the service (the first tier). Within the previous period, be that a month or a week, the amount of usage is then calculated. Depending on where on that chart, the amount falls, the client pays a certain amount. In some cases, income tax, for instance, the tiered approach, applies an according to rate to the different levels of usage.
- Coupling Tiers with Overages: Functioning with a twofold approach, this mode of pricing formatting uses the tiered approach in conjunction with overage methods. This is another occurrence when it is beneficial to have existing user information to run a set of analytics. It is also a good way to control the demand of your consumers when supply is limited. With this method, the consumer pays according to the tiered structure first. With ascending prices at each level, the customer pays for what is used at an agreed-upon rate. However, with the overage structure, there is a cap to the tiered model. If the customer exceeds this predetermined cap, they then pay an overage fee. This is charged on a per-unit basis thereafter, allowing for a heavy spike in revenue, provided there is no functionality downside to the increased usage.
- Multi-Atribute Pricing: A great example of this approach is through vehicle rental companies. Using a pricing model with multiple attributes, this gives businesses a chance to both control perception and apply charges in the most profitable places. For instance, fees can be on a timeline basis (a charge per day), as well as pricing based on the model of the product (a type of car), in addition to a per-unit or tiered model application relating to the distance traveled. When balanced properly with the brand’s positioning strategy, this is an effective approach to driving revenue growth.
Usage-Based Pricing: Key Takeaways
Perhaps the most important lesson for companies to glean from usage-based pricing is the opportunity it presents. It allows customers the opportunity to grow in tandem with your business capacity. Provided your market saw initial success when using your service, they will seek to use it more frequently and in greater quantities. By opting for a user-based approach to pricing, you encourage revenue growth. This facilitates the return on investment for all your marketing and analytics efforts to make sure that you don’t miss out.
Another key component of this structure is that it works in balance. Whereas it is helpful to incorporate user-based strategies, it is not functional as a standalone. When paired with recurring price options like those seen with subscription models, you provide yourself with a steady source of revenue in the event of a usage reduction. Additionally, when you pair a consumption focused pricing strategy with a term, it protects your interests in that your customers cannot leave after getting the usage they need. It solidifies a steady revenue and allows you to see the profits of your user-based methods.
Provided you consider both the virtues and risks associated with a user-based pricing, your business will see the most benefit possible. The key takeaways are essentially balanced and important. Consider the strategies that work best for your unique business and structure your pricing accordingly.
In essence, usage-based billing allows customers to grow with your business. Consumer loyalty is a well-established fact; if a customer has a positive initial experience, they will stay with your company. By factoring in a usage-based strategy, you get the opportunity to grow your revenue in tandem with increased usage. It affords you the maximum return on investment from your advertising efforts while also providing you with meaningful analytics details. It is, of course, a matter of balance. Naturally, there will be a period of trial and error – something true of every pricing structure change. However, provided you can identify the best way to properly incorporate usage-based pricing into your structure, you gain the advantages of steady income and growth opportunities.