Early this year, Kyle Poyar claimed boldly over TechCrunch: subscription-based model is dead. Usage-based billing is taking over.
He isn’t alone. Deloitte also published what sounds like a glowing review of the popularity of metered billing not only among software-as-a-service platforms but also in traditional industries – from healthcare to car insurance. Moreover, a global market report on telecom cloud billing revealed that this niche would achieve a compound annual growth rate of over 28% from 2019 to 2026.
Moreover, a global market report on telecom cloud billing revealed that this niche would achieve a compound annual growth rate of over 28% from 2019 to 2026.
Why is the demand for usage-based pricing rising? What companies are choosing to switch to this from other business models?
1. Usage-Based Billing Is Scalable
While some companies still offer platforms or applications per license, these are getting rarer. More vendors prefer to provide subscription-based modeling since they are more versatile than the most traditional options.
But even that can have challenges. For example, some customers may find themselves trapped in the same plan not only for months but for years. Although each bundle’s contents are more varied, with the customers’ needs in mind, consumers may still not be able to use all of them regularly.
The advantage of metered billing lies in its scalability, which greatly benefits startups and small enterprises. According to Deloitte, when fledgling companies have access to high-quality assets, they can scale without spending a huge amount of money.
Moreover, it allows these companies to be both competitive and dynamic. Take, for example, usage-based car insurance. With this setup, drivers will pay less premium if they drive more carefully. The variables included are hard braking, speeding, and sharp turning. Moreover, the system could monitor if you’re using your cellphone while driving. Also taken into account is how often you drive and your car’s mileage within a specific time period. Instead of spending a huge capital outlay on drivers’ insurance, businesses can now take advantage of usage-based billing, which they could pay less if their drivers are more disciplined on the road.
Furthermore, businesses can design their bundles in many ways:
- Per usage or consumption, such as flat rate, multi-tiered, rollover, or family plan
- Subscription, such as monthly, quarterly, semi-monthly, annually, or custom
- Per marketing, like discounts, promotions, exemptions, and credits
2. Usage-Based Billing Software Increases Customer Retention
Many studies show that customer retention is more affordable than customer acquisition. According to Bain & Company, a financial services firm that increases its customer loyalty rate by at least 5% could boost its profits by 25%.
The reason is simple: loyal consumers buy more products on a regular basis. They are the ones more likely to be responsive to cross-sellers since they know the brand is credible and trustworthy.
Repeat consumers may also share their positive experiences with others, which can further improve a business’ revenue. In data by Spiegel Research Center, positive reviews may increase the conversion rate for higher-priced items since other consumers consider these products riskier to buy.
But how can metered billing be useful in promoting customer loyalty? Answer: VALUE of service.
- For utility businesses, from electricity to telecommunications, consumers pay only up to the volume they used. If they exceed the limit, they are charged a pro-rated fee than a full amount.
- Unlike in subscription models, consumers are no longer stuck to a long lock-in period. In turn, it empowers consumers to make better choices for themselves, based on how much they can afford and the services they want.
- Because customers can now leave the service or let go of the product anytime, companies are forced to create more customized bundles.
Perhaps one of the best examples here is Zapier. The company offers five plans to customers (Free, Starter, Professional, Team, and Company). Each has its respective inclusions. Except for the Free subscription, users can choose further according to the number of tasks they hope to accomplish in a month. Hence, someone who chooses a Starter plan can opt for 1,500 tasks a month for only $39 and save themselves from upgrading to $49 a month to cover their needs.
3. Metered Billing Is Cost-Effective for Both Businesses and Consumers
Some businesses may feel they are in a losing situation if they shift to usage-based billing software.
In another perspective, however, metered billing can be more profitable for them. For one, they can charge a higher cost for on-peak seasons, such as in the case of electric power companies. Often, electricity costs soar during summer and winter.
However, the premium price they charged during these seasons may then compensate for the lower profits they may generate on lean seasons like spring or fall.
Opting for a usage-based billing can support the need for a large capital outlay to provide, maintain, and sustain their services. The costs are even more expensive for companies that demand more complicated infrastructures like telecommunications.
Take, for example, Comcast’s case, whose new data plan has been a subject of controversy. Under the new bundle, consumers now pay a fixed rate of $10 plus tax. However, they may end up paying up to $100 a month for every 50GB of data they consume.
While many complain about the excessive charges, in reality, a terabyte is no longer enough for Internet users. In an OpenVault study, the number of users who used more than a terabyte increased from 7% to 14%, particularly during the pandemic.
Usage-based billing is a win-win approach not only for companies but also for consumers. Users pay only for what they use. A perfect example of this would be the use-cases of Airbnb and Uber.
When travelers stay in Airbnb, the rate usually focuses on the cost of accommodation and cleaning only. This is unlike hotel prices, which may also cover amenities and services most customers don’t plan to use in the first place.
Find the Right Usage-based Billing Software
Usage-based billing delivers versatility resulting in higher profits for businesses. With customized pricing packages, companies can scale-up faster. It is also more dynamic, giving customers more options. Metered billing will provide businesses with a viable advantage over their competition. However, it all boils down to finding the right usage-based billing software. While there are many options, companies need to focus on what works better for them and their consumers.