“Usage-based billing is taking over, and subscription-based billing is dead,” Kyle Poyar claimed boldly over TechCrunch.
He is not 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.
What are usage-based billing models, why is the demand for them rising, and what companies are choosing to switch to this from other business models?
Table of contents
- 1. Usage-Based Billing Is Scalable
- 2. Usage-Based Billing Software Increases Customer Retention
- 3. Metered Billing Is Cost-Effective for Both Businesses and Consumers
- Find the Right Usage-based Billing Software
What are usage-based billing models?
As the name implies, a usage-based billing model is when customers are charged depending on how much they consume your products or services, with the final bill put together when the billing cycle ends. One good example is pay-as-you-go cell phones. These are commonly based on how much the customer uses their phone, including how many minutes they use and the texts they send. Another example is international calling plans, which charge you based on your usage number.
Usage-based billing business models are a good idea when customers are presented with a service, they only want to pay for how much they use the service, and the business wants to match their revenue with usage.
The following are the signs that your business is right for a usage-based model:
- Your customers complain about having to pay too much, which is a sign that the price of your service doesn’t match the value of it
- When customers use your service a lot but are paying a flat rate for it, this would suggest that there is room for your business to monetize this service better and make more money from it.
The following are some of the critical features of usage-based models for businesses considering adopting one and companies that don’t realize they should choose one.
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 for months and 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, fledgling companies can scale without spending a huge amount of money when they have access to high-quality assets.
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 the 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 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 monthly 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 charge during these seasons may compensate for the lower profits they 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 pay up to $100 monthly for every 50GB of data they consume.
While many complain about the excessive charges, 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.
What Business Types Benefit from a Usage-Based Model?
High-volume transactional services are best for usage models. This includes:
- Marketing automation businesses who can charge per the number of sent emails and tracked contacts
- Media companies with video platforms which can bill based on the amount of data stored and streamed and the number of videos played
- Billing software that can charge based on the number of API calls and amount of stored data
- Communications businesses can bill based on the number of phone calls and text messages
- Insurance companies with pay per drive business model
- E-mobility service providers which offer EV car charging services
- Financial services with the processing of high volumes of transactions like payments, accounts, and fees
- Utility companies
- Cloud Apps & Infrastructure
- IoT companies
- different OTT service providers
Why are These Businesses Suited to This Model?
- This model brings the price in line with the value of a product when customers use services at varying rates
- It is fairer on customers compared to having to pay for units that they may not use
- When customers use a lot of a service, a usage-based model precludes customers from needing to predict their usage ahead of time
Which Businesses Should Not Adopt Usage-Based Business Models and Why?
There are businesses such as time-based businesses (i.e., companies that bill based per seat or user) or services that offer subscriptions to physical goods.
Some businesses believe that their per-seat model is a variable business model because how many seats a customer users can vary per billing cycle. The difference here is that the customer is in control of this variability and pays for their variability when they change it. With traditional usage-based models, customer usage is the driving force behind the variability, and they pay in arrears. So if your business is built around time-based access, then you need to prorate any changes made in the middle of the cycle based on time. This means that you need to use a fixed-recurring per-seat model.
Like with the per-seat model, people generally pay for physical goods upfront and don’t use them incrementally, which would justify having to pay per usage.
An Alternative; Combination Models
Some businesses choose to take the third route and offer a business model that combines a fixed recurring fee and usage-based fees in the form of subscription plans. Taking this approach means customers pay a prepaid amount, which is their upfront commitment to using the product, and then usage-based charges if they go beyond the prepaid amount. One example of this is a cell phone plan where customers pay upfront for a set amount of data, and then they are charged extra if they go above the limits of their plan.
Why is this model a good idea?
- Combination models give customers the value of usage models with the predictability that they get from fixed models
- Predictable invoices are suitable for everyone; customers will pay for their usage, and the business has a set amount of anticipated revenue
How to implement a fixed business billing model
- Consider getting your customers to pay for a set amount of usage units in advance. That way, customers are committed to a recurring fee they agree to up-front. The usage fee kicks in when they go over this limit.
- If you have a service that has multiple values, such as if there is some value to the time-based access to the service, but the ultimate goal of your users is the high-volume transactions, then you can couple your fixed recurring fee with the usage-based fee added for the transactional components.
- If you run a seasonal business, you may need to reset the included units every so often based on the seasonality of your service. That way, you can encourage customers to stick around for the entire year.
The main benefit of adopting usage-based billing models for a transactional service is that it brings the price of the service in line with its value of it.
So you need to ask yourself how much customers value what you offer. Is your business a transactional one? Is it based on seasonal use? Are there losses associated with high usage that you need to start recouping? Will a usage model offer the chance to get more revenue? Answering these questions will help you to make the right choice about whether you should transition to a usage-based model or not. Please contact us if you would like to learn more about Tridens Monetization and the billing models we support.
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 must focus on what works better for them and their consumers.
Want to get more information about the Tridens Monetization solution? Leave a comment below or schedule a free demo!