The five challenges of moving to usage-based billing

The five challenges of moving to usage-based billing
Moving your business to usage-based billing is not without its perils – from how you implement it in your subscription plans, to whether your customers take the change kindly. Here are five common challenges that every business must overcome to shift successfully to a usage-based pricing model.

As more subscription companies turn to metered or usage-based billing, those who look to adopt this model must assess whether it’s right for their business and decide how to make the transition without massively disrupting their offering and driving away existing users.

As we’ve written about previously, a usage-based billing model comes with its fair share of drawbacks on top of its considerable benefits; though it may provide prospective customers that easy introduction to your service with a commitment-free offering, it also creates uncertain revenue streams for your business.

Here are five of the most significant challenges that subscription companies can face when adopting usage-based billing:

#1: Choosing your pricing model

One way to determine whether usage-based pricing is an appropriate model for your service is simply to consider your company costs; if they remain fixed and unchanged regardless of how much your customers use your services, then a usage-based model may not be right for you.

This is why usage-based billing is best suited for the likes of SaaS, cloud and data companies, due to the higher costs generated by increased usage, and the ease of metering such digital services. For other businesses, however, the needs of their product may be inappropriate for metered billing.

You must also consider how your customers use your service; if their usage doesn’t vary much month by month, there may not be any benefit for them, or you, in metered billing.

It’s at this stage that your business may consider opting for a hybrid approach rather than a purely usage-based model, charging a recurring fee for access to core features with users then paying on a per-use basis for any additional features or services.

#2: Convincing your customers

When making the switch to usage-based billing, you may be greeted with some degree of apprehension from your customers, especially if you’re beginning to charge for a service that you once provided for free. Because, as we’ve previously discussed, no-one wants to pay for something they once received free of charge.

You’ll need to convince your customers that the change is worthwhile, and will be a benefit to them. If you can’t adequately articulate this, then they probably aren’t going to be keen on the switch. You may even experience an increase in customer churn.

This stage will be a test of both your customer communications strategies, and the loyalty of your existing user base. Some churn may be inevitable here – the question is how much?

#3: Determining your value

Metered billing doesn’t tend to deliver value to businesses or savings to customers without an appropriate price point for the service in question.

Up until recently, usage-based pricing has only really worked for businesses with a measurable “unit” of product or service, such as telecoms and utilities. The metric should correlate closely to the value your customer extracts from your product so that your customers can best predict their usage and factor those outgoings into their budgets – for example, taxis charging customers by distance travelled.

Many SaaS companies employ usage-based billing for their products or services, either outright or supplementary to their main product, with customers paying additional usage fees based on applicable metrics.

There are many potential usage metrics that companies can use in their pricing; HubSpot uses the number of contacts, Mailchimp uses the number of emails sent, and Zapier uses the number of tasks (or “Zaps”) executed.

Pricing is just one of many components of your product offering that must be constantly re-evaluated; companies reportedly spend only six hours settling on their pricing strategy in the entire history of their business.

#4: Billing your customers

A good recurring billing system is necessary for collecting user consumption data and then charging customers accordingly in a timely and transparent manner.

Subscription businesses must be able to map and collate usage data from many different systems and sources, regardless of its format, in order to track usage and apply pricing. But in many cases, the corresponding customer data is stored and housed totally separately from the billing software, resulting in errors and discrepancies when it comes to billing.

This is where implementing and integrating a robust charging and billing system is vital – to streamline the payment process and produce itemised invoices.

#5: Predicting your revenues

If you’re looking at implementing usage-based billing, then be prepared for unpredictable revenues when it’s time to bill your customers.

Most subscription businesses forecast their revenues based on Monthly Recurring Revenue (MRR), but predicting your revenue from a usage-based pricing model becomes much more difficult.

Complicating this further is the variable cost of delivering your service; if your spending is bound to customer usage, then your associated costs will rise and fall with that usage too. If your revenues are high, then so are outgoings, which necessitates finding new ways to acquire users and optimise your service delivery at scale.

The same issue applies to your customers, who could be left feeling uncertain as to what their monthly outgoings will be without investing their own time monitoring and managing their usage – in effect, defeating the benefits of the usage-based model.

Adopting usage-based pricing is not an easy move to make, and you may find that it isn’t the right fit for your business. But if these aforementioned issues can be met and overcome, then usage-based pricing can enable subscription companies to acquire a vaster cohort of new customers, and bill them efficiently and accurately, while growing their business along with them.