Pay your own way with usage-based billing

More and more SaaS companies are turning to usage-based billing models to entice uncertain new customers with commitment-free offerings. But can these companies handle the uncertain revenue that this entails?

You may associate it more with topping up your twenty-year-old phone or your dreaded quarterly gas bill than with SaaS. You may be more familiar with it under other names: pay-as-you-go, or metered billing. You may think it counter-intuitive to charging a predictable, flat rate for your product or service.

But like it or not, SaaS companies are increasingly supercharging their billing operations with usage-based pricing models. These payment models allow customers to cough up only for what they've used at the end of a billing cycle, rather than a flat rate subscription at the start.

Utilities and telecoms providers are the clearest examples of usage-based billing; service providers bill their customers using tariffs to calculate the consumption charges every month – no more, no less. Taxis have, likewise, long operated on usage models, paying a fixed rate per unit of distance travelled (albeit on top of a fixed charge so even short journeys remain profitable).

Now, sophisticated charging and billing platforms have allowed other businesses to apply this billing routine to
their business model.

For your customers, usage-based billing better aligns what they spend on your service with the value that they get out of it. New customers can start at a low cost as they ease into your product or service, with their value rising over time as their investment (both financially and otherwise) in your service increases.

Typically, usage-based pricing has been only for businesses with a measurable “unit” of product or service – such as units of gas, water or electricity for utilities providers – applying at the end of a billing period. To implement a usage-based model, you need to identify a “unit” of your product or service that customers will understand, convert that unit into a quantifiable value, and run your customers’ usage through a metering system to collect this consumption data and bill accordingly.

The rise in popularity of usage-based billing has mainly been driven by consumers unwilling to pay for what they don’t use, seeing the model as a better deal than a flat rate subscription that includes features they will likely never need.

Usage-based billing is becoming increasingly prevalent for software and API-based products too, where the usage can be easily measured and valued by customers. Cloud hyperscalers, such as the likes of Microsoft Azure and Amazon Web Services, are metering server use by the gigabyte and charging accordingly.
But what you charge could be tied more closely to your product or service – pay-as-you-X – such as billing, as Mailchimp does, per email, or per webhook as with Zapier’s usage-based pricing scheme, or Stripe’s per transaction charge.

For example, car companies can appeal to occasional motorists by charging subscribers for distance driven, as Fiat are doing. Perhaps businesses should take a page from Epson’s book, offering an “always on” pay-as-you-print subscription service. Meanwhile, some waste management companies are even beginning to offer pay-as-you-throw systems to encourage recycling.

In fact, the more innovative your company gets with its billing, the greater the results; last year, the Weserburg Museum of Art in Bremen, Germany adopted an unconventional pay-as-you-stay model, charging guests based on how long they stayed at the museum, and saw its admissions increase by 42%.

While charging some users ultimately less than you would under a simple subscription structure, it’s your power users – subscribers who make heavy use of your services – that will be your business’ best friend with usage-based billing, more than covering the costs associated with them while offsetting any reduction in revenue from occasional users. Furthermore, usage-based billing makes your services attractive to a wider market, lowering the barrier to entry for customers who may be uncertain of the value or unable to afford a standard subscription.

Yet you must consider whether your business is prepared to weather the course with a much more unpredictable revenue stream and customers on fully prepaid models or rolling monthly contracts; likewise, your customers, be they consumers or businesses, might want predictable, low-rate costs to manage their own outgoings without having to closely interrogate their use of your product or service. The trade-off for this is that they will have to commit to a longer period.

SaaS businesses are finding their revenues growing rapidly with usage-based billing, getting paid directly for the value they provide, while customers can easily adjust their bills if they want to scale up or down their usage without needing to commit to an expensive long-term subscription. Are you ready to join the join the usage-based billing revolution?

Let Cerillion Skyline’s flexible charging and billing capabilities power your subscription and usage-based pricing models.