by Chargify Blog
In an ever-changing marketplace, businesses that offer precise and responsive services to their customers gain an advantage over their competition. This is also true when it comes to the pricing and billing options companies offer their customers.
By utilizing a usage or consumption-based billing model, companies can not only meet customer demand but also introduce a pricing model that can appeal to a wide range of customers, regardless of their product line or where their business is on its growth trajectory. However, as many businesses that utilize usage-based billing know, it is not always as simple as multiplying the level of service utilization by a price; there are many additional dimensions that need to be considered to account for different types of customers and the variability in their use of your services.
In this article, we will dive deeper into how your company can make usage-based billing work best for your business, your customers, and your bottom line.
How to Make Usage-Based Billing Work for Your Business
Introducing and refining a usage-based billing model is not always easy, but it can certainly be worth it. Here are four key ways to make it deliver for your business.
1. Create the Right Portfolio of Services
One of the most important ways to make usage-based billing work for your business is to ensure you tie the value of what the customer is consuming to how you are pricing your services. If you are looking to shift from a subscription model to a usage-based model, this can be obvious or might require a bit more thought depending on the products you offer.
A simple example is moving from a flat fee month over month for access to your system, to a per unit charge based on the number of times your system is accessed. Another example that might require more thought is a company selling data storage on a monthly subscription. When moving to a usage-based model, this company needs to look at how best to charge for their value. Is it the volume of data stored? Is it the number of times accessed or the number of people who have access? Or is it some combination? Figuring this out is key to making usage-based billing models work for your company.
A few other ideas on how to bill based on usage are:
- Number of active user accounts over a period of time
- Number of events created
- Amount of data stored, consumed, moved, and so on
- Number of sessions created
2. Select the Right Blend of Usage-Based Pricing Models for Your Customers
Under more traditional billing models, pricing is the same period over period and does not vary by customer. Some customers like the predictability of this fixed pricing for their budgeting purposes or because they are able to accurately predict how much of a service they need. However, not all customers today fit this mold. With more and more importance placed on value, customers are shifting to only want to pay for what they use.
With this in mind, it is important to select the right blend of pricing models, leveraging the right level of predictability and variability for items in your product offering and aligning the value your customers get from your product to how they pay.
For example, products or features to which customers always want access can be priced in a predictable recurring manner such as subscriptions. However, products or features which are consumed in units can be priced with a usage model. Depending on its nature, that usage model can be based simply on count or enhanced to vary the price based on multiple attributes associated with the usage.
For example, within a solution like Chargify, companies can select one of several customer pricing models right out of the box, such as:
- One-time items
- Bill customers for one-time items such as setup fees
- Flat-rate/subscription billing
- Bill for the same amount, period over period, regardless of the amount of service used (e.g. system access)
- Quantity-based billing
- Bill for a recurring quantity each period (e.g., user seats)
- Usage billing
- Simply bill based on what a customer has used in that period (e.g., API calls)
- Events-based billing (only available with Chargify)
- Bill for any event or interaction measured by your system calculating in real-time (e.g., messages delivered)
- Bill by multiple data points or attributes associated with an event (e.g., messages delivered by country)
- Pre-paid with drawdown
- Bill upfront for a specific amount, and then allow your customers to consume and draw down against that amount over time (e.g., payments processed)
Then, take your blend of billing types and overlay them with the right billing period so your customers get billed at the right times.
- The defined period can be any number of days, weeks, or months that work for your business (e.g., every 14 days, every month, once per quarter, or once per year).
- This also includes the ability to introduce savings or offer discounts to customers who commit for longer time periods.
Chargify also allows companies to vary their per unit pricing amounts as customers consume more or less of a service. Leveraging different pricing types can help you shape customer behavior. Two examples of this are:
- Decreasing your per unit amount on all units when customers cross usage thresholds. When done effectively, this can help drive adoption and use of your system.
- Differentiating the price of units that are paid for and committed to up front versus those that are consumed as an overage or variable rate. A higher overage rate The common theme across all of the pricing models available is understanding and balancing your customers’ needs with your platform’s operating costs. Fortunately, with usage-based billing and with strong customer communication, you can refine how your products are priced and packaged on an ongoing basis.
3. Integrate Enterprise Systems to Capture Customer Usage
When charging based on usage, a higher level of transparency is required by your customers because their bill is now fluctuating each period. With this fluctuation comes a need on both sides to clearly see the accuracy of the usage consumed and how it is calculated. To do this, your billing system needs to be integrated with your other enterprise systems that are constantly reporting usage throughout the billing period. Whether through native APIs, scheduled batch data calls, or other means, your business and your customers need to have as near real-time levels of service usage as possible.
With the appropriate data flowing in, your enterprise billing system can then apply the pricing model specific to your customer and the products used, measuring customer usage based on the value metrics chosen. Not only will this help to monitor operating costs and potential billing, but it can also allow your business to use this information to facilitate proactive communication with customers.
For example, an organization can configure systems to notify customers via a dashboard or other means of communication if usage reaches or drops to certain levels or if data limits or tiers are being met. This information can also be used to help facilitate conversations on which pricing model is right for your customers.
4. Personalize Billing for the Customer
Customers want transparent, easy-to-understand presentations of their usage charges and, of course, for the appropriate charges to be applied. Use your ability to customize and personalize your customers’ invoices as much as possible to display the key components of how their total bill was calculated for that billing period. This should include all the information needed for your customer to understand what service they consumed, how much of that service they consumed, what the per unit rate was (with detail, if needed) and how much their overall charge was.
Having this level of detail also gives customers the ability to directly link the value of what they are paying for with the service your company provides. This information can also be used to support ongoing customer engagement and product alignment conversations, including internal discussions on how the current product offerings and pricing models affect your customers.
Bringing It All Together
It is easy to see why usage-based billing is so attractive to customers and businesses, but it can be tricky to refine its implementation. However, by constantly evaluating your portfolio services and pricing models, proactively communicating with your customers, and offering plenty of transparency in how your customers are billed, you can put your business on the right trajectory.
If your team wants to refine how you utilize usage-based billing or get support in setting it up, Chargify’s team is ready to help you learn more and get the process started.