by Chargify Blog
Until recently, only industry titans like Microsoft, Amazon, and Google could successfully and effectively harness continuous, real-time data use statistics to fuel events-based billing models. Backed by an army of developers, data engineers, and finance professionals, this events-based billing model allowed these large companies to directly link the value that their services provided with the cost presented on a customer’s invoice.
However, with the introduction of Events-Based Billing by Chargify, this event-based billing model is now available to small and medium-sized businesses, giving them the ability to offer the same pricing models and bill customers just as precisely as Amazon Web Services (AWS) or the popular voice and messaging platform Twilio. No longer are large IT budgets, legions of developers, and seemingly endless financial resources a requirement to create pricing models like the big brands in the business.
So what is the next step toward putting these best practices in place at your organization? This article will walk you through what these brands are doing right when it comes to events-based billing and how you can implement it in your own operations.
What Amazon Web Services and Twilio Get Right
As of late 2019, Amazon’s cloud services business, Amazon Web Services (AWS), accounts for about 71 percent of its parent company’s operating income and about 13 percent of the brand’s overall revenue. Put another way, cloud services are a huge part of Amazon’s 1,233 percent stock surge over the last decade.
Despite being a much younger company, Twilio, the cloud-based communications tools and services company has established a business and billing model that is made to last. In just the last year, Twilio saw revenue jump 57 percent year over year as customer accounts rose 23 percent.
Though they offer two very different services, AWS and Twilio have both harnessed the power of their events-based data to provide their customers with flexible, value-based billing. Twilio’s pricing structures include offering customers monthly recurring charges or pay-as-you-go options. The latter, of course, was pioneered by Amazon, which launched the billing model based on user events in 2006. The pay-as-you-go model has since been the catalyst for Amazon’s rapid growth and dominance in the marketplace.
How AWS Does It
When AWS first entered the cloud services business over a decade ago, the SaaS market was known for subscription-based business. Customers entered into annual (or, in some cases, multi-year) contracts that locked them into prices and usage levels. As with other products launched by Amazon, the cloud services business model immediately caught other services providers off guard and gobbled up market share. And, for customers, AWS offered the ability to pay as they go, which translated to customers only paying for what they used and nothing more.
As if that wasn’t enough to buck the trends, AWS also offers customers volume pricing—customers pay less as they use more of AWS services, and they have the opportunity to select a billing model that allows them to “save” or retain unused capacity from one period for future use in another billing period. Combined, these billing models have made AWS a very attractive service provider for businesses of every size and across the maturity spectrum because, unlike structured contracts, this flexible billing model helps organizations stay agile; they can scale up their capacity or service usage to meet their own customers’ demand or scale down to save costs during slower periods.
How Twilio Does It
Twilio is a provider of cloud-based communications tools that serve as the backbone of Lyft, Yelp, Airbnb, and Shopify, a space in which many market analysts see huge potential for market growth.
No matter the industry – whether the customer is the ride-sharing giant Lyft or a recent startup – all Twilio customers have the opportunity to pick from two pricing models: monthly recurring charges or pay-as-you-go. In both cases, Twilio’s billing model allows for scalability for both the company and its customers.
Under their monthly payment model, customers pay a flat rate based on the services they select for that month, regardless of the level of use. To get them started, Twilio packages their typical services based on recent customer demand and new related features.
Twilio’s pay-as-you-go model is just like AWS’s, but with a slight twist: Twilio bills customers upfront with a model similar to a retainer; customers’ usage is deducted from their balance held by Twilio. Once a customer reaches zero, they can no longer use Twilio services. However, if they have money left in their retainer, those funds can carry over.
Creating Your Own Events-Based Billing Model
In the case of Twilio, AWS, and many other SaaS giants on the market, the common threads across their pricing and events-based billing models are flexibility and precision. Flexibility means customers have the ability to choose their payment structure from available options while also allowing for variability from month to month. In regard to precision, these SaaS providers are able to present invoices to customers with detailed usage statistics that these customers can use to directly link their service to their own value. With the new billing management systems available, this event-based billing model is now available to smaller businesses, too, and they can be just as scalable.
Setting Up Events-Based Billing with Chargify
So what is involved in getting events-based billing set up at your organization? Setting up events-based or pay-as-you-go billing is a bit more complex than just assigning a fixed price to a product and invoicing against it at the end of a billing period. You first need to set up your real-time data streams and get your rich events data into Chargify, so you can bill on any aspect of it!
To get started, there are generally four high-level steps involved to implement.
1. Find Your Billable Metric and the Set Pricing Model
The first step includes determining the billable metric that your company will use to measure the level of use your customers are getting from your service. This metric is going to be specific to your organization’s product offering, but some of the more common metrics include:
- Communication Events: The number of sends or receipts from messages, calls or any other communication method. Examples include message or call minutes, as in the case of Twilio, or messages delivered successfully or call duration in other cases.
- Data Events: The amount of data stored, used, or processed via your platform. An example of this is API calls and vCPU service hours like Amazon (AWS). You can also leverage clicks (Google Ads), data requests, form entries, or page views.
- Usage Events: Any measurable way of your customers using your products and services, such as transactions processed, queries, security activity and log sizes.
Once you have the billable metrics selected, it is time to select the events-based pricing model to offer your customers. Your pricing can be based on a variety of different ways of counting your events or usage. This could be based on the summation of everything submitted or limited to a summation of only unique values submitted. You can take averages or look at min/max quantities and even percentages or standard deviations. Most any way you would like to slice and dice your events data for billing, is available.
From there, you can look to specify your per-unit prices and how they behave when your customers consume more or less of your platform. A simple example of this is giving a customer a per-unit discount as they consume more and more of your service (volume-based discounts).
Finally, you can decide if you would like to price on a single attribute such as messages delivered, or vary your price based on multiple attributes, such as messages delivered by country. Regardless of how simple or complex you wish to make your events-based billing model, the right configuration is available to you.
2. Capture and Monitor Customer Events Data
Once your billable metrics are assigned and your customers begin to utilize your services, your platform will need to feed that fully attributed events data into Chargify. Chargify integrates directly with your enterprise infrastructure, via API, to structure, route, and record customer usage levels.
This integration can be complex because customers utilize services across different platforms and data can flow in from different systems in different formats, time frames, and loads. However, using Chargify’s single API endpoint, this data collection is simplified regardless of where the data is coming from.
3. Apply the Pricing Plan
In this phase, Chargify will apply your customer’s pricing model against the consolidated events-based data collected specifically for them. This process can also be complicated because you are now varying your billing based on different attributes, so making sure your customers understand their bills by having easy to understand and transparent invoices is extra important.
4. Bill Customers
After your data is fed in and the pricing calculations run, your invoice is sent to your customers. Events-based billing invoices are created at the end of the billing period, displaying the details that allow customers to easily link the value that they are paying for with the services they received.
Your billing management system should also be configured to offer customers more than just one payment option, in addition to a credit or debit card. Allowing for flexibility in payment methods also helps to control some of the factors that influence involuntary churn, where invalid or expired payment information prevents payment or service renewal. Through Chargify’s dunning functionality you can also decrease involuntary churn by setting up dunning flows and messaging specific to your events-based products. This targeted messaging goes a long way to help your events-based customers continually renew.
Leverage Your Events Data to Create Events-Based Billing
No matter how you leverage events-based billing, providing flexibility and detail around your pay-as-you-go model drives customer satisfaction and loyalty. Events-Based Billing also allows you to target customer markets that were previously out of reach.
So if you are ready to establish events-based billing for your company with the same level of precision as the big players in the market, Chargify’s team is ready to help you learn more and get the process started.