Benefits of Usage-based Billing

Also known as consumption-based pricing, usage-based billing is a pricing model that charges customers only when they use a product or service. In a fixed subscription-based pricing model, users are charged a flat fee, regardless of the services that they use. However, the prices in a usage-based billing model fluctuate according to what the user consumes. Generally, the user is billed once the billing cycle ends.

While it might sound like a new term, usage-based billing isn't a new concept at all. In fact, you should be familiar with this pricing model if you use metered services like water or electricity from public utilities. Today, most Infrastructure as a Service (IaaS) and Software as a Service (SaaS) are adding subscription-based pricing options to their billing models to attract and retain more customers. The usage-based pricing option allows users to access services or products without having to pay any coin upfront.

Also, it's important to note that usage-based billing brings forth an activity-based management strategy, where businesses evaluate and adjust their operational processes for cost efficiency. This happens by utilizing an activity-based costing strategy, which is also used to monitor custom software development cost. For instance, software development companies can migrate from a subscription-based cloud service to serverless computing.

Typical usage-based billing models

The following are the most common usage-based billing models:

• Pay as you go – this model allows customers to pay only for the services they use. For instance, a customer only pays for a VM when it's in use, which could be priced on a minute or hourly basis. This pricing model is ideal for businesses that have changed business needs.
• Per-unit pricing – this billing model is also known as pay-per-use or price per unit and allows customers to be charged depending on resources used. The per-unit pricing model continues to become popular as cloud computing service vendors offer more granular services, like API gateways, which are priced per API call.
• Tiered pricing – users can select a tier that suits their needs, and each tier has a certain allowance. So, if you reach or exceed the set allowance, you move to the next tier. Generally, the tier pricing model has a free tier for customers to start with.

Now that you understand the common usage-based billing models, let's look at the top benefits of usage-based billing.

It's very attractive to users

Usage-based billing is a very straightforward model, which makes it appealing to most customers. This pricing model is very simple—pay for the services or products you use and nothing more. We can compare the model to a mini bar in a hotel—you can consume whatever you want, and you will be billed accordingly. And, if you don't use anything, you will not be charged.

Most users tend to underrate their usage, meaning it doesn't feel like an enormous task to get started. Not paying for what you've not used can be very satisfying—unlike when you subscribe to a service you will be charged for, no matter how rarely you use it. The thing is, most businesses love the usage-based billing model because they know users will underestimate it at the start, then start growing once they implement it.

Minimal entry barriers

Usage-based billing and product-led growth go hand-in-hand. And, since users don't need to sign any contract upfront or pay lump sum amounts of money to get started, they can start with a limited usage amount and then start scaling up once they start seeing the value of this model. As said earlier, usage-based billing allows users to pay for what they use. So, if they benefit from the service, they will likely pay more—thanks to increased usage. With this increased usage, you can share in their success as they scale up. The good thing about this approach is that it can help you widen your target market by making it easier for smaller companies to access your products or services.

Usage-based billing can be tailored to meet the needs of users and businesses

The flexible nature of usage-based billing allows it to be customized to meet the specific needs of users and businesses. This results in a billing arrangement that can be modified to meet the ever-changing needs of businesses and their clients. For instance, a business can decide to offer discounts for users who utilize their resources efficiently. As a result, usage-based pricing is a more transparent and fair billing method, which helps to build trust between businesses and their clients.

Helps to increase business revenue

As mentioned above, usage-based billing leads to increased customer usage, which translates to increased business revenue. The most exciting thing is that this happens within a very short period of time. However, this has one downside—with customer usage going down, your business revenue takes a dip too. This, however, shouldn't scare you, as it cannot happen unless you start offering poor services.

Offering discounts can motivate usage

It's very common for usage-based billing to get discounts when they achieve a certain usage threshold. This is more like purchasing the value pack of an item at a grocery store—more consumption means you pay less per item. So, these discounts mean accepting lower discounts but hitting higher general contract values.

Better net dollar retention

Businesses that have implemented usage-based billing are known to outdo their competitors regarding net dollar retention. A report released by the State of the Cloud in 2021 revealed that such businesses average around 10% more points in net dollar retention than businesses that use the typical subscription-based billing mode.

Helps businesses retain customers

Another benefit of usage-based billing is that it helps businesses improve their customer retention rate. Since the charges are based on actual usage, companies can encourage their clients to continue using their services by offering reduced rates for loyalty.

In addition, usage-based billing helps businesses to manage resources better. Since this model gives businesses insights into how users utilize their services or products, they can make the necessary adjustments to better optimize these offerings. Typically, this can involve anything from changing the structure of their prices to changing the available services or features.

Helps to lower revenue leakage

Another important benefit of usage-based billing is that it helps businesses stop or reduce revenue leakage. Typically, revenue leakage can happen when a business fails to collect payments for the services offered. This happens because of different reasons, like inaccurate billing or customer fraud. Usage-based billing can help businesses deal with this issue by ensuring that users are only charged for their services.

Also, since usage-based billing software by Kansys can help businesses to track usage patterns, they can easily spot any unauthorized usage and take the necessary steps to prevent it. Moreover, this model allows companies to identify possible fraud and resource wastage. Furthermore, usage-based billing gives businesses a better and more accurate picture of customer usage patterns. This, in turn, ensures that businesses can better manage their resources. This makes usage-based pricing an essential tool for businesses aiming to reduce revenue leakage and expand their bottom line.

(Disclaimer: Devdiscourse's journalists were not involved in the production of this article. The facts and opinions appearing in the article do not reflect the views of Devdiscourse and Devdiscourse does not claim any responsibility for the same.)