Every business needs to set the price of their products to create revenue and profit. There’s another level to this for subscription based models as they need to create the right billing models. Subscription services will typically go with a fixed recurring price, which is when the price stays the same. Things are even more complex for SaaS companies who need to charge based on how many users who access services and they typically use prorated rates. There are also business that offer usage-based prices. These are often businesses that deal with high volumes of transactions and they can be very useful for these businesses.
So just what are usage-based billing models? How can you tell if this model is the right one for your business?
As the name implies a usage-based billing model is when customers are charged depending on how much they consume your products or services, with the final bill put together when the billing cycle ends. One good example is pay-as-you-go cell phones. These are commonly based on how much the customer uses their phone including how many minutes they use and texts they send. Another example is international calling plans that charge you based on how many minutes you use.
Usage-based business models are a good idea when customers are presented with a service they only want to pay for how much they use the service, and the business wants to match their revenue with usage.
The following are the signs that your business is right for a usage-based model:
- Your customers complain about having to pay too much, which is a sign that the price of your service doesn’t match the value of it
- When customers use your service a lot but are paying a flat rate for it. This would suggest that there is room for your business to better monetise this service and make more money from it.
- The following are some of the key features of usage-based models for businesses considering adopting one and businesses that don’t realise they should adopt one.
Pros and Cons of Usage-Based Business Models
- Merchants are able to cover costs generated by high users while also getting more revenue from these users
- Customers who don’t use as much don’t pay as much, which is fairer to them.
- It’s harder for a merchant to predict their revenue
- Users who use your service the most may get upset about their rising bill prices
What Business Types Benefit from a Usage-Based Model?
High-volume transactional services are best for usage models. This includes:
- Marketing automation businesses who can charge per the number of sent emails and tracked contacts
- Video platforms who can bill based on the amount of data stored and streamed and the amount of videos played
- Developer tools who can bill based on the number of API calls and amount of stored data
- Communications businesses who can bill based on the number of phone calls and text messages
Why are These Businesses Suited to This Model?
- This model brings the price in line with the value of a product when customers use services at varying rates
- It is fairer on customers compared to having to pay for units that they may not use
- When customers use a lot of a service a usage-based model precludes customers needing to predict their usage ahead of time
Which Businesses Should Not Adopt Usage-Based Business Models and Why?
There are business such as time-based businesses (I.E businesses that bill based per seat or user) or services that offer subscriptions to physical goods.
Some businesses believe that their per-seat model is a variable business model because how many seats a customer users can vary per billing cycle. The difference here is that the customer is in control of this variability and they pay for their variability when they change it. With traditional usage-based models the customer usage is the driving force behind the variability and they pay in arrears. So if your business is built around time-based access then you need to prorate any changes made in the middle of the cycle based on time. This means that you need to use a fixed-recurring per-seat model.
Like with the per-seat model people generally pay for physical goods up front and they don’t use them incrementally, which would justify having to pay per usage.
An Alternative; Combination Models
Some businesses choose to take the third route and offer a business model that is a combination of a fixed recurring fee and usage based fees in the form of subscription plans. Taking this approach means customers pay a prepaid amount which is their upfront commitment to using the product, and then usage-based charges if they go beyond the prepaid amount. One example of this is a cell phone plan where customers pay up front for a set amount of data and then they are charged extra if they go above the limits of their plan.
Why is this model a good idea?
- Combination models give customers the value of usage models with the predictability that they get from fixed models
- Predictable invoices are good for everyone; customers will pay for their usage and the business has a set amount of predictable revenue
How to implement a fixed model:
- Consider getting your customers to pay for a set amount of usage units in advance. That way customers are committed to a recurring fee they agree to up-front. The usage fee kicks in when they go over this limit.
- If you have a service that has multiple values; such as if there is some value to the time-based access to the service, but the ultimate goal of your users is the high-volume transactions, then you can couple your fixed recurring fee with the usage-based fee added for the transactional components.
- If you run a seasonal business you may need to reset the included units every so often based on the seasonality of your service. That way you can encourage customers to stick around for the entire year.
The main befit of adopting usage-based models for a transactional service is that it brings the price of the service in line with the value of it.
So you need to ask yourself how much customers value what you offer. Is your business a transactional one? Is it based on seasonal use? Are there losses associated with high usage that you need to start recouping? Will a usage model offer the chance to get more revenue? Answering these questions will help you to make the right choice about whether you should transition to a usage based model or not. Please contact us if you would like to learn more about FlyBiling and the billing models we support.