Consumption-based pricing (also referred to as usage-based pricing) charges based on what you use or consume. This usage-based pricing model charges customers only for the resources consumed. For instance, let’s assume a SaaS company sells cloud-based data storage. Here’s how consumption-based pricing works.
- The customer uses the data storing software.
- The provider tracks the predetermined usage metric.
- At the end of the billing cycle, the provider calculates the customer’s usage and invoices them accordingly.
The pricing model continues to rise in popularity among a variety of industries like auto insurance, wealth management, advertising, software-as-a-service (SaaS), and of course utilities and telecommunications. Unlike traditional pricing strategies such as flat rate, this type of metered pricing offers unparalleled flexibility and scalability to businesses and customers alike.
Sounds simple enough, right? Let’s dig a bit deeper into the consumption-based pricing model, its advantages, how to implement consumption pricing, and why the right pricing software matters.
Reap the Benefits of Consumption-Based Pricing
Providing benefits for both businesses and customers, the consumption pricing model outpaces other pricing models when it comes to advantages. Let’s explore 14 benefits you can expect by transitioning to a consumption-based pricing strategy.
Business and Customer Benefits
- Easier for businesses to align price with product(s) and services value.
- Lowers barrier to entry for new customers, while making it easy for existing customers to upgrade or try new product(s) or services.
- As usage increases, pricing typically scales with customer growth.
- Improves financial forecasting by tracking usage metrics.
- Allows for greater visibility into customer behavior.
- Removes usage limits, enabling companies to scale more rapidly.
- Provides the ability for organizations to quickly experiment and change pricing models to align with usage fluctuation, as well as market trends.
- Enables companies to align costs directly with how customers use the product(s) and services offered.
- Sales cycles tend to be shorter and easier.
- Lessens complexities associated with launching new features, which provides for increased monetization.
- Improves customer retention and builds stronger customer loyalty.
- Customers gain predictable pricing and improved control over their spend.
- Reduces customer upfront costs when compared to subscription-based pricing models.
- Enhances customer satisfaction and drives innovative business growth.
Consumption-based pricing represents the most advantageous pricing strategy for companies wanting to provide value, foster customer loyalty, and drive growth.
Get Started with Consumption-Based Pricing
Implementing consumption-based pricing requires forethought and planning. By following these best practices, you’ll be on your way to streamlining and simplifying the transition to consumption-based pricing.
1) Conduct market research
Gather feedback from current users of your products or services to determine how receptive they would be to a consumption-based pricing model. Additionally, determine how common consumption-based pricing is within your industry, as well as whether your competitors have pivoted to this pricing strategy.
2) Identify usage metrics
Usage metrics need to closely align to the associated value of your product(s) and services. These metrics need to clearly convey how your offerings help customers address challenges and resolve issues.
3) Determine pricing models
While somewhat determined by the product(s) and services you sell, you can stand out by offering one or more of the following enterprise pricing models – pay-as-you-go, tiered, volume, overage, hybrid, and combinations. You may also want to charge based on multiple metrics, require a minimum commitment from customers, require prepayment for product(s) and services, etc.
4) Communicate internally
Although the move to metered service needs to be communicated throughout the entire organization, it’s imperative that marketing and sales personnel have a deep understanding of the usage metrics, pricing models, and how your offerings are closely aligned to the value provided.
5) Communicate externally
Encompassing customers and prospective customers, be sure to clearly communicate the upcoming pricing changes and the advantages this pricing model will provide.
6) Invest in billing software
The software needs to provide the ability to easily transition from simple one-time and subscription-based pricing models to innovative metered and usage-based pricing model.
7) Track & monitor key metrics
This starts with having access to the data needed, without it you won’t be able to test the usage metric(s), assess and compensate sales reps, deliver financial metrics, or track customer usage. With the right data you’ll be able to recognize any weaknesses in your pricing model, accurately adjust pricing, introduce new products and services, and provide updates and features.
So What’s Next?
The question now becomes, is consumption-based pricing right for your business? While consumption-based pricing isn’t right for every organization or industry (if you’re a SaaS company check this blog out), you can determine if it’s right for you by answering the following three questions.
- Can you accurately and easily break down usage into units?
- Can customers easily predict, with a level of accuracy, their usage requirements?
- Is the usage and value of your product(s) and services increasing?
If you answered yes to even one of these questions, consumption-based pricing may be what your company needs to take it to the next level. We’ve broken down several usage-based pricing examples here to further help you decide.
Don’t Let Pricing Software Slow You Down
Key to consumption-based pricing is the ability to accurately track usage metrics. This is where things get tricky.
Your internal financial processes shouldn’t need to change to adapt to a vendor’s software. On the contrary, the software should have the agility to conform to your business needs and requirements. To help you select the right consumption-based pricing model software, let’s explore the top eight attributes and their benefits.
1) Configure, Price, Quote
This covers everything from the first entry in your customer relationship management (CRM) system through managing consumption-based pricing to recognizing payments in the general ledger. Unified quote-to-cash enables you to simplify operations, lowering operational costs, eliminating quoting errors, and decreasing time-to-market.
2) Mediation
This is critical to consumption-based pricing. A built-in mediation engine enables you to gather, normalize, enrich, and route raw usage data of any kind, from any source. With a mediation engine that’s automated and rules-based, you can filter out unnecessary usage records, develop tailored pricing models, and route information to be rated and billed.
3) Rating
Consumption-based pricing is inherently complex, and rating automation is a must to quickly modify pricing, develop innovative rating models, and differentiate your business from the competition.
4) Invoicing
Your customers expect accurate and timely invoices. Errors or delays not only put the company at risk for customer churn but delays the cash flow that keeps your business in the black. The right consumption-based pricing model software enables your finance team to view invoices by geography, subsidiary, customer, or industry, as well as support complex account hierarchies for easy invoice consolidation or dynamic separation.
5) Revenue Recognition
The complexity of consumption-based pricing requires automated revenue recognition to improve accuracy and auditability. With the intelligence provided by consumption-based pricing model software, you gain the ability to streamline the revenue management process. That translates to faster and more efficient allocation, reconciliation, monitoring, and revenue recognition. Additionally, regardless of your billing approach or promotional offers, you’ll have peace of mind that you’re always in compliance with ASC 606 and IFRS 15.
6) Dunning
Even when doing everything right, payments can (and do) end up in arrears. Whether it’s because of expired debit/credit cards or insufficient funds, you need to put revenue recovery on autopilot. Automating the dunning process gives you the ability to automatically schedule and tailor messages to keep customers informed of outstanding balances, manage late fees, account suspension, and much more.
7) Collections
If you’re like many of your counterparts, one of your biggest challenges is managing outstanding balances. By automating the collections process you’re able to prioritize accounts that need immediate attention, link payments to invoices, and maintain an audit trail of all activities. This minimizes revenue loss, increases employee productivity, and enhances customer satisfaction.
8) Reporting & Analytics
Making informed business decisions requires up-to-the-minute intelligence. The inherent complexity of a consumption-based pricing model makes it vital for your finance teams to have access to granular billing data to assess the overall financial health of your business. Getting a clear picture requires reports that easily manipulate data, apply filters, create pivot tables, and automate complex calculations. Additionally, dashboards are needed to create customized, role-based views, and provide real-time information. With a billing system that provides analytics, you’ll have the tools needed to extract meaningful information to translate data into actionable strategies.
Make Your Consumption-Based Pricing Strategy a Reality
Consumption of your products and services are what drives your business forward. And the right consumption-based pricing model software gives you the automation needed to supercharge your growth and revenue potential. Unlike other cloud and legacy billing solutions, BillingPlatform aggregates and analyzes usage data from any source and transforms it into revenue potential – in real time.
Our cloud-based solution enables organizations to support any business model with any combination of one-time charges, subscription, consumption, or hybrid-based billing, all on a single platform. We provide everything needed to help ensure your consumption-based pricing strategy is a success. From usage, tiered, subscription, overages, minimum commitment, and more, we give you the tools needed to dynamically manage pricing and unlock your company’s full growth and revenue potential.
Isn’t it time to simplify your consumption billing receivable process, reduce errors and revenue leakage? Stop waiting and reach out to our team to learn how to get started!
