TechTarget defines consumption-based pricing – also referred to as pay-as-you-go billing, metered billing or usage-based pricing – as a service provision and payment scheme in which customers pay according to the resources they use. Historically, this pricing model was the choice for utility companies. However, since its pioneering days by companies like Amazon Web Services (AWS) and Azure, this pricing scheme gained popularity and become commonplace among cloud computing, SaaS, PaaS, and IaaS companies. The charges are based on one or more metrics that are measured in units such as the number of application programming interface (API) calls or the amount of storage used.
Business has changed and you’ll find evidence of this anywhere you turn. Instead of just purchasing an exercise bike, you can now access a digital app to work out with their instructors, classes and playlists. Gone are the days of heading to your local dealership to buy a car, now you can do it all online and they’ll deliver it to your door. Or, you can sell your car online through the same service and go a different route. Scooter sharing companies are more prevalent than ever as people try to reduce their reliance on (and cost of) personal vehicles to get around town for quick errands.
So how do traditional businesses start shifting their pricing and billing models to serve this new base of customers? With the ability to price for products and services based on the usage of a product—clicks, seats used, bandwidth, bike sharing, water or electric consumption—companies have the ability to charge only for services used. This allows customers to start using services at a lower cost, and it can also generate additional revenue on top of basic subscriptions. It’s a win-win billing model that’s only gaining popularity in today’s world.
The Basics of Consumption-Based Pricing
Remember the days when a meter reader, an actual person, came to your house to physically read and track electricity usage? That data was then taken back to the office of the utility company and entered into the billing system to be rated and charged. Today, companies with smart devices connected to those meters can gather that data automatically and translate it immediately into billing data. And it’s not just electricity meters, it’s also the ability to track consumption of water from an irrigation system or the miles driven in a ride-sharing car, to name a few.
Also known as pay-as-you-go or usage-based pricing, a consumption-based pricing model allows customers to pay for only what they use. Than includes resources, number of active users, the time services are used, a combination of metric units and more. More sophisticated than subscription or fixed pricing, consumption-based pricing schemes incorporate the best of both of these pricing models. This enables businesses to create innovative revenue-generating pricing packages that provide customers with more billing options.
Using consumption-based pricing to open the door to increased revenue and profitability may sound daunting at first. When you look at the variety of consumption-based pricing plans, as well as decisions the company needs to make such as minimum term and/or maximum capacity commitments, device limitations per account, and whether to take consumption-based pricing a step further by offering hybrid plans – the complexities begin to mount. But it doesn’t need to be!
Here are four simple steps to leverage your billing platform’s functionality.
Step 1: Invent
It sounds simple but you need to first look at your industry, products, services and competition. Then you can tailor offerings that meet customer requirements and demands. Accomplishing this requires a comprehensive billing solution that enables you to invent competitive offerings by using a customizable product and component designer.
Once the offering is designed, the billing system is put back to work – this time around pricing. Whether tiered pricing, rate bundles, discounts, renewals, rentals, etc., advanced billing systems are designed to support every element of your service offering.
Step 2: Configure
No two businesses operate the same and you need to be able to configure your billing processes to fit your specific business model. Doing this requires a billing solution that allows you to customize any aspect of your operation – from quote to cash.
A few aspects to take into consideration include:
- Custom invoices and communication templates
- Integrating with any merchant provider for credit card and ACH processing
- Seamless connections with any external system for CRM, orders, usage collection, and accounting… to name a few
- Define customer hierarchies with different rate plans, billing cycles, or any other billing element you can imagine for each customer or group of customers
- The ability to structure data and processes to reflect the way you do business
Step 3: Launch
Bring new offerings to market faster than the competition by reducing long product development lifecycles. The right billing system enables you to launch new products and services in just minutes! While no one can be 100% certain as to what customers will want in the future, an advanced billing system enables you to create fully customizable reports, giving you the ability to predict trends using specialized forecasting tools.
If you’re launching products and/or services internationally, the billing system should provide complete international functionality such as language, currency, number fields, tax providers, payment providers, etc. so that you can ensure that your global customers receive their bills on time and in a format they understand.
Step 4: Monetize
Monetization requires automation and nowhere is this more important than with your billing platform. Billing automation needs to encompass every aspect of your business, including customer-specific billing cycles, invoice delivery, credit card and ACH charging, account integration, customizable dunning, and integration to third-party systems for a complete financial ecosystem.
These four steps provide the foundation for a successful consumption-based business, but simplifying the process requires a flexible and advanced billing system. A system that enables you to quickly and easily provide attractive offerings to your customers, allows you to automate every aspect of your billing process, provides measurable intelligence into your products, services, sales and receivables performance, and allows you to sell your innovative products and services the way you want – without predefined structures.
Start Growing Your Bottom Line Today
A consumption-based pricing model provides numerous benefits for both the customer and the business. At the top of the list is providing you with the flexibility needed to meet and even exceed customer requirements, while enabling you to improve profitability. When done correctly it can be a powerful tool to increase sales, drive operational efficiency, and improve customer loyalty. However, key to your success is a powerful billing solution – one that delivers automatic rating, data mediation, invoicing, and consumption-based revenue recognition.
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. We provide what’s important for consumption-based pricing success – usage, tiered, subscription, overages, minimum commitment, etc. – to enable you to dynamically manage pricing and unlock your company’s full growth and revenue potential.
While you may have the right strategy to shift to consumption-based pricing, traditional technology will hinder your efforts. Built to support consumption-based pricing schemes, BillingPlatform enables organizations to easily support any business model with any combination of one-time charges, subscription, consumption, or hybrid-based billing.
Receiving many accolades, Gartner recently ranked BillingPlatform as a Leader in its Magic Quadrant for Recurring Billing Applications. Our support for billing one-time charges, fixed recurring charges, usage charges and project time, expenses, and milestones is among the best evaluated for this report.
Are you ready to shift to consumption-based pricing and unlock your company’s full potential? Contact us today to start!
