In today’s digital world, people and businesses are more connected than ever. That connectivity provides in-depth knowledge of what consumers do and how they use products/services within their daily lives. Unsurprisingly, this has companies searching for ways to dig deeper into that data so they can maximize a particular product’s use and benefits to consumers. When looking through the lens of how to bill for these products or services, we see two flexible models emerge — subscription pricing and usage-based pricing.
To put these models into context, if you own a cellphone, a television, or have used ride-share services, you’ve been exposed to both. Some businesses rely on subscription pricing, exclusively. Others find that adding usage-based pricing to their subscription models provides great financial benefits and higher customer retention. This is because usage-based billing offers flexibility, affordability, and in some cases a lower initial commitment point for customers.
The Difference: Subscription Billing vs. Usage-based Models
Subscription billing allows businesses to create ongoing relationships with clients and generates a predictable revenue stream. Think about any monthly or annual bill your business pays. Utilities, office maintenance, Software-as-a-Service (SaaS) applications – these are all billed by subscription. The customer knows the product they’re getting on the predetermined date and at a set price, and the business has a predictable revenue stream from the monthly or annual billings.
Then there is usage-based pricing, where you move beyond simple subscription-based pricing and charge customers based on their use of your product. Think of this like when a cell phone provider or utility company charges customers based on how much a product or service is used. This type of billing is often coupled with subscription services for additional pay-as-you-go offerings. That way customers have the option to enhance their service and get more from their subscription.
At the enterprise level, usage-based pricing is commonly used for infrastructure services and cloud computing. Think of Amazon Web Services (AWS) where there’s a great deal of variation between individual customers and enterprise use. For example, with subscription billing a vendor charges a flat rate for every 100 transactions of any amount. However usage-based metering allows the vendor to track the first 100 transactions, then charge for additional transactions at a different flat rate or a percentage of the original rate.
Beyond subscription model businesses, innovation has driven many that rely solely on pay-as-you-go billing. This usage-based pricing is the driving force behind an entirely new economic model. Consider the Uber’s and Airbnb’s of the world, which have defined a new shared economy. With consumption-based pricing, these companies deliver a service between the driver or host, and charge the customer based on variables like time, distance traveled or nights reserved. A portion of the charge then goes back to Uber or Airbnb.
Why Are Companies Switching to Usage-based Pricing?
Usage-based pricing offers agility, affordability, and low commitment that translates to greater profits. So it’s not surprising that many companies today are rethinking their subscription billing models. In fact many are deciding to switch to (or simply add) usage-based pricing to their billing methods. While there are many more to consider, here are just three reasons many are making the switch.
When a company is small and just starting out, the lowest tier of service may fit its needs. However, as the business scales and grows, access to more services may be required. With usage-based pricing, instead of a customer simply outgrowing their capabilities, companies can easily adapt and charge for the additional usage. The customer is then able to purchase more services or new features to meet their demand.
Likewise, usage-based pricing provides businesses with the agility to anticipate customers’ future needs. By metering usage, a business can track and analyze product or service usage data. They can use this to send promotions in real time, targeting customers based on their interests. A digital newspaper subscription service, for example, can track the number of articles a user accesses. If the user exceeds their monthly article allowance, the newspaper can offer a-la-carte pricing for each article over the subscription amount.
Usage-based pricing gives each customer options in line with their perceived value of the product. Amazon Web Services (AWS) offers a variety of products (e.g. EC2) priced so the customer pays for only what they use, making AWS more affordable than paying full price for a variety of products that are not fully utilized.
Back when music came on CDs, you’d have to purchase an entire CD for access to one particular song. Now, with a streaming music subscription, you can purchase that single song and add it permanently to your music collection. When a product is available on demand in a smaller increment and without a large up-front investment, more potential users are likely willing to try the product. This also satisfies their desire to avoid the burden of ownership.
How You Can Take Advantage of the Usage-based Pricing Model?
BillingPlatform’s cloud-based billing solution offers the flexibility and ease-of-use that makes usage-based pricing easy to implement. With our built-in mediation capabilities, customers are able to meter product and service usage and charge based on that usage. Today, BillingPlatform supports usage-based billing for a number of industries such as public transportation, office services, teleconferencing and utilities.
Discover how BillingPlatform can help Software-as-a-Service companies maintain the most efficient and successful billing practices, download our Enterprise Guide to Billing for SaaS today.