Also called pay-as-you-go or metered billing, a usage-based pricing model allows customers to only pay for the products or services used. For example, a cloud storage software as a service (SaaS) provider will track customer usage, and at regular intervals invoice their customers for the exact number of gigabytes stored. This billing model not only provides a bounty of benefits for your business, but also delivers exceptional advantages for your customers. Before highlighting the benefits, let’s take a look at how usage-based billing for SaaS businesses works.
Understanding Usage-Based Billing for SaaS
Using a simple description, think of usage-based billing for SaaS as a box of crayons. The box of crayons is available to all of your customers, and each customer only pays for the number of crayons they remove from the box within a certain period of time. The most basic of usage-based billing models, many SaaS companies supplement this billing strategy with usage-based pricing schemes that are less straightforward such as tiered pricing and volume pricing.
Using our same box of crayons scenario, we’ll explore usage-based pricing, tiered usage-based pricing, and volume usage-based pricing.
This simple pricing scheme enables customers to pay a set amount for what they use. Using our crayon example, each crayon taken from the box is $.27. If a customer takes 75 crayons out of the box, they’re charged $20.25 (.27 X 75).
As the name implies, pricing is based on the number of units used, or in this case crayons taken from the box. For instance, 1 – 50 crayons are $.25 per crayon, and 51+ crayons are $.20 per crayon. Again, the customer takes 75 crayons out of the box and is invoiced $17.50 (50 x .25 = $12.50 + 25 x .20 = $5.00) for that billing cycle.
This pricing scheme charges based on the highest tier reached during a predetermined period of time. Using the same pricing as in the previous example, 1 – 50 crayons are $.25 per crayon, and 51+ crayons are $.20 per crayon used. Like the examples above, our customer takes 75 crayons out of the box, however, with this pricing scheme the customer will be billed $15.00 (75 x .20 = $15.00).
As you can see from our usage-based crayon examples, the amount you invoice at the end of the billing period varies depending on the usage-based billing scheme(s) you offer. Although we used crayons to describe each of the usage-based billing models, you’re able to bill and rate on virtually any aspect of your offering such as clicks, API calls, downloads, seats, text messages, minutes, bandwidth, etc.
Now that we’ve covered the inner workings of usage-based billing for SaaS, let’s explore some of its key strengths… and limitations.
The Upside and Downside of Usage-Based Billing
Only limited by your imagination, usage-based billing for SaaS allows you to price, package, and sell your products and services in countless ways. Given the flexibility of this billing model it delivers benefits for both you and your customers, including:
- Enables SaaS companies to grow faster
- Expands your reach of potential customers with its lower entry point
- Gives customers a pricing model that they love
- Provides transparency since customers only pay for what they use
- Enables customers to test your offerings at a lower cost and increase usage as their budget grows or needs change
- Reduces fear of vendor lock-in by enabling customers to scale up or down
- Provides greater insights into what customers value
- Enables you to bill more accurately
A win-win for you and your customers alike, however you may be wondering – what’s the downside? Like any pricing model, there are some limitations such as:
- Predicting revenue can be difficult due to month-to-month fluctuations.
- Difficulty in monitoring and tracking customer usage, which can result in invoice errors. (However, this is only true if the SaaS company doesn’t have a billing system that’s built for usage-based billing).
- Customers can become overwhelmed with too many tiered pricing options. So we recommend you create only 2 – 5 tiers per offering.
- Customer confusion if they aren’t sure of their usage needs. If we go back to our crayon example, a customer may know that they use a box of crayons every month and pay a flat rate of $25.00 per month. While a bit of number crunching will help them determine the number of crayons they will use during a billing period, it’s up to you to make your usage-based pricing structures easy for customers to understand.
These examples show why usage-based billing is a , but it isn’t for all companies.
Is Usage-Based Billing Right for Your SaaS Company?
As you know, offering the right pricing models is essential for the financial health of your SaaS business. Usage-based billing provides considerable benefits, but it’s better suited for some SaaS companies than others. Here are some questions that will help you to decide if usage-based billing for Saas businesses is right for you.
- Do you offer products or services that encourage your customers to scale up?
- Do you want your revenue to reflect usage?
- Does the usage of your offerings fluctuate?
- Do you have a critical number of power users?
- Do you want to cast a wider prospect net by offering lower entry points?
If you answered yes to the majority of these questions, a usage-based billing model may be the right choice. Given the popularity of this billing model, you’ll have many choices when it comes to billing platform vendors. We’ve compared BillingPlatform to another such vendor on key usage-based billing functionality to provide you with a high-level overview of strengths and weaknesses.
What You Need to Know Before Selecting a Billing Solution
You want and need a billing platform that is cost-effective, easy to use, and provides the flexibility that enables you to focus on innovation and growth instead of maintenance and development. With this in mind, here are some key comparisons of usage-based billing for SaaS solutions.
- BillingPlatform supports any business model and provides dynamic pricing for one-time charges, usage, tiered, subscription, overages, minimum commitments, formula-based, and more. Some others can easily process subscriptions, but additional functionality for physical products or contract management is lacking.
- The key to usage-based billing is in your billing platform’s ability to charge and bill for the amount of products and services your customers actually use. BillingPlatform comes complete with built-in mediation and powerful rating capabilities. Although others support usage-based billing, you’ll need to subscribe to a third-party mediation solution provider to gather data from external sources.
- The ability to efficiently manage your business processes is essential. With BillingPlatform you get a built-in workflow engine that offers easy point and click configuration. Other providers offer workflow, but it’s an add-on product that you’ll need to purchase separately.
- Increasing cash flow and improving customer satisfaction is key to your long-term success. BilingPlatform automates the entire collections process – from identifying past due accounts and assigning collection tasks to monitoring ‘promise to pay’. Other providers’ collections modules are found outside of the core billing solution. This means that you’re responsible for making sure all of the endpoints and connections are in sync.
- Your customers want to manage their own accounts – when/how they want. BillingPlatform’s customer portal enables them to independently complete a wide range of services such as upgrades, downgrades, pauses or restarts of services, monitoring of service usage and billing, making payments. All without the limitations seen in other providers.
These comparisons are just the tip of the iceberg. For a more detailed comparison, check out Subscription Billing Without Limits.
Optimize Your Revenue Potential
Only a sophisticated, cloud-based billing solution provides the agility needed to create and deploy any combination of SaaS usage-based billing models. BillingPlatform is the only billing solution on the market that enables SaaS companies to support any business model. All with a combination of one-time charges, subscription, consumption or hybrid-based billing – on a single platform. Request a 14-day trial to see BillingPlatform in action!