Marketplace is evolving rapidly, and businesses are leaving no stone unturned to remain ahead of their competition. Offering precise, customized, and responsive services to your customers can be a gamechanger specially when it comes to the pricing and billing options you are offering to your customers.
A lot of companies are rapidly moving towards adapting and utilizing the usage/ consumption-based billing model to meet the demand of their customers. It introduces a pricing model that can attract a wide range of customers, irrespective of their product line or where a business stands in terms of its growth.
Why Usage-based Billing?
Why is usage-based billing becoming imperative and why are SaaS companies increasingly adopting a usage-based revenue model? Honest answer to this question is – the benefits it offers to its customers. It opens wider customer base for business and is a sort of win-win for both customers and the companies.
In simple words, it allows your customers to enjoy the much-needed flexibility when it comes to their budgets; and at the same time, you are also holding themselves responsible for how much they end up using your product.
Benefits of Usage-based Billing
Usage-based pricing does not have the straightforward and accurate price offerings for its customers like flat-rate billing etc, but it does come with a lot of business benefits. Here is the list –
1. Allows the customer to start at a low cost, minimizing friction.
2. Directly links the price paid with value received.
3. Allows more users to access the product within an account, making the software more ubiquitous and seeding new use cases.
4. provides businesses with the agility to anticipate in the future requirements of its customers.
5. While the usage is being metered, businesses can easily track and analyse usage data for the product or service.
6. Provide the customers with options/choices that are aligned with their perceived value of any product or service.
7. On-demand product availability that attracts more potential customers
8. Get the flexibility to offer different combinations of services to increase revenue streams.
9. Overall, it is a flexible, easy to use and comes with several customer benefits.
Why Usage based billing is even better then One-time sales or Subscription Model?
There are three types of monetization models that businesses generally follow –
Out of the three models mentioned above, the consumption or usage-based model comes with the widest range of monetization options. The one-time sale option provides exactly what the name says (a one-time purchase/transaction), on the other hand, subscription model offers a fixed recurring rate irrespective of what is or is not used. But the consumption model or usage-based billing model is the most feasible of all the options and can work for variety of different options, thus significantly increasing the number of offerings available for the customers and help businesses in reaching maximum revenue numbers.
When the fixed rate subscriptions are combined with flexible usage-based pricing, it results in the form consumption or usage-based model. This model allows the business to take advantage of a recurring fee and provides them special ability with the help of which they can charge for overages and increase revenue while any product or service is being used or consumed.
Minimize Business challenges with a usage-based model
To take full benefits of usage-based model, it is important to work on the most common roadblocks that businesses might face in strategizing, GTM, and finance. Here are a few questions in each category which any business should understand to fully leverage the advantage of usage-based model –
Strategy & Pricing:
– Is usage-based pricing the right revenue model for us?
– Did we pick the right usage-based value metric?
– What if customers do not like paying based on usage?
– How do we handle overages?
– What should be the role of self-service, sales, and customer success?
– How do we navigate sales comp?
– How do we grow adoption and usage?
Finance & Operations
– Is usage revenue valued differently than subscription?
– How do we handle billing?
– How do we handle financial planning with volatile revenue?
– How do we handle cash management and rev rec?
Choose usage-based metric that meets following criteria:
1. Value-based – Aligns with how customers derive value from your product and how they see success. Helps you communicate your unique product value.
2. Flexible – Allows the customer to choose and pay for their exact scope of usage. Helps overcome buying constraints and budget thresholds.
3. Scalable – Generates more spend from a customer over time as they use more of the product. Revenue scales naturally with customer growth
4. Predictable – Provides billing and budget predictability for customers large and small.
5. Feasible – Possible for you to monitor, administer, and police with your customers. Tracks with your COGS so that you do not have consistently unprofitable customers.
What are the 5 Financial Metrics that businesses should mainly focus on –
- Remaining performance obligations (RPO)
- Dollar-based net expansion
- Active customer accounts
Major challenges of shifting to usage-based billing model –
Shifting your business to usage-based billing comes with its own set of risks and difficulties – from how you execute it in your business’ subscription plans, to whether your customer is taking the change kindly or not. Here are a few major challenges that you as a business need to overcome to move successfully to a usage-based pricing model –
Picking the right pricing model for your business:
A simple way to understand whether the usage-based pricing is an correct model for your business is to contemplate your company costs; if this remain static irrespective of the number of customers using the service, then usage-based billing model may not be right fit for your business.
Therefore, the usage-based billing is most suitable for businesses working on SaaS, cloud and data. This is because of the higher costs generated by increased usage, and the comfort of metering such digital services.
Convincing your customers
While moving to usage-based billing model, you might face some challenges from your customers, especially when you have started to charge them for a service that you once offered for free.
Now it is up to you, that how you convince your customers in understanding that this change is worthwhile, and they will be offered with a lot of its benefits once they start using it. If you as a business fail to effectively articulate this, then your customers might not be okay with the shift. Your business might also experience an increase in customer churn. At this stage only you will be able to identify how effective your customer communications strategies are and also who are your loyal and trustworthy customer.
Predicting your revenues
You must be prepared for unpredictable revenues at the time you bill your customers if you are looking forward to implementing usage-based billing.
A lot of subscription-based businesses forecast their revenues on the basis of Monthly Recurring Revenue (MRR) but forecasting your revenue with usage-based pricing model is a little more difficult. One thing that further complicates this is the variable cost of delivering the service; if your expenditure is bound to customer usage, then your associated costs will fluctuate with that usage too.
Billing your customers
Businesses need to have a best recurring billing system for collecting user consumption data and then further charging them timely and most importantly in a transparent way. Subscription businesses must be able to map and collate usage data from many different systems and sources, irrespective of its format, to track usage and apply right pricing. This is where executing and integrating a robust charging and billing system is important. It helps in streamlining the payment processes and produce itemised invoices.
Usage based pricing/business model is a very effective way to improve business performance. However, billing for usage-based pricing model comes with a lot of difficulties too. This is where Acuiti Labs with its vast experience in ‘consume to cash’ can help the companies in transforming their business model.
Contact us to know how our technical expertise in SAP BRIM can be the right choice for your business?