Usage-based Billing: Beyond Recurring Billing

on Dec10

Written by

James Davis

Senior Technical Writer at United Thinkers

Author of the Paylosophy blog, a veteran writer, and a stock analyst with extensive knowledge and experience in the financial services industry that allows me to cover the latest payment industry news, developments, and insights. Read more

Reviewed by

Kathrine Pensatori

Reviewed by Kathrine Pensatori

Product Specialist at United Thinkers

Product specialist with more than 10 years of experience in the Payment Processing Industry. I help payment facilitators and PSPs solve their various payment processing issues. Read more

Payment concepts and paradigms are constantly evolving. And recurring billing mechanisms are not an exception. Advance of the internet of things presents new challenges for billing software developers. At the same time, pandemic spurs particular changes in consumer behaviors. As a result, traditional subscription billing software is unable to satisfy the new and more sophisticated needs of both businesses and their customers. So, in many fields recurring payments are vacating the space for consumption-based payments (consumer’s perspective). Or, in other words, usage-based billing is replacing ordinary recurring billing (business’s perspective).

Both IoT platform users and recession-struck ordinary consumers demand truly flexible payment functionality. Functionality, that conventional recurring payment and invoice software is often unable to support.

In this article we will explain how usage-based billing works. We will also list the main features that distinguish traditional recurring payment processing from usage-based billing model.

How Usage-based Billing Works

Conceptually, usage-based billing model is not something sophisticated. Would you buy a box of nails (or chocolates) if you only need 2 or 3? Or a gallon of milk when you only need one glass? In utility services world, a similar approach bears the name of “smart metering”. In mobile connection and some other subscription-based services they call it “pay as you go” payment plan. The idea is that the customer should pay only for the actually consumed amount of a product or service.

Another synonym of usage-based billing (perhaps, borrowed from utility services) is metered billing. This term is more often used by businesses rather than consumers. Indeed, through metering of consumption, a company can keep track of product usage patterns. Based on these data, it can design sales and billing strategies. That is, it can adjust and monetize its offering according to the amounts, consumed by specific categories of customers.

Features and Challenges of Usage-based Billing Model

From technical viewpoint, implementation of consumption-based billing is a challenging task. Next to ordinary subscription-based model (that also has to be flexible to be viable), usage-based billing is even more sophisticated.

Customer intelligence

In order to keep track of consumer behavior, the company needs to implement smarter customer intelligence practices. In one of our articles on recurring billing systems, we mentioned committed and uncommitted subscriptions. So, for a customer, low commitment is a great benefit of usage-based billing. But for a business, predicting unstable consumer behavior is a great challenge.

Internet of things

If a company is an IoT platform provider, it needs to maintain a highly fragmented business structure and support complex value chains. In the internet of things, consumers often link multiple recurring services to a single device. As a result, the company needs to be able to manage multiple devices through which multiple customers make payments (both recurring and one-time) 24/7.

Pricing models

For successful implementation of usage-based billing, a business needs innovative and agile pricing models. One of the advanced trends on today’s market is implementation of hybrid or agile pricing, combining recurring billing and one-time sales.

Example

A subscriber might pre-pay a fixed amount of a commodity on recurring basis. Consumption of the same commodity in excess of this amount might be qualified as one-time purchase, and priced accordingly. The approach is somewhat similar to electric power consumption model. Convenient, but often tricky to implement.

Some companies prefer to follow the so-called outcome-based pricing strategy. It is based on the end results of customer’s usage of the product or service.

Example

A digital marketing company might price its service, depending on the success of this or that digital ad campaign.

The Advantages of Usage-based Billing Model

The main advantages of consumption-based model are its flexibility and symbiotic nature.

Companies, can prevent customer churn and diversify their customer bases. They can streamline their resources and efforts to the “heaviest” user categories. They can also attract new customers, who were previously “scared away” by high subscription prices.

Customers, in their turn, get an opportunity to pay only for what they are actually consuming. And as they get used to the usage-based billing model, offered by your company, your revenues continue to grow.

Conclusion

Usage-based billing model represents a new phase of recurring billing evolution. Its implementation can be beneficial for both your company and its customers. However, before switching to consumption-based billing from conventional recurring billing, you should carefully weight all the pros and cons. Perform a reality check or a cost-benefit analysis; evaluate your overheads versus revenues. And devise a clearly measurable indicator for value and consumption, specific to your business case. These are necessary, but, probably, insufficient steps.

Need a targeted advice on how to embrace usage-based billing? Feel free to contact our experts at unipaygateway.com.