Usage-based billing: What businesses need to know?

The marketplace is evolving rapidly, and businesses are leaving no stone unturned to remain ahead of their competition. Usage-based billing is playing a key role in transforming many businesses that have already started leveraging its benefits. Offering precise, customized, and responsive services to your customers can be a game-changer especially when it comes to the pricing and billing options you are offering to your customers.

A lot of companies are rapidly moving towards adopting 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? The honest answer to this question is – the benefits it offers to its customers. It opens a wider customer base for business and is a sort of win-win for both customers and the companies.?SAP BRIM is a new-age solution to choose the usage-billing option for your business.

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 them responsible for how much they end up using your product.

Business benefits of choosing Usage-based Billing?

Usage-based pricing does not have 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 the 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, the requirements of their customers.
5. While the usage is being metered, businesses can easily track and analyze 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 flexible, easy to use, and comes with several customer benefits.

Why Usage-based billing is even better than a one-time sales or Subscription Model?

There are three types of monetization models that businesses generally follow –

• one-time
• subscription
• consumption/usage

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, the 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 a variety of different options, thus significantly increasing the number of offerings available for the customers and helping businesses in reaching maximum revenue numbers.

When fixed-rate subscriptions are combined with flexible usage-based pricing, it results in the form of a consumption or usage-based model. This model allows the business to take advantage of a recurring fee and provides them a special ability with the help 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 benefit of the 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 that any business should understand to fully leverage the advantage of the 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?

GTM Strategy

• 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 a usage-based metric that meets the 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 –?This allows the customer to choose and pay for their exact scope of usage. Helps overcome buying constraints and budget thresholds.
3. Scalable –?Generates more, spending 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 –

• Revenue
• Remaining performance obligations (RPO)
• Billings
• Dollar-based net expansion
• Active customer accounts

Major challenges of shifting to a 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 usage-based pricing is the correct model for your business is to contemplate your company costs; if this remains static irrespective of the number of customers using the service, then the usage-based billing model may not be the right fit for your business.

Therefore, 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 a 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’s how you convince your customers in understanding that this change is worthwhile, and they will be offered 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 customers.

• 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 a 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 the?best recurring billing system?for collecting user consumption data and then further charging them timely and most importantly in transparent way. Subscription businesses must be able to map and collate usage data from many different systems and sources, irrespective of their format, to track usage and apply the right pricing. This is where executing and integrating a robust charging and billing system is important. It helps in streamlining the payment processes and producing itemised invoices.

• Conclusion?

Usage-based pricing/business model is a very effective way to improve business performance. However, billing for a 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?