Businesses have a variety of pricing models that they can use, depending on the types of products and services they offer. While many companies rely on flat-rate charges for monthly services, commonly referred to as subscription-based pricing, others are increasingly shifting to a usage-based pricing model. This approach requires the business to account for a customer’s usage and bill in arrears, but it provides a number of benefits to both providers and customers. With this guide, it is possible to see the effects of usage-based pricing on modern businesses.
What Is Usage-Based Pricing?
The difference between usage-based pricing and subscription-based pricing is fairly simple. With a subscription, customers pay a single rate for the service, no matter how much they use. Companies may offer subscription tiers or limit the number of users as a way to control usage. Prices are constant, but the biggest users may get much more benefit than customers who rarely use the service. By comparison, usage-based pricing lets the customer pay as they go. The business may create tiers or steps to dictate the pricing per unit, but otherwise allow the customers to use what they will. The provider must keep detailed records to correctly bill usage and ensure that the system can handle high demand. Frequent users may pay more than they would under subscription-based pricing, but costs may be more affordable for minimal users.Impacts of Usage-Based Pricing on Businesses
Revenue Recognition
One of the bigger impacts of usage-based pricing on businesses lies in revenue recognition. With a subscription-based model, the company knows precisely how much it will need to bill. The finance team can choose how and when to recognize the revenue because it is generally unchanging, barring the creation or dissolution of a customer contract. Usage-based pricing requires the company to bill in arrears, with a complete record of the customer’s usage. Utilization of billing management services can help to smooth out the differences.Customer Record-Keeping
Logically, usage-based pricing requires much more detailed record-keeping than a subscription-based pricing model. When the customer pays the same rate every billing period regardless of usage, the company does not have to monitor it. Businesses that do not have the resources to track customer use must upgrade their systems to monitor and record usage. Otherwise, they risk allowing users to accumulate much higher usage rates without proper billing. Third-party tools offer the ability to track customer data, providing updated insights about usage and accurate billing each month.Forecasting
Accurate forecasting is a benefit of usage-based pricing. When companies rely on subscription-based pricing, they may have no idea about their customers’ usage patterns and trends. This can be an operational risk, especially if the business fails to see usage dropping off. By comparison, the collection of customer use data for usage-based billing becomes a treasure trove of information for future business decisions. Companies can look at usage trends to segment customers for upselling, adjust tiers to reflect customer needs, or get advance notice of changing expectations.Customer Value
While businesses can absolutely benefit from the switch to usage-based pricing, the one who wins most is the customer. Under subscription-based pricing, only the heaviest users benefit. With usage-based pricing, customers can reduce their expenses by controlling their usage individually. This dynamic approach allows companies to create new pricing tiers that make it easier for new customers to try out the service for a low cost or turn usage data into effective changes that improve the customer experience. While the model can create instability in revenue prediction, it often makes up for it with increased customer satisfaction and retention. Building reliable revenue generation and customer satisfaction is built upon the right pricing models. Usage-based pricing can be more complicated to structure, monitor and bill, but often results in better outcomes. By considering this approach, businesses can understand how the model could affect their daily operations and customer goals. Author bio: Matt Ream is the Director of Product Marketing at BillingPlatform. With extensive experience in product marketing, particularly for B2B SaaS companies, Ream has a proven track record of establishing robust marketing foundations and positioning products as industry leaders. Read more articles for the ConnectComm Community here.