Subscriptions have simplified the customer buying process in recent years, making it easier for companies to generate revenue. However, many companies are opting for usage-based pricing instead of flat-rate pricing lately as it can lead to more attractive, client-oriented services that ultimately drive revenue growth. The rapid growth platform providers want to increase their revenues and are pushing for more complex pricing, bundling, and payment requirements. IoT, Communications, Cloud, and Software platform providers need to handle multiple recurring and one-time payments, made by millions of customers using different devices worldwide. This necessitates the adoption of usage-based billing models.
Usage-based pricing widens the addressable customer base for companies by removing flat-fee pricing which reduces the initial purchase barrier. People like the idea of flexible usage-based pricing as it is cost-effective and the price only increases with increased usage, and thus increases the value derived. You will also see lower churn due to seasonality as customers won’t be forced to pause or cancel their services during periods of low usage. If you're interested in a usage-based pricing model and would like to identify the best way to implement effective usage-based billing, you have come to the right place. Overhauling your billing system to incorporate usage-based billing might be the right choice for you. However, it is not as simple as implementing a recurring billing model and requires thorough planning and strategic execution.
This change may generate some pushback from the Finance or Legal departments as this model may be associated with less revenue predictability as there is no flat fee. Therefore, when you plan to implement a new billing system, it's important that your team includes people who know the current billing and integrated systems well, as they will have essential insight into requirements for the new billing system. Make sure you include members from the Finance, Operations, Product Management, and IT teams, so that you get the perspectives of everyone that interacts with the billing system and understand the challenges they face.
Now that you are ready to launch a usage-based billing solution make sure to follow these steps for the best results:
1. Determine the right usage billing metric
Usage-based pricing has been used by telecom and utility companies for a long time. It is easier for these businesses to determine and calculate the usage unit for their services. But if you are in any other industry it is important to identify a metric that closely matches with the value that your customer extracts from your product or service. For SaaS or IoT businesses, it is usually based on technical metrics like data, API calls, minutes, etc. Pro-tip, whenever possible try to map the usage billing metrics to customer outcomes.
The next step is to determine if you will be charged based on the data used, time spent, or the number of times a service was used. Whichever metric you choose it should be scalable and predictable for the customers so that they can budget their usage accordingly.
2. Choose your usage-based pricing model
Decide on the pricing model that is best suited for your business. Understand what will work best for your product offering and customer needs. Is it event-based, value-based, and/or tiered pricing, or should you opt for a hybrid approach where you charge a flat or dynamic recurring fee for access to basic features, and charge extra per usage.
3. Select a modern billing solution
When you're selecting a usage-based billing solution, be sure to choose a configurable billing system that can manage complex usage and rating scenarios. Look for a billing system that integrates with the tools you already use. As you grow your business and the complexity of your operations grow, so too will the need for a more sophisticated billing system. Choose a modern billing platform that grows with you.
4. Dynamic usage-based pricing
The flexibility in pricing provided by usage-based billing allows you to cast a wider net of customers and makes it easier to retain existing customers. Make use of promotional offers, and provide value and demand-based pricing as user preferences fluctuate. The billing platform you select should provide you with the flexibility to launch new products to market, offer multiple product catalogs and pricing configurations seamlessly.
When choosing a billing provider, you need to consider whether they can handle your complex product catalogs and multiple product offerings. Your billing provider should be your growth partner allowing you to respond to the changing market and meet customer needs so that you remain competitive.
5. Select a Usage rating method
Before you switch to usage-based billing you need to determine the usage-based rating rules. Rating is the process of calculating and assigning an appropriate monetary value to usage events logged by your systems and partners.
Customers demand clarity and total transparency in billing. So make sure you provide real-time access to usage and rating data which is only possible with an automated billing system designed to provide accurate and real-time usage billing. This information should remain accurate regardless of the volume and complexity of transactions. Accuracy in billing enhances your customer experience and will earn you loyal customers.
6. Automate usage-based billing
If you are still using manual billing methods, it's nearly impossible to efficiently and accurately bill and invoice your customers for complex usage plans. Manually calculating customer usage is not only unreliable and prone to errors and inconsistencies, but it is also time-consuming and expensive. Manual billing can also wreak havoc on your back office and take a toll on your employees. So if you are switching to usage-based billing, it is a good idea to automate your billing processes to keep your back office organized and ensure seamless, accurate, and reliable billing for your customers.
7. Update Your Marketing Material
Make sure that you update your website and all other marketing materials including brochures, product sheets, and all other offline and online marketing collateral with your new pricing model. This new campaign should help launch your pricing strategy and get people excited about the fair and flexible model you offer your customers, in contrast to your competitors' opaque pricing.
8. Train your Sales Team
Train your sales team on your new pricing model and provide them with the right tools to make sure they have everything they need to inform customers and help them achieve results. When you prepare your sales team correctly, they will not only sell, they'll educate your customers on the benefits of your product offering and pricing which will potentially ward off customer churn. With an intelligent billing system, you can arm your sales teams with the tools required to also track and identify which customers consistently exceed their usage limits and upsell an offer to upgrade their package. Alternatively, if the sales teams notice a downward trend in customer usage, they can offer a more personalized package to ensure customer retention.
Pro-tip - Usage-based pricing is a natural fit for a Product Led Growth (PLG) model, enabling your customers to get started often with little to no direct sales engagement.
9. Be Transparent with your Customers
Understanding the usage-based billing model and the benefits will make it much easier for customers to accept it and therefore make your sales process much easier. So It is important to keep your customers in the loop about the changes in pricing and the benefits they will derive from the new flexible pricing model. It would be unwise to hit your customers with a sudden increase in cost that they weren’t expecting.
In line with this, give your customers full access to their usage consumption reports through customer portals and notifications alerting them of reaching threshold events. This could be in your app, on the invoice, as well as in a standalone customer billing portal. Most customers like to see a breakdown of their real-time usage and improved billing and invoicing features, they may even ask for an upgrade even before you offer it.
Introducing usage-based pricing may require you to upgrade existing systems and invest in educating customers on the benefits. But with a reliable usage-based billing system, you can efficiently meter your customer usage and delight them by offering fair and personalized plans that best fit their needs.
Usage-based monetization enables real-time reporting, transparency, and reliability. LogiSense is not just a billing vendor, we are a strategic partner that can help you define your usage-based billing strategy and requirements and set you up for success. The LogiSense team has helped hundreds of businesses develop and refine their billing strategies. We will support you every step of the way from start to launch.
The future of billing is usage-based. It is 100% transparent and fits the needs of customers as it charges them only for what they use. If you are ready to take your revenue potential to the next level by adopting an agile usage-based billing partner, we invite you to apply for a free 30 day Test Drive program with LogiSense or contact one of our billing experts to schedule a demo.