Your customers want to pay a fair price for products and services—and they want to receive value that’s commensurate to that cost. Choosing the ideal usage-based pricing model for your product is a great way to keep those two wants in alignment.

If you’re unsure how to choose the right model in the usage economy, I’ve got you covered. In this article, you’ll discover the spectrum of usage-based models, which model works best for business value maximization, and tactical business solutions to diminish risk when you make the switch.

What are the different types of usage-based billing models?

A subscription-based model involves a recurring charge for access to a product or service. Customers pay a period fee, typically monthly or annually—think Netflix, Spotify, and gym memberships.

The next type of transaction is the commitment plus usage model. Cell phones are a great example of this. When you buy a new phone, you’re locked into a contract to pay $100 a month for two years. You pay back the phone over time, and if you go over the set usage limits, you incur additional charges.

In a consumption drawdown or usage drawdown model, the customer prepays an amount and draws down against it. Cloud providers like Amazon’s AWS operate this way, offering variability for the consumer along with some certainty for the vendor. Prepaid toll-payment devices work similarly—you put $50 on your account, and it pays when you go through a toll. When your account hits zero, it’s up to you to add additional money.

A pure usage or consumption-based pricing involves paying as you go. There is no capital expense and no forced commitment. The buyer is charged specifically for what they use, like water or electric bills.

To choose the pricing model that best suits your business, you’ll need to consider what works for your product, who your customers are, and what they need. You may offer flat-rate pricing or tiered pricing, or you can charge a recurring fee for access to basic features and charge extra per usage. If a pure usage approach doesn’t fit your risk appetite, it might be more beneficial to establish a basic subscription with the usage component—a combination of the two—or to implement more of a multiyear term.

Why does choosing the right pricing model matter? Ask Wink.

About 10 years ago, I got all hyped up about home automation and went all out, swapping my light switches with fancy dimmers, installing motorized blinds, and setting up SoundLink speakers. Everything connected to a hub I got for $50—that’s it, no extra subscription charges—and was controlled by the Wink app.

Despite being an early front-runner in the market, Wink’s income from just selling hardware wasn’t enough to keep the ship afloat. The company filed for bankruptcy and bounced ownership multiple times. Fast-forward to 2020, and their product leadership announced the switch to a subscription model, admitting that their previous transaction model didn’t work.

Instead of charging new customers from the onset, Wink told long-term customers like me, “You’ve had the smartphone app for free for five years, but now you have to pay to keep it.”

No, thank you. Customers don’t respond well to having to pay for something they used to get for free.

Think of all the revenue that Wink sacrificed and couldn’t recoup by failing to offer subscription solutions from the start! Their original product launch strategy could only lead to failure. They only saw the hub, and not the strategic innovation of a connected home, as the value metric.

So, why should you take the risk of usage-based billing?

You might be wondering, “If there’s so much risk when billing for value, why bother? Why not stick to more traditional sales models and let the customer assume the risk?”

Because customers today are pickier than ever before. It’s easier for them to browse until they find the best option. Taking on more risk in the commercial model as a vendor means less risk for the customer, and that means more opportunities to attract new customers, upset the competition, and drive growth.

In fact, in a recent LogiSense survey, 54% of CFOs agreed that having a usage-based option could reduce customer churn. Flexible, transparent value-based billing empowers people to make their own choices—and that makes customers four times more likely to enroll and twice as easy to retain. Isn’t that worth the switch?

When considering taking a leap, make sure to take every factor into account, including revenue, pricing trends, risk, customer loyalty and retention, and your approach to infrastructure and technology. Relying on usage telemetry, along with advanced analytics tools and cross-team collaboration, can help predict usage trends and diminish risk while optimizing product value. Machine learning and AI can be used to detect usage patterns, from peak seasonality to infrastructure needs.

The shift to usage-based transactions is a chance to reimagine your business and its modern product strategies.

Without adapting to today’s customers and meeting their needs, you’re leaving the door open for others in your industry to take the lead. Usage-based models create an opportunity for you to meet your customers where they need to be met.

Are you ready for the usage economy? Get the strategic business solutions you need for the billing transformation with The Usage Economy. Available now on Amazon.