Consumption-based billing: Yes or No?

by Tina Huynh

October 23, 2020

In today’s world of digital transformation, businesses have more means to obtain in-depth information about consumers behaviors and buying patterns. Companies can use this data to customize their product’s benefits and offerings, while updating their business models to maximize revenue and improve customer retention. When considering billing for these products and services, there are two main models: subscription billing and usage-based or consumption-based billing.

Why are companies switching to consumption-based pricing models?

Usage-based option is agile, affordable and does not require commitment. Many businesses are either switching to this model, or adding a usage-based option to their billing methods.

Agility

As the business scales and expands, more services or products might be added. Instead of having customer demands outgrow the system capabilities, companies can adapt and charge for the additional usage and customers can add purchase on demand to meet their needs.

Moreover, usage-based billing provides prediction of future customer demands. With usage metering features, companies can track and analyze usage data, which reflects buying trends and patterns. This information can be used for real-time, interest-based target marketing.

Affordability

Usage-based pricing provides a variety of pricing options, giving customers the flexibility of paying for only the value of the product they are utilizing, which makes the product or service more affordable. For example, customers pay a fixed price for monthly subscription of a video streaming service. This would be a big save for those who stream videos all day, but for those who don’t have time to view as much, or only need the service once in a while, they would be paying for capability that they don’t use. In this case, usage-based pricing would be more affordable as the user only pays for what they use instead of wasting money on a full price package.

Less Commitment

It is more likely for businesses to obtain new customers when they don’t have much to lose. Customers seem to hesitate to try new products/services when there is commitment. Usage-based pricing attracts more potential users as products are available on-demand in a small increment without upfront investment of long-term commitment.

What type of business best benefits from a usage-based model?

High-volume transactional services, including:

–   Marketing automation (billing based on clicks, posts, page visits, etc.)

–   Video platforms (billing based on streams, plays, downloads)

–   Communications (billing based on number of calls, text, data spent)

–   Developer tools (billing based on number of API calls, data stored)

What type of business does NOT benefit from usage-based billing?

Usage-based pricing does not suit well with businesses that are time-based or involve physical goods. These business models often do not involve incremental use of product or service.

Overall

Ask your company or organization these questions before choosing a billing model:

How do your customers value your business?

Is your business transactional?

Is there seasonal use?

Would be there an opportunity to increase revenue from the usage-based model?

At Congero Technology Group, we have a team of experts that can help you determine the best billing option for your business and answer your questions. Please visit our platform and contact us today for a personalized demo, just for your business.

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