What is Usage Based Billing?
With the variety of billing models to choose from, there are many options for us to get asked the question: what exactly is usage-based billing?
It is also known as pay-per-use metered billing, pay-as-you-go, or pay-as-you-; usage-based billing is often described as a model of pricing based on consumption that allows customers to be paid for the item or service they use.
Simply put, when you are using the product or service, the provider of the product or service can measure the amount you consume and charge you according to your usage and a base price.
The demand of customers drives a large portion of this. More companies are using the concept of usage-based billing, which is a good thing, and for good reasons.
Types of Usage based Billing
- Per-unit pricing
Also referred to as pay-as-you-go, it is the most widely used and straightforward pricing model based on usage. Based on the number of customers, users are only charged for the use they make, not more or less.
For instance, your SaaS business is charged $10 per seat or user per month. When your client has ten customers, they will cost $100.00 per month. However, in the case of 250 users, the monthly cost will be $2,000.
- Tiered pricing
Customers pay in increments based on the amount of usage. If usage-based billing software offers cloud storage with the first 50GB of storage costs $0.25 for each GB. When the user reaches the limit of 50GB, they cost $0.23 per GB for every 50GB of storage.
When 101GB is used, and above, the customer can move into the next increment, which costs $0.21 per GB, which is for up to 150GB. For further explanation of the concept, suppose an individual uses 75GB during the month; they are charged $18.25 (50 GB multiplied by $0.25 equals $12.50 plus 25GB per $0.23 is $5.75).
- Volume pricing
The usage-based billing model is similar to tiered pricing with an added twist. Instead of paying an incremental cost, it is paid in accordance with the highest level attained. Let’s suppose there are three plans available for API calls, and each plan is being offered at a lower cost.
To illustrate, the initial level allows the possibility of 2,000 API calls each month for $0.20 per call. When the customer is in the second stage (2,001 or 4,000 API calls per calendar month), they’ll get charged $0.10 per call.
The third tier, the last stage (4,000plus calls per month), is charged $0.05 for each call. If there are 1,000 calls during a particular month, the user will be set $200 for that month. However, if 4001 API calls were placed that month, the total bill is only $200.05, double the number of calls for the exact cost.
Mediate Customer Usage
When you’ve decided to implement a usage-based pricing system, and users begin to use your services, you’ll be required to monitor their usage data. The procedure to collect, clean, and route usage data is mediation.
When you have multiple daily active users and the usage records come from different data sources in various formats, the process of mediation can become complicated.
There are a few complicated issues, but there’s no other way to get around them. Clean data is an essential element of understanding the customer’s journey and precise billing.
For any business using an underlying usage model, it is essential to maintain accurate usage data records to ensure that invoices from customers are correct. If you do not, you are at the risk of leakage of revenue or inaccurate invoices, as well as a negative experience for customers.
Examples of Usage based Billing
In B2B, SaaS businesses like Snowflake, Stripe, Zapier, Twilio, and more use metered billing. In particular, Snowflake tracks usage based on the resources used to compute.
In the same way, Stripe usage-based billing implements usage-based pricing that allows per-unit billing, where they charge their customers based on a successful charge to their card. Zapier is a tiered pricing system for usage with each tier specifying how many tasks (a task defined by Zapier that is every time the Zap succeeds in moving data or does something on behalf of you) are part of the respective level.
Is Usage Based Billing Right for You?
It’s a win-win for both the customer and the business alike; usage-based pricing offers customers the ability to affordably access the products and services they require while offering businesses a steady and lucrative revenue stream. However, while the benefits are substantial, it’s not designed to suit every business.
No matter what billing method you decide to use, regardless of the billing method you choose, you require a robust billing platform that offers assistance for every business need irrespective of the product, service, or any business model.
Billing Platform provides the only solution for billing available that can accept any of the following: single-time charges, subscriptions consumption, hybrid, or billing on one platform.