Maximizing Customer Value with Enhanced Usage-Based Pricing Models

As companies look to differentiate themselves from competitors in crowded markets, the most effective approach is to look for ways to maximize value for customers. With this in mind, usage-based, or consumption-based pricing has gone from an interesting differentiator to a must-have for many companies across every industry. Why? These models unlock opportunities for businesses to drive new, incremental revenue beyond the subscription while giving budget-conscious customers the power to pay for only what they need and everything they pay for.

Usage-based billing models are a win for customers and businesses alike. They come in many different forms, allowing companies to tailor their models to their needs and their customers' preferences. Here are just a few forms usage-based billing can take:

Minimum

Under this model, customers pay for a base plan each month at a minimum charge, which gives them access to certain features, service hours, or usage events per period. They are, of course, welcome to purchase additional products or services on top of that, and those may be billed in several ways, such as one-off payments or additional bundle purchases, etc. This model really offers the best of both worlds — a basic subscription provides predictability, while the add-on opportunities raise the revenue ceiling.

Flat Rate

The flat-rate model offers customers unlimited usage for a fixed rate each period. Think of it as the all-you-can-eat buffet. A business may lose money on the customer that goes back for thirds (or fourths or fifths), but that's balanced out by the one who pays the full buffet fee and then eats nothing more than a bagel and a few bites of cantaloupe. As long as that balance is there, the flat-rate model can benefit both customers and businesses.

Allowance

Like the flat-rate model, the allowance model has customers paying a fixed rate each period. The difference is that this model provides them up to a certain quantity of goods, services, or usage events. In other words, it puts a limit on that all-you-can-eat buffet. Examples of allowance models may be a retainer paid to an attorney, a printer subscription that allows a certain number of pages per month, or a cell phone data plan. Often, these allowances come with overage charges — applied when a user goes over the allotment for the period — or, less often, rollover capabilities, where unused products or hours are applied to the next period.

Tiers

Tiered pricing is one of two common volume discounts businesses can offer. The discount is applied to every unit purchased. Here’s an example with easy math: if a customer is buying ten items, they'll cost $100 apiece, but if she's buying 20, she'll pay the discounted price of $90 for each of the twenty items, a total of $1800.

Tapers

Tapered pricing is another kind of volume discount, and it also involves decreasing the price at particular quantity thresholds. The difference is that, in tapered pricing, the discount does not apply to every item purchased — only the items within each tier. So, using the same math above, the customer pays $100 apiece for the first ten items, and then she pays the discounted rate of $90 for items 11 through 20. Under the taper model, her total bill is $1900.

Pooling

Also known as sharing, the pooling model can apply to charges like software subscriptions or service plans with multiple users, streamlining budgets by allocating charges based on which user or department is consuming more of the service. Under this model, if a company pays for 100 hours of service to be shared between the marketing and sales departments, but sales use 80 hours while marketing only uses 20, then at the end of the period, that cost is divvied up accordingly.

Threshold

Threshold notifications are often used in conjunction with other billing models, such as allowance or stored value billing. These notifications are triggered when a customer’s stored value hits a certain level or when a customer has used a certain percentage of the allowance for a period. (They could also be used with pools to help customers track each users' use or with tiers and tapers to follow how close a customer is to the next pricing level.) When these thresholds are hit, businesses can automatically send emails, texts, or API calls that let customers know their status and what actions they need to take to keep their goods or services coming uninterrupted.

Stored Value

Stored value models allow customers to "preload" accounts with a specific dollar amount. The business then draws from that amount as the customer uses products or services. Once the stored amount hits zero, the customer loses access to goods or services until they “reload.” We often pay for public transportation using this model, adding a certain amount of money to our passes and then drawing from that amount with every ride until it’s time to pay up again. Other examples include gift certificates, prepaid phone cards, or the opportunity to pay upfront for several hours of services from a vendor.

Pay-As-You-Go

While this term is often used as a catch-all for usage-based models, the pay-as-you-go model refs to models in which customers pay only for units used at the end of each period. Electric bills generally work this way, with users paying each month based on the kWh used in the previous month. Water bills, too, are calculated after the fact based on the volume used. You might see this model in carshare services such as Car2Go, where payments are calculated based on miles driven in a particular use.

Time-based

Under the time-based model, service rates may change depending on date or time of day, so the customer will be charged based on the rate in effect when they used the service. For example, consider hotel rates or airfare that fluctuate based on demand, rising during peak seasons and decreasing in slower times. Carshare services often use time-based pricing, implementing rate spikes during rush hour and on busy weekend nights.

Multidimensional

Multidimensional models consider several different variables to calculate the final charge for a particular event. You might see this with an Uber or a rental car, where you’re charged for both mileage driven and time in the car.

Combination

Finally, while any one of these models can be advantageous independently, they can also be used together in any combination that makes sense for businesses and their customers. Simple subscriptions can be paired with any of these models to enable "add-ons,” and businesses can combine two or more usage models — such as layering pooling onto stored value or applying tiers or tapers to pay-as-you-go models. In this way, businesses can truly customize billing in the way that best provides value to customers — and grows revenue.

Usage-based billing can have a powerful impact on growth, but implementation of these models requires just the right foundation. Traditional billing software was not created to handle the complexity of usage-based models, so companies looking to use them as a competitive advantage need to embrace platforms that will empower, rather than hinder, growth. The Gotransverse agile billing platform was designed to do just that, and we’d love to show you how. If your company is looking to capture new revenue through usage-based offerings, we invite you to take a tour of our platform today. Then, when you’re ready, request a demo to find out whether Gotransverse is the right agile billing platform for your organization.