Back to Billing Basics: Usage-Based Billing

In our “Back to Billing Basics” series, we’re revisiting some of the key elements of billing and critical billing platform functionalities. We’ve covered revenue recognition and revenue leakage already, and today we’re going to dive in to usage-based billing. We’ll cover what usage-based billing is, what it can look like, and what businesses need to consider before they make the switch from simple subscriptions or one-time payments to these more complicated (and more fruitful) models.

What Is Usage-Based Billing?

Also called consumption-based and pay-as-you-go billing, usage-based billing is a model where customers get charged only when they use the product or service. Usage-based models empower businesses to take advantage of the predictability of subscription models, but add the limitless cross-sell and upsell opportunities of one-time and usage-based payments. These models first picked up steam in the telecommunications industry, where providers began combining one-time payments (new phones, additional lines, etc.) with subscription billing (monthly fees for local calls), and usage-based add-ons (long-distance minutes and, later text messaging, data transmission, etc.).

So why is usage-based billing a smart choice for businesses? For starters, these models can help drive revenue by attracting new customers and encouraging existing customers the flexibility to try new features at a low risk and speeding up “time to revenue” for new products and services. Usage-based models support innovation in both offerings and customer experience, ultimately disrupting competitors and giving businesses a stronger foothold in the market.

Our recent blog post dives deeper into the many ways usage-based billing helps businesses get ahead, but in short, the value customers get from paying for only what they need — and the new sales opportunities businesses enjoy as a result — make usage-based billing a critical competitive advantage in just about any industry.

What Does Usage-Based Billing Look Like?

Usage-based billing models come in many different forms, and businesses can use one or more to fit their needs and their customers’ preferences. Utility companies measure the units of electricity customers use, often varying costs per unit based on time of day. In the transportation industry, rental car and rideshare companies calculate pricing based on distance traveled, fuel consumed, and seasonal (or hourly) demand levels. The key to usage-based billing isn’t some “one-size-fits-all” approach; rather, it’s that whatever usage metric a business identifies as their pricing yardstick must simply be a trackable, measurable quantity.

Considering that cardinal rule, here are a few more examples of what usage-based billing might look like:

• Offering “volume discounts,” reducing prices based on the quantity of widgets or volume of services a customer purchases.
• Accepting prepayment (such as a subway pass, a gift certificate, or a block of service hours) and drawing from that payment as products or services are used.
• Establishing an allowance, similar to a retainer, that allows customers to pay a periodic subscription fee for up to a predetermined consumption amount, whether they use all that amount or not.
• Adjusting rates based on date or time of day to reflect demand, like a hotel or airline that charges more during peak seasons or a car share service with rush hour rate spikes.

As long as the selected usage “units” are measurable, there’s no limit to the usage-based models (and combinations) that can drive innovation and revenue for a business.

How Can Businesses Implement Usage-Based Billing?

While the payoff to implementing usage-based billing is significant, the implementation process itself requires some upfront investment in time and resources. First, a business needs to select the right usage-based pricing models — the model or combination of models that will strike the perfect balance between maintaining stable, recurring revenue and opening the doors to growth. Next, identify what metrics you’ll use to measure usage and determine payment due — and then how you’ll go about storing, maintaining, and converting that usage data to revenue through mediation, rating, and invoice creation. Finally, how will the business automate these processes to ensure a smooth customer experience, minimize revenue leakage, and allow for high volumes of transactions as the company grows?

Fortunately, no business has to go it alone. An agile billing partner can work with you to ensure everything is in place for a smooth transition, no matter how complex the models or how rapid the growth. How do you select the right billing partner? We recently broke down the four things leaders need to consider during the search, and we also outlined how to tell if a vendor truly supports usage-based billing.

At Gotransverse, we pride ourselves on helping our clients unlock the many advantages of usage-based billing. To learn more, take a virtual tour of our billing platform today. Then, when you’re ready, request a demo to find out whether Gotransverse is the right billing partner for your organization.