What Is Consumption-Based Billing?

Both traditional and digitally native companies are making the switch to a new, more flexible model: consumption-based billing.

Traditionally, two models have dominated the billing stage: one-time, fixed charges and simple subscriptions. Both have their advantages. One-time, fixed charges allow the customer to pay only for what she wants, exactly when she wants it; and subscription models help businesses build ongoing relationships with clients and provide a more predictable revenue stream. However, neither model offers the flexibility businesses need to keep today’s consumers — who are balancing ever-evolving needs — fully satisfied.

Consumption-based billing is a hybrid of the two traditional models, coupling subscription services with additional, pay-as-you-go offerings. Consumption-based billing can take on a variety of structures — from simple, pay-as-you-go usage fees to more sophisticated rating models — based on a business’ specific needs.

You’ve seen consumption-based pricing models at work on your utility and cell phone bills for years, but today, other high-tech businesses are entering the consumption-based service space, charging for a wide variety of add-ons, from number of users to number of transactions completed. Amazon, General Electric, Progressive Insurance and many others have introduced consumption-based billing for one or more of their services. And, according to Gartner, it’s the billing model of the future:

The next generation of business/pricing models will be hybrid models that offer a combination of subscription and pay-as-you-go and give rise to a la carte pricing scenarios, where providers will have the ability to charge for additional features, more bandwidth and so forth. _{-Disruption in Software Business Models Creates new Opportunities for Monetization, Gartner, February 2017}

Advantages of Consumption-Based Billing

In a business landscape where companies are racing to meet consumers’ ever-changing preferences and where consumers are laser-focused on value and transparency, consumption-based billing models offer both sides the flexibility they need.

For businesses, the model enables them to track and analyze product or service usage data and update offerings in real time to maximize value and stay on top of the market. It also helps drive revenue by pairing a predictable subscription with add-on revenue from additional products, services and features.

For customers, a consumption-based pricing model provides total transparency around what they’re paying for versus what they’re getting, and it lowers the barrier of entry for untested products, allowing them to try something new without making a risky (and costly) long-term commitment. ...More advantages and considerations of consumption-based billing.

Mechanics of Consumption-Based Billing

Though the concept is fairly straightforward (and a dream for the business-customer relationship), the underlying systems that support consumption-based billing are more complicated than what businesses may already have in place for one-time offerings or simple subscriptions.

Whereas invoices on a one-time or simple subscription model are fairly standardized, consumption-based billing works on a more individual basis, and it requires a different set of systems to work effectively. An intelligent billing system can process usage data at scale according to the business’ unique packaging, pricing and rating models and the eight core tenants of consumption-based billing.

8 Core Tenants of Consumption-Based Billing

A sophisticated intelligent billing system offers a flexible product catalog, a real-time rating engine that maintains accurate records and keeps customers informed about their usage each period, native revenue recognition, granular invoicing capabilities and detailed reporting power to help maximize customer engagement. All of this is designed to fully enable airtight, flexible and scalable consumption-based services.

Getting Started with Consumption-Based Billing

Consumption-based billing models, which empower companies to package and sell products in innovative, customer-centric ways, are a powerful competitive differentiator. And where the technology that powers this functionality was once reserved for industry behemoths, cloud-based, intelligent billing systems are now available to businesses of all shapes and sizes.

For businesses looking for the flexibility and control to produce new revenue streams at scale, consumption-based billing is the way to go. And at Gotransverse, we have the preeminent intelligent billing platform to support those businesses in their efforts to build stable and reliable billing relationships with their customers as they launch new products, configure new bundles and packages and produce dynamic promotions — all as part of a tailor-made consumption-based billing model.

For more information about how we can help your organization gain a competitive advantage by making the shift to a more powerful billing model, contact us at info@gotransverse.com today.

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