Unpacking Usage-Based Billing Models

We talk a lot about the advantages of usage-based billing: stronger customer relationships, bigger market share, freedom to experiment with new and innovative solutions, and dramatic revenue growth opportunities, for starters. We also talk about how savvy businesses are trading in their legacy billing platforms for more agile systems that allow them to take advantage of these usage-based models. But what, exactly, do usage-based billing models look like?

Well, the beauty of usage-based models is that there’s no one answer to this question. Simply put, consumption-, usage-based, or pay-as-you-go models are various methods businesses can use to offer products and services above and beyond their simple subscriptions. Think of them as “subscription-plus.” For customers, the attraction is that they can purchase exactly what they need and pay for only what they use. And for businesses, it’s that they can capture more detailed usage information in order to refine products and services, they can roll out new or experimental offerings more quickly and with less risk, and they can significantly raise the revenue ceiling.

These models come in many different forms, and businesses may use one or more to fit their needs and their customers’. Let’s break down the nine most common variations:

1. Time Basis

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 that was in effect at the time they used the service. For an example, consider hotel rates or airfare that fluctuate based on demand, rising during peak seasons and decreasing in the slower times. Carshare services often use time-based pricing, too, implementing rate spikes during rush hour and on busy weekend nights.

2. Stored Value

Businesses using stored value models allow customers to “preload” their accounts with a certain dollar amount. The business will then draw from that amount as the customer uses products or services, until it dwindles down toward zero and the customer has an opportunity to “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.

3. Allowances

If you’ve ever seen language that says your payment is good for up to a certain quantity of goods or services, you’re probably working with an allowance-based model. Under this model, the customer pays a periodic subscription fee for up to a predetermined consumption amount, whether they use all that amount or not. Allowances are not unlike retainers you might pay an attorney. Or you may have a printer ink subscription that’s based on an allotted number of pages per month. And it’s likely your cell phone data is billed on an allowance basis, though the provider may vary the model with a “rollover” offering that adds any unused data to the next period’s allotment.

4. Pass Though

Pass through rating allows businesses to take in a pre-rated event and apply it to customers’ allowances without changing the charge of the event. So if a portion of your pricing comes into your billing system already rated, you don’t need to waste time sending it through the rating engine again. Or if you want to add an upcharge to a pre-rated event, you can easily do that too.

5. Threshold Notification

Threshold notifications are often used in conjunction with 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. When these thresholds are hit, businesses can automatically send emails, texts, or API calls that let customers know they’ll need to re-up soon.

6. Tiers

Tiered pricing is a type of volume discount businesses can offer customers. The discount is applied to every unit purchased. So, if we look at the example above, if a customer is buying 10 items, they’ll cost $100 apiece, but if she’s buying 20, then she’ll pay the discounted price of $90 for each of the twenty items — not just items 11 through 20.

7. Tapers

Tapered pricing is another kind of volume discount, but unlike tiered pricing, pricing is determined by tiers (1-10, 11-20, 21-30, for example), and each tier has a different unit price. So, your first ten items may cost $100 each, but the next ten will cost $90 apiece, the next ten will cost $85, etc. It’s important to note that, in tapered pricing, the discount does not apply to every item purchased — only the items within each tier.

8. Sharing

Remember the days before unlimited texting? Maybe your family paid for 1,000 text messages per month across every phone in the plan, but your sister used 800 of them herself. Sharing models can reallocate the charges to each user based on their overall usage. So, if sis wants to use 80% of the text messages, she can pay 80% of the bill, too. Though text allocation isn’t a problem anymore, this 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.

9. Multidimensional

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

These are just a few of the ways businesses can configure usage-based billing to increase both customer value and revenue opportunities. To learn how agile billing can help your organization implement some of these models — and all the other ways it powers growth — we invite you to download our recent e-book: Agile Billing Powers Business Innovation. Then, when you’re ready, request a demo to find out whether Gotransverse is the right agile billing platform for your organization.