Usage-based pricing and subscription models are prevalent in every aspect of our business lives. If you own a cellphone, a television, or have used ride-share, you have been exposed to both usage-based and subscription based pricing. If both models are so common in our everyday lives, how do companies know which model to use to maximize profits? Many businesses find that usage-based pricing adds lucratively to their subscription models; other businesses rely on metered pricing exclusively. Usage-based billing provides agility, affordability, and low commitment for customers that, in turn, drives profitability for companies.
The Difference: Subscription Billing vs. Usage-based Models
Subscription billing allows businesses to build continuing relationships with clients and generates a more predictable revenue stream. Think about any annual or monthly bill your business pays. The magazine subscription, the water delivery service, software as a service applications - these are all billed by subscription. The customer knows the product she will get on the predetermined date, and the business has a predictable revenue stream from the monthly or annual billings.
But, what if you were able to charge a customer by metering their utilization of your product? Like a wireless network provider or electric utility, customers pay for their use. This is the basis of usage-based pricing. Usage-based (or metered) pricing charges based on how much a product or service is used. This type of metering is often coupled with subscription services as additional pay-as-you-go offerings. Usage-based pricing offers a choice for customers. They can choose to enhance their subscription to meet any additional scale.
Usage-based pricing is commonly used for infrastructure services and cloud computing, such as Amazon Web Services. However as the following examples illustrate, usage-based billing is a lucrative addition to subscription software and other innovative businesses. For example, a payment delivery vendor charges a flat percentage from every 100 transactions of any amount. Usage-based metering allows this vendor to track the first 100 transactions, then charge customers for additional transactions at an increased percentage rate.
Beyond subscription model businesses, there has been a wave of innovation that relies solely on pay-as-you-go billing. These are the Lyft’s, Uber’s and Airbnb’s of our world, which have defined a new shared economy. With consumption based pricing enabled by new mobile technologies, these companies deliver a desired service between the vendor and consumer for a small fee charged for individual use. Usage-based pricing is the driver behind an entirely new economic model.
Why Are Companies Switching to Usage-based Pricing?
Presently, many SaaS and services companies are rethinking their subscription billing models and making the switch to, or simply adding, usage-based pricing. Usage-based pricing offers agility, affordability, and low commitment that translates to greater profits.
With usage-based pricing, the provider is able to charge for additional usage and the customer is able to quickly invest in more services or new features to meet new demand. When a company is small and just starting, the lowest tier of Dropbox may fit its needs. However, as the business scales and grows, more space is required.
Likewise, usage-based pricing provides a business the agility to anticipate the needs of customers. By metering usage, a business can track and analyze product or service usage data and send offerings in real time to cater to the immediate needs of the customer.
A digital newspaper subscription service, for example, can track the amount of articles a user accesses. If the user exceeds their monthly article allowance, the newspaper can offer a-la-carte pricing for each article over the subscription amount.
Usage-based pricing gives each customer pricing in line with their perceived value of the product. Amazon Web Services (AWS) offers a variety of products (e.g. EC2) priced so the customer pays for only what they use, making AWS more affordable than paying full price for a variety of products that are not fully utilized.
In the days when music came on CDs, you’d have to purchase an entire CD for access to one particular song. Now, with a streaming music subscription, you can listen to an entire album before you purchase it to permanently add it to your music collection. When a product is available on demand in a smaller increment and without a large up-front investment, more potential users would be willing to try the product, which satisfies their desire to avoid the burden of ownership.
Entrepreneurs learned that, to maximize profits and keep overhead low, it is cost effective to purchase a membership to a co-working space rather than establish a permanent office space. Purchasing an office space requires a lot of capital, insurance, office furniture, etc. In order to avoid the burden of ownership, a small business entrepreneur might purchase a membership to a co-working space and pay by use in a shared office environment.
If the customer needs access to a conference room, usage-based pricing allows the customer to pay a one time cost for access to a conference room that is not included in the base subscription. If the co-working space observes that the customer is purchasing a-la-carte conference space regularly, that customer may upgrade to a higher tier of co-working space subscription that allows use of the conference room for 3 days every month. This saves the customer money and provides the co-working space with an upgraded subscriber at a higher price.
How You Can Take Advantage of the Usage-based Pricing Model
BillingPlatform’s cloud-based billing solution offers the flexibility and ease of use that makes usage-based pricing easy to implement. With our built-in mediation capabilities, our customers are easily able to meter product usage and charge customers based on their contract agreements quickly. BillingPlatform supports usage-based billing for a number of business types like public transportation, office services, teleconferencing and utilities.
Discover how BillingPlatform can help Software as a Service companies maintain the most efficient and successful billing practices, download our Enterprise Guide to Billing for SaaS.