Usage-Based Pricing/Billing /

Usage-Based Billing Basics

What is Usage-Based Billing?

Usage-based billing is a pricing model where customers are charged based on a product or service they use. Usage-based billing goes by many names: metered billing, consumption-based billing, volume billing, variable pricing, or pay-for-what-you-use. Whatever you call it, it's getting increasingly popular, not just because of the rise of cloud computing but because usage-based billing is fair, affordable, and consumer-friendly.

How do you bill for consumption?

Billing for consumption is not a new idea. Your electric company, your water company, and your telco have been doing it forever. They rely on timely and accurate measurements of the amount of resources consumed.

Choosing the right pricing model


The most common pricing model is per unit pricing. That means that customers who consume more will pay more, and vice versa.

Tiered pricing is a smart way to capture more customers based on how much they use your product or service. Instead of paying a set price per unit. With tiered pricing your customers’ price per unit decreases as a certain tier volume is reached.

Volume pricing is similar to tiered pricing, where higher tiers offer more discounted pricing compared to the lower ones. However, with volume pricing the discount is applied to all items once the customer hits a higher tier.

Usage-based pricing best practices

How do I make sense of my usage data?

For high-tech organizations, usage data is an important source of information to measure performance. Usage data not only provides clarity into the customer’s actual usage habits, but also helps you answer questions about how product features are being used, and what to develop next.

With the help of today's cloud technologies, it's possible to track usage data from phone calls, data, API, minutes, etc., and charge for it appropriately.

Once you've captured the usage data, you'll need to review them for any possible errors that need to be fixed and reprocess the failed records. This process of data transformation requires a robust usage-based billing software.

How do you forecast revenue with usage pricing models?

With usage-based pricing models, customers are charged based on their usage, so the revenue generated is variable and is determined by the number of resources used by the customer. Forecasting usage revenue has become quite common for tech, SaaS, IoT, and professional services industries. In order to correctly forecast recurring revenue generated from usage, historical sales data, annual recurring revenue (ARR) history, and customer usage patterns need to be taken into account.

The most important thing to look at when assessing revenue is the previous year's annual recurring revenue (ARR) and usage. This will help you predict how it may affect the next year’s ARR. The other key metrics to look at when forecasting recurring revenue are monthly recurring revenue (MRR), customer lifetime value (CLV), customer acquisition costs (CAC), and customer churn rate. Forecasting customers’ future usage works best when you have access to accurate data, which can then enrich revenue forecasts. An agile usage-based billing system can provide accurate usage data for recurring revenue forecasts.

Who should consider going usage-based?

You should consider switching to a usage-based billing model if your customers demand convenience, flexibility, and fairness in pricing. Usage-based pricing is best suited for businesses that offer high-volume transactional services, and it has the ability to track customer usage based on the chosen value metric be it API calls, minutes, downloads, etc. which requires you to automate your billing system. The following businesses can get the best benefit from usage-based billing:

  • Cloud apps and infrastructure companies
  • IoT (Internet of Things) companies
  • Software as a service (SaaS) companies
  • Utility companies
  • Telecommunication businesses
  • Financial services companies that process a high volume of transactions
  • OTT service providers, and streaming service companies, etc
  • Telematics industry
How does usage-based billing work?

Usage-based billing allows you to charge customers based on resources they have consumed, rather than overcharging them for resources they have underutilized. It helps businesses develop attractive client-oriented services that ultimately drive revenue growth. Usage-based pricing allows your business to expand your customer base by removing flat-fee pricing which reduces the initial purchase barrier.

The model allows businesses to create various pricing tiers to fit the customer’s needs. These thresholds or tiers determine the amount you can charge per data that's collected, versus just charging a flat fee. By strategically placing thresholds, businesses can increase revenue based on consumption.

What are the top things I should consider for usage pricing?

When transitioning from subscription to usage-based billing, there are many factors that need to be considered like the different types of customers and the variability of their usage. It is advisable to consider both go-to-market and operational challenges in setting the right price and billing frequency. In order to capture value from customers, companies must think through and execute the following steps:

  1. Choose a usage billing metric that your customer associates with your product value
  2. Determine the usage-based pricing model best suited for your business, product offering, and target customer
  3. Choose a configurable usage-based billing provider that can manage complex billing scenarios and integrates with all the software you use
  4. Determine the usage-based rating rules, and ensure you provide real-time access to usage and rating data
  5. Update your marketing material to reflect the changes in the billing and launch the new pricing model
  6. Make sure your sales team can communicate the value proposition of your product and new pricing model to customers
  7. Inform your customers about the new pricing model and the changes they will expect to their invoices. Also, educate them about the transparency in pricing this model will offer

Why Usage-based billing is better

Lower Entry Costs
Makes products and services more affordable
Creates higher customer retention rates
Allows the provider to see usage data in real-time
Facilitates the creation of new products and services
Generates cross-sell and upsell opportunities

Why LogiSense?

LogiSense's automated, cloud-based pricing and billing platform has helped countless companies around the world grow revenue through usage-based billing. Recenty, we increased a network solutions provider's profit by $12.9 million, creating a NPV of $9.52 million, and an ROI of 283%

Partner with LogiSense. We're Ready, Billing, and Able


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