Usage Based Billing: Pros And Cons [2024]

Introduction

Usage Based Billing – When you are choosing a billing method for your company, you have to consider a variety of factors, including your resources, customer preference, budget, plans for development, and much more. Making the right choice can simplify the accounting process and keep your audience happy.

Many companies believe that this method billing can be the right choice for their needs. However, to make sure it suits your requirements, you need to take a closer look at how it works.

In this article, you’ll find out what usage-based billing is all about, study its pros and cons, and receive valuable information to help you make an educated decision.

What Is Usage-Based Billing?

Usage-based billing is a billing model built on service consumption. This model involves charging a customer only when they take advantage of the product or service. Usually, usage-based billing software tracks the customer’s use of products and services over a certain time (often a month) and issues an invoice at the end of the period.

Contrary to the flat-fee pricing model that charges the customer a set fee no matter how often or how much they use the service, this billing method allows impressive flexibility.

For example, if a customer of a cellular service provider uses 500 minutes one month and 200 minutes the next, they get different bills for each month. In case, the provider charges a flat fee, the customer would have to pay the same amount every month regardless of the usage.

Today, many SaaS companies (around 45%) and telecom companies take advantage of this billing model thanks to its flexibility and convenience. When one company in the industry uses a flat-fee pricing model and the other one turns to usage billing, many clients change their service providers

Advantages of Usage-Based Billing

This has many advantages over other billing methods, but only if it suits the type of services or products you are offering. Here are a few pros to consider:

Easy to Scale and Grow

When it comes to growing revenue from your products and services, the usage-based approach works the best. Basically, you don’t need to change anything at all. As usage grows, so does revenue.

In flat-fee models, users can’t increase the volume of services without contacting the company, adding features, changing pricing plans, and the like. This slows down the process and keeps clients and customers from using more services.

With usage-based billing, the transformation is smooth. As soon as the usage goes up, so does the revenue.

Easy Conversions

When you are looking for new clients, it’s much easier to convert them by offering a usage-based billing model. A new client who doesn’t know how much of your service or products they are going to use is reluctant to agree to a flat fee or another billing model.

Signing a contract or paying a substantial amount upfront is likely to scare some of your audience away.

This

billing model is highly appealing. The customer never has to pay for more than they can use. Meanwhile, the absence of upfront payments makes your target audience more willing to try your services.

Higher Retention

Usage-based billing contributes to higher customer retention rates. Flexibility coupled with a fair billing approach allows customers to continue working with your company.

While you have an opportunity to change the billing model after you gain customer loyalty, in most cases, it would mean losing the customer. Clients tend to stay with companies that offer usage-based billing options because they create a sense of control over the billing process.

Overall, it can provide many benefits for companies that can implement it for their needs. However, the approach comes with some disadvantages as well.

Disadvantages of Usage-Based Billing

With the right approach, it’s possible to reduce the cons of using this pricing model. However, you still need to be aware of them at all times.

• Unexpected bills – customers who don’t keep track of their usage can eventually face a larger-than-expected bill. This could cause the so-called “sticker shock,” which usually leads to lower satisfaction rates. Some customers even choose to switch to competitors.
• Poor commitment – since usage-based billing doesn’t usually require a contract, a customer can switch to another provider at any time. That’s why companies that offer usage-based billing need to work on commitment strategies.
• Lack of stability– since you don’t know how many products or services customers will use every billing period; it can be hard to predict your income. This could cause problems for smaller businesses and startups.

You can mitigate these disadvantages by adding more transparency to the usage-based billing method and improving your lead generation, conversion, and retention tactics.

Is Usage Based Billing Right for You?

If you are providing products and services that customers aren’t likely to use evenly, you may want to consider usage based billing. To make sure the model works as expected, you need to use the right tools, streamline usage tracking, and be transparent about the costs.

While it’s always possible to switch to another billing model, making usage-billing work for you is a great way to increase conversions and boost revenue.