Glossary definition

What is consumption billing?

Consumption billing is when you charge your customers based on what they consume or use. It can also be called usage billing.

Companies with subscription business models may price consumption of their services differently depending on the service they provide and on how customers perceive their value. Types of consumption may include:

  • Units – this pay-as-you-go model is based on how much your customers use and aligns with the number of users
  • Tiers – this incremental model is based on usage increments, as your customers use more of your service, they are bumped up to the next billing increment or tier
  • Volume – just as it sounds, this is based on usage volume. As your customers hit your set billing thresholds, they are charged based on the highest threshold or tier they reach
  • Minimum – minimum price points based on usage
  • Flat Rate – fixed fee regardless of usage
  • Standard, Volume and Flat Rate Tiered – various price points for ranges of usage
  • Threshold – pricing changes based on usage
  • Rollover – usage allocated not used in one service period is shifted to the next
  • Pay-as-you-go – usage-based pricing, paying as the customers consumes
    • Time-based – pricing set on a fixed time, typical of subscription offers
    • Overage – fees for using more than the allotment

    You may want to provide your customers with a variety of consumption billing options as you evolve your product line and perhaps, prove product-market fit. With the right subscription billing solution, you should be able to analyze your sales and SaaS metrics to continuously monitor your pricing and billing models.

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