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What is usage-based billing?

Glossary definition

What is usage-based billing?

Usage-based billing, or consumption-based billing, bills customers for what they use or consume. These business models provide SaaS companies the flexibility to price and bundle their products based on trends they see in the purchasing and demand for their products and services.

Much to the delight of customers, usage pricing ensures they only pay for what they use. As such, usage-based billing provides a way for you to gain new customers and grow with them as you provide the opportunity for them to try your product and keep the costs low, if not free, as they gradually adapt and increase the usage of your SaaS product. As they rely more and more on the value derived, their willingness to pay increases. In fact, TechCrunch says that SaaS companies leveraging usage-based billing as their pricing models are some of the fastest-growing software businesses.

The most common usage-based billing scenarios include:

  • Variable Usages (daily/weekly/monthly/quarterly/annually cadence)
  • Recurring Usages (monthly/quarterly/annually cadence)
  • Rollover usages (per invoice / per renewal)
  • Reset of usages (per invoice / per renewal)
  • Minimum Commitment Contracts (monthly/quarterly/annually cadence)
  • Commitments plus overages (monthly/quarterly/annually cadence)
  • Pre-paid Usages

You want to capture each customer’s usage of your SaaS product and flow this data into your billing system. An integrated billing and financial management system automates this data flow, improving billing accuracy, regardless of the numerous complex billing scenarios you may have. Revenue recognition reporting requirements, as part of ASC 606 and IFRS 15, can grow in complexity as billing scenarios increase. This can make market growth nearly unsustainable for SaaS companies struggling with worksheets and fragile formulas or multiple systems with import and export processes.

Analyzing usage-based billing metrics will help your Sales teams isolate cross-sell and up-sell opportunities to increase Customer Lifetime Value (CLTV) and other SaaS metrics. Your Customer Success teams can use the data to recognize accounts with decreased usage and reach out to them with remedial action, helping reduce churn rates. This is important as the KeyBanc Capital Markets Annual SaaS Survey demonstrates, upsell and expansions have around a 60% reduced customer acquisition cost (CAC).

Throwing artificial intelligence (AI) into all of this adds a level of prediction that helps pinpoint issues and opportunities throughout the customer lifecycle pertaining to the usage of your products.

SaaS companies can analyze product usage and services engagement to build more profitable pricing tiers while providing a better customer experience at all points of the customer lifecycle.

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