What is usage-based billing?

Explaining the new billing paradigm and what it means for you

When you’re thirsty, you might go over to a faucet and turn on the water, which your house’s water meter conveniently tracks. At the end of the month, the water company bills based on the usage data from your water meter. The process is frictionless, and it makes sense–for the consumer and the water company.

This convenience gets to the heart of usage-based billing: pricing and payments based upon communicating usage data instead of a fixed price in dollars and cents. Until recently, most SaaS businesses didn’t have access to the metering tools required to implement usage-based monetization–even when customers prefered it.

Think about it through the lens of an Uber or Lyft customer. When passengers ride in their drivers’ cars to their destination, the ride-sharing apps conveniently track the distance and duration of their trips. Now, customers expect the same convenience from SaaS.

“Firms are shifting from one-time perpetual sales or fixed monthly subscriptions to consumption models that blend one time, subscription, and usage-based billing.” – Forrester Wave

The industry’s shift toward usage-based billing may even eclipse the decade-long move toward fixed subscriptions. It isn’t all sunshine and roses, however, as you consider the difficulties SaaS companies face in responding to this new trend in customer demand.

Challenges of usage-based billing

For one, you can’t just install an equivalent “water meter” in every business. Building a usage-based billing system requires time and money, and often involves revaluating how and where your company provides value.

In SaaS, for example, it can take a developer weeks or months to build a way to track usage data and bill for it. I would know–my team and I did that for more than 25 revenue-generating companies at Sproutbox. That was time our business wasn’t able to focus on building our core products, and it resulted in delays getting to market. Even worse, anytime we wanted to change pricing, developers would have to spend hours in our pricing meetings.

Perks of usage-based billing

A usage-based billing platform isolates pricing from your code base and empowers you to flexibility change pricing. Executives and marketing leaders can customize and test pricing in real-time without burdening development teams or waiting on releases.

Building a billing system centered around usage data is also significantly easier than traditional billing and payment systems. It’s simple–you just outline what items the development team needs to track, and the usage-based billing system does the rest. Pricing, payment processing, collections, customer communication, revenue optimization, and SaaS reporting all come out of the box.

Usage-based billing also allows businesses to help identify where they provide value and match variable costs with variable pricing. This can be a huge help to new companies, allowing them to let initial usage tracking data influence pricing decisions from day one.

Consumers and billing

Saving time, saving money, and adding flexibility to your pricing is great, but above all, one of the biggest benefits of making the switch to usage-based billing is that customers will love you for it. They are the ones driving this billing evolution because it means they get fair, transparent pricing that’s more aligned with the value they receive.

And that’s how billing should be.

About Cheddar

Billing built for developers. Using a unique usage-based approach to billing, we cut the time it takes to build monetization into a product by as much as 90%. No matter if your billing model is metered, one-time, subscription, or some combination, Cheddar allows you to focus on building awesome products, not billing for them. Sign-up for a free developer account.