If you look hard enough, you can find instances of usage-based billing in nearly every facet of life. Homeowners pay for water, electricity, cleaning, and lawn services based on how much they use. Yoga enthusiasts might choose to buy a class punch card and pay only for the classes they use. Even some daycare centers let you pay for usage by the day or even the hour.
And though flat-fee subscription billing has grown by leaps and bounds in recent years, there’s still a case to be made for usage-based billing. A business may need to bill customers on a monthly basis or quarterly basis in varying amounts - depending on how much of a product or service the customer uses.
If you’re thinking about usage-based billing and whether or not it applies to your business model, consider these 3 questions before you make a decision.
Do your customers prefer to pay for constant access to a product or service, or only for what they use?
Think about a couple of “constant access” models to start - your cable provider, for instance. If you still have cable, you probably pay a monthly fee for online access, rather than access each time you connect. Part of what you are paying for is the security of being able to connect at any time. Another good one is a gym membership. When you join a gym with a monthly subscription fee, you’re paying for access to that gym at all the posted hours, regardless of when you use them.
Usage-based billing isn’t a good fit for either of these models - at least, not until the cable companies allow you to pay only for the channels you want to watch. But it is a good fit for customers who prefer to pay only for what they use.
Would you be happy to pay for more electricity or water than you actually use? Probably not. And instead of a gym membership, you might prefer to go to a cycling or pilates studio. Do you want to pay for more cycling or pilates classes than you attended? Not unless you are gifting a class to a friend or family member.
That’s not to say businesses can’t get creative and flip things on their head. That cycling studio could create a membership fee that functions just like a gym membership, with unlimited access to all classes. And the cable company might experiment with a fixed + variable billing model - the fixed part being internet access, and the variable part being the number of channels you buy.
But for the most part, the best way to decide if usage-based billing works is to classify your products and services as “constant access” or “pay per use”.
What’s your tolerance level for a wide variance in monthly revenue?
One of the great things about fixed subscription billing is predictability. As a business owner, you know that with a certain number of subscriptions per month, you’ll have a set amount of cash coming in. That’s incredibly reassuring in a world of uncertainty.
Usage-based billing has the opposite effect. With customers paying only for what they use, it’s difficult to predict how much cash you’ll bring in each month. Historical data (if you have it) can help give you a directional estimate, but it’s no guarantee.
When thinking about potential swings in cash flow, it’s also important to consider business expenses. Maybe your business has very few expenses and can tolerate variable revenues, in exchange for being able to charge based on usage. Or you might have high overhead like rent, servers, store staff, and the like that make usage-based billing a risky prospect.
One way to give yourself a feel for usage-based billing is to look back at a year’s worth of customer transactions. Instead of the previous billing method, decide on what each unit is, how much you’ll charge, and then recalculate all the transactions. Break out the recalculated revenues by month and compare them to monthly expenses.
Do you have the infrastructure in place to implement usage-based billing?
Let’s say your customers prefer to pay per use, you’re comfortable with varying cash flow, and the financial outlook for usage-based billing is positive. Do you have the internal systems to support it? An electric company has meters that record each customer’s electricity usage, and feed that data back into their billing system. You need a similar setup for the products and services you sell.
Make sure you can easily record and track products and services used, and your billing and invoicing system allows you to directly connect to these usage records. Online invoicing platforms like Invoiced offer automation for usage-based billing. Usage records are recorded on each invoice, and the next billing cycle triggers a new invoice to each customer.
Want to know how Invoiced supports a robust usage-based billing strategy? Contact us for demo to learn more.