The Benefit of Usage-Based Billing

Enterprise companies are finding new ways to monetize their products and increase revenue through additions to their product catalogs that reflect new billing/pricing models. Traditionally, there are three types of monetization models: one-time, subscription, and consumption/usage. The one-time sales model (ex: a purchase at a local retail outlet) has recently given way to the popular subscription model, evident in the success of companies and offers like Netflix and Adobe Creative Cloud, which offer a recurring, fixed fee for their services. But what if your product/service does not fit into a one-time sale or a traditional subscription?

Consumption, or usage-based billing, is playing an increasingly important role in strategies across multiple industries, particularly where SaaS-based products are popular. In these cases, one-time sales and subscription models fail because customers demand and desire to pay only for what they use or consume.

Recurring revenue success happens when companies understand how to mine assets to monetize “revenue moments”, which are defined as discreet customer events or touch points that can yield profit. The first step requires taking another look at the product catalog to identify how existing products and services can be repackaged to create several new offers.

Out of the three models, the consumption/usage-based model has the widest range of monetization opportunities through these revenue moments. The one-time sale provides exactly what it says (a one-time purchase or transaction), and the subscription model provides a fixed recurring rate regardless of what is or isn’t used. The consumption model, on the other hand, allows for a variety of different options, increasing the number of offerings available to consumers to allow businesses to reach maximum revenue numbers.

When you combine fixed rate subscriptions with flexible usage-based pricing, you create a consumption/usage model that allows you to take advantage of a recurring fee plus the ability to charge for overages to increase revenue based on use or consumption of the product or service. Flexible usage models and automation allow a variety of ways to sell: flat rate usage, standard tiered usage, volume tiered usage, fixed rate per tier usage, high water mark usage, threshold-based usage, etc. Aria sees enterprise organizations using two approaches to increase revenue by adding usage to their product catalog – the pure consumption-based model and the combination model.

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The benefit of a usage-based model is the amount of service combinations you can offer to increase revenue streams. For example, Nokia HERE, the business unit of Nokia responsible for all mapping and location assets, uses a cloud-based system that provides maps in nearly 200 countries to businesses like Garmin, BMW, Amazon, Bing, and others. Nokia HERE’s product catalog includes 96 plans using combinations of 111 services and complex, tiered rate schedules that total over 5,000 rate inputs. That is a LOT of different revenue options and streams coming from one central service.

Additionally, Nokia HERE takes advantage of usage pooling to provide discounts to its usage-based offerings and usage monitoring, which allows the company to proactively inform consumers (and its own internal applications) that the consumer is about to hit a usage-based threshold. This revenue moment is an opportunity to allow consumers the ability to take action and avoid potential usage charges by upgrading their existing plan or cutting back on usage. This “consumer-first” approach can lead to longer Customer Lifetime Value (CLV), an integral component of recurring revenue success.

Another added bonus? Companies can add usage-based offerings to their product catalog at any time. They can adjust existing usage offers as demand grows/changes and make the services available to all customers or limit which ones they’re offered to.

With the usage-based model, customers are not locked into a contract where they pay for products or services they aren’t using – giving them another reason to love your company and continue doing business with you. Customers are increasingly flocking to businesses and services that offer the option for them to only pay for what they use or that include some usage as part of a recurring subscription and only pay for overages.

The usage-based model has numerous benefits, both for the enterprise and the customer alike. More companies are catching on to its popularity and prosperity by reevaluating their product catalog to determine how they can repackage their products and services into usage-based offerings. Remember, a harmonious and healthy relationship between the company and customer builds the foundation for long-term growth and recurring revenue success. Don’t let these revenue moments pass without fully taking advantage of them.

About the Author

Ed Sanville
Ed Sanville, Aria Systems director of professional services center of excellence, is responsible for successful client go-lives including Red Hat, Roku, Pitney Bowes, and many others over more than six years at Aria. Ed has successfully launched clients in professional services for over 15 years at companies including Accenture, Portal Software (acquired by Oracle), and Taleo (acquired by Oracle). Ed currently authors Aria's Implementation Methodology and manages its Center of Excellence.

The Forrester Wave: Subscription Billing Platforms, Q4 2015

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