Usage-based pricing models offer SaaS and cloud companies a lot of flexibility. There are far more options for discounting, contract structures, and payment plans with consumption-based pricing than there for traditional subscription models. However, the flexibility comes at a cost. Usage models introduce a lot of complexity to a company’s operations. Calculating invoice line items, forecasting quarterly revenue, and negotiating renewals become a lot more challenging. Education employees about the nuances of the model can help to alleviate some of the complexity. However, it’s not just the employees that need the training. Customers need to be educated too.
Some of the customer education occurs during the initial sale process. However, in most cases there will be a continual need to educate the customers throughout the lifecycle. Much of the responsibility for educating the customer falls on the customer success and accounts receivable teams. These are the two groups that get inquiries when customers don’t understand their bill.
Top 6 Accounts Receivable Challenges with Usage-Based Billing
1) Monthly Minimums
Monthly minimums is one of the more popular capacity contract structures for usage-based pricing. In these contract structures, the customer commits to pay a minimum monthly fee in exchange for a discount on usage-based pricing. The customer will be billed for either 1) the charges associated with their actual usage or 2) the monthly minimum fee – whichever is higher. In both scenarios, the monthly invoice may create some confusion.
If there is an unusually low usage month, the customer may question why they are paying such a high dollar amount for a service that was hardly used.
If there is an unusually high usage month, the customer may question why the invoiced amount has increased so much since the last payment.
2) Overage Fees
Customers are notorious for questioning and disputing overage fees no matter how clearly the thresholds are communicated during the sales process or in the user experience. Invoices with overage fees will result in an above average level of inquiries to the AR department or customer success, particularly if the overage fees are at a premium rate compared to normal usage pricing.
3) Zero Dollar Invoices
Prepaid credits is another one of the more popular capacity contract agreements for usage-based pricing. Customers agree to commit to a certain level of usage in exchange for a volume discount. Each month, during the billing process the customer draws down against their prepaid credit balance.
Customers that have paid in advance for prepaid usage typically will not need to pay until they deplete the balance of credits in their account. However, some SaaS and cloud providers may send invoices that show the balance of credits remaining with a $0 line item.
Zero-dollar invoices theoretically should result in the fewest number of inquiries. Unfortunately, however, the opposite is often the case as customers want to understand why they received a bill if there is nothing to pay.
4) Auto-Replenishment (of Prepaid Usage)
Some SaaS and cloud providers offer customers the option to automatically replenish their prepaid usage balance when it falls to zero or below a certain threshold.
Low dollar value purchases these replenishment transactions might be processed on a credit card. As a result, there is an unexpected charge on the monthly card statement, which creates confusion.
High dollar orders will likely generate an invoice automatically that is routed to the customer’s AP department. With no associated new contract or purchase order these auto-replenishment invoices often create confusion within the payables team.
5) Expired Prepaid Credits
Prepaid credits typically have an expiration date attached to them. The expiration policy typically has two goals. First, SaaS and cloud providers want to incentivize customers to consume the service. Second, the finance department wants a definitive timeframe in which they will be able to recognize the revenue associated with the prepaid credits.
Customers may not be closely tracking upcoming expiration dates, particularly if the deadlines are not highlighted on the invoice or account statement. As a result, users may question why they are being billed for new usage when there were unused credits that were paid for in advance.
6) Ineligible Spend
Spend commitments with true ups are another form of capacity contract for usage-based pricing. In these agreements, customers commit to a certain dollar level of spending over the life of the contract in exchange for a volume discount. Spend commitments may or may not require any upfront payment. However, at the end of the contract term (or spend period), the customer may be invoiced if they fell short of their obligations.
With both spend commitments and monthly minimum contracts, the SaaS provider often categorize scertain products as ineligible towards satisfying their obligations. Products with lower gross margins or that are non-recurring in nature are often considered ineligible. Procurement analysts that are tracking the spend in their own spreadsheet may question why their numbers don’t reconcile with those of the vendor and why the spend from these ineligible products is not being credited towards the targets.
How to Reduce Inquiries from Invoices with Usage-Based Pricing
To mitigate the risk of delayed payment and to reduce the email volume to accounting organizations, many SaaS and cloud providers provide customers with more detailed documentation and resources to educate them on billing policies and invoice calculations.
In addition to the monthly invoice, some SaaS and cloud providers will also share detailed usage records with the specifics of each individual transaction processed. Others will provide statements, particularly for customers with prepaid balances or spend commitments that need to be tracked closely. More extensive online documentation and FAQs are typically posted online as well to help customers understand the fine print of billing policies and math behind the calculations.
