Usage-Based Billing for Monthly Minimum Contracts

In scenarios where the customer is able to confidently forecast a minimum level of usage that they will need each month, a monthly minimum contract can be an attractive option. With the monthly minimum contract, the customer agrees to a commit to a baseline level of spend in exchange for a discounted price.

There is risk to the customer if the forecast usage proves to be lower than anticipated. If the customer uses less than the forecasted amount, they will be invoiced for the monthly minimum. If the customer uses greater than the forecasted amount, they are invoiced for their actual usage (which is effectively the monthly minimum plus overage fees).

Let’s review the process for how the rating engine computes charges for contracts with monthly minimums in more detail with examples.

Step 1

Calculate the Actual Monthly Spend

First the rating engine will calculate the actual monthly spend for the customer during the period. To arrive at the charges, the billable usage quantity will be multiplied by the applicable price for each product. The sub-totals for each product are then summed up to arrive at a total, actual monthly spend.

Suppose for example that a customer agrees to a monthly minimum spend of $10,000 for products A and B. The customer uses 1,000 units of product A, which is priced at $2 per unit and 5,000 units of product B, which is priced at $1 per unit.

The actual monthly spend would equal

• Product A = 1000 units x $2/unit = $2,000
• Product B = 5000 units x $1/unit = $5,000
• Total = $2000 + $5000 = $7,000

Note: In some cases, certain products may be ineligible to be included in the monthly spend totals. These ineligible product should be subtracted from the monthly spend total.

Step 2

Compare Actual Spend to Monthly Minimum

Next, the actual monthly spend will be compared to the contracted monthly minimum.  If the actual spend is more than the contracted minimum, then an overage has occurred and the actual spend will be invoiced.  If the actual spend is less than the contracted minimum, then the minimum will be invoiced.  Some SaaS and cloud providers might price the overage usage at a different rate which will require additional calculations.

Continuing the example from above, the customer had committed to a monthly minimum spend of $10,000, which is more than the $7,000 determined from the calculations.  As a result, the minimum $10,000 will be invoiced.