Usage-Based Billing Challenges for SaaS Companies
“Over the past five years, there’s been a growing interest in this concept of usage-based pricing, where the customer pays a variable fee each month that’s correlated with the amount that they consume, the product or service.
Now, there are a lot of different usage-based pricing metrics out there. Some companies charge based on the amount of time you use the products in minutes. Others charge based on the number of transactions that you might have in any given months. The API calls some charge based on the number of tokens consumed, like a generative AI application, but the billing for these kinds of usage arrangements can get quite complex. So one of the important things is you’ve got to meter the consumption for each individual customer.
And that might happen centrally in the cloud or in a distributed way in the real world. If you’ve got an IoT application, you might have sensors on manufacturing lines, cameras in distribution centers, GPS trackers on cars and trucks. And so there’s trillions of data points that have got to be brought in from this telemetry and fed into a reading engine, which takes the unit price and multiply it by the quantity consumed to figure out what the customer owes.
There’s also a lot of complex capacity contracts that happen as well. One is called a monthly minimum, where the customer perhaps agrees to pay $1,000 a month to be able to consume up to a certain level. But if they consume more than that, then there’s overage fees with a different rate card that need to be applied. Another popular contract model is called prepaid credits, where the customer has a pretty confident level what they’re going to use over the period of a year.
And so they pre-purchase these credits at a discount and they draw down upon them every month. But that creates a lot of complexity for the billing system, because there’s a whole separate set of accounting and ledgers. They need to track the credit balances for each of these accounts. And in any given billing cycle, figure out whether the customer has enough credits remaining to cover what they consumed or whether they need to be replenished.
Now, all this complexity gets narrowed down to a single line item on the invoice. And that’s where the really hard part starts, which is explaining to the customer how you arrived at that line item charge so that they pay the invoice on time.”
Learn more about Ordway’s Usage-Based Billing Software
