Usage-based Billing
By DealHub Experts 
Reviewed By Alon Michaeli Updated May 13, 2024
Table of Contents
What is Usage-based Billing?
Usage-based billing (UBB), also known as consumption-based billing and metered billing, is a billing system that charges customers for services based on their actual usage or consumption. This is an attractive alternative to traditional flat-rate pricing plans, as it allows customers to pay for what they use without overspending on services they don’t need
Usage-based billing is used in various industries and applications, such as utilities, telecommunications, software services, and cloud computing. With utilities, the customer may be charged according to the amount of energy or water consumed.
Telecommunications companies may bill based on how many minutes are used or how much data was transferred during a certain period of time. In cloud computing and software services, usage-based billing is usually determined by the amount of memory storage space allocated to the customer.
Synonyms
- Consumption-based billing
- Metered billing
- Use based billing
- UBB
How Usage-Based Billing Works
In metered billing or usage-based billing plans, companies may set different pricing tiers and strategies depending on what type of service they provide and what level of use their customers have.
For example, a mobile data plan may have different tiers depending on how much data is used each month. When the customer reaches a certain amount of data usage per month, they will move up to the next tier and pay more for the additional use.
Cloud storage services also often employ metered billing models where customers are charged depending on the amount of data stored in the cloud.
This pricing model can make it easier to manage costs while ensuring that customers are not overpaying for what they need.
Some software subscription services also offer metered billing plans where customers are charged based on usage levels or features enabled within their accounts.
In addition to offering more flexibility in payment options and budgeting resources, consumption-based billing can also help businesses reduce waste and optimize their delivery process.
By tracking how much each customer uses their service or product, companies can better understand what types of customers require what levels of resources and tailor their delivery process accordingly.
This helps companies save money by providing only what is necessary without over-delivering resources that go unused by customers.
Overall, metered billing provides many advantages for businesses and consumers by offering flexibility in payment models while also helping businesses optimize delivery processes to reduce resources wasted in the over-delivery or under-utilization of services and products.
Implementing Usage-Based Billing
UBB can help businesses better manage their costs while providing flexibility and scalability to their customers.
Instead of buying a pre-priced package, customers can select a pricing model that best meets their needs.
The pricing model will be based on their consumption of resources such as bandwidth or processing power. This allows customers to pay for only what they need and use instead of paying for features they may not use.
The pricing model will normally include two components: the base rate and the usage rate. The base rate is the initial cost for consuming the service, and this fee does not change regardless of how much or how little is used by the customer.
The usage rate is then applied on top of the base rate and is calculated according to how many resources are consumed by the customer in a given period.
The pricing model also allows businesses to adjust pricing according to different pricing tiers or levels, which can be set according to specific criteria such as location, industry type, or user type.
Billing operations can also create discounts that reflect the actual usage patterns of their customers to incentivize them to use more of their service while still offering competitive prices.
Moreover, usage-based billing helps companies avoid unexpected costs associated with traditional pricing models where services have been pre-priced but not fully utilized by customers, resulting in overspending without any real benefit to them.
Furthermore, it helps businesses adjust pricing quickly if there are changes in demand or supply, such as during peak times or when certain services become more popular than others within specific industries or regions.
Pricing Models in Usage-Based Billing
There are several pricing models used in usage-based billing. Below are the most common flexible consumption models:
Pay-As-You-Go
Pay-As-You-Go (PAYG) pricing is a pricing and billing model where customers only pay for what they use. It is helpful for businesses and individuals who want to avoid committing to long-term contracts or being locked into specific services.
PAYG models are usually offered along with subscriptions, where customers can choose what level of service they require based on their budget and usage requirements.
These models allow customers to have greater control over their expenditures as they can adjust what services they pay for when needed. In addition, PAYG enables customers to scale up or down as needed without being locked into any service level with a set price.
Volume Pricing
The concept behind volume pricing is simple: the more customers buy or use, the lower their per-unit cost. This incentivizes customers to buy more and encourages them to increase their order frequency. Businesses can use different formulas to calculate discounts in usage-based billing models.
These formulas may include linear growth, whereby discounts increase proportionately with each additional item purchased, or step-growth, where discounts increase exponentially after reaching specific milestones (such as ordering 100 units).
Businesses should develop an appropriate incentive structure that encourages customers to keep buying without adversely affecting profitability.
Tiered Pricing
Another form of pricing that uses a usage-based billing approach is tiered pricing, which charges different fees based on customer usage tiers.
In this model, customers are grouped into several categories according to their usage level and then charged different rates depending on which tier they belong to.
Tiered billing is commonly used by providers who offer subscription-based services, such as streaming media or hosting plans. Customers who use more resources will be placed into higher tiers and charged higher fees accordingly.
Overage Pricing
Overage pricing works by charging customers an additional fee for exceeding their predetermined allowance or quota of services or products.
Overage pricing, often used in the telecommunications industry, is sometimes referred to as ‘overage charges’ or ‘overage fees.’
In this sector, services and products such as data plans, texting plans, and phone minutes are offered with a set threshold of what customers can use before they incur additional costs.
How to Recognize Revenue in Usage-based Billing
Recognizing revenue in usage-based billing is a critical task for businesses, as it helps ensure accurate accounting and financial reporting. UBB, or metered billing, involves charging customers according to how much of a service or product they use.
As such, revenue recognition requires careful accounting and management to ensure accuracy and compliance with generally accepted accounting principles (GAAP) and ASC-606.
The first step in recognizing revenue is to set up a tracking system for how much each customer has used the services or products purchased, how often they have used them, and how much the total cost will be.
Accounting departments use software that tracks usage or manually enters data into an organized spreadsheet or database.
Once this data is collected, businesses must then determine how much revenue has been earned from each customer’s usage and how often the revenue has been earned.
When setting up the tracking system for UBB, businesses should also consider how long it takes for customers to use their services or products before being billed.
Many businesses bill customers at regular intervals (e.g., monthly) so they know precisely when the revenue needs to be recognized.
Revenue recognition also requires businesses to factor in any discounts applied when charging customers for their services/products (e.g., promotional offers or seasonal discounts).
This helps ensure that the business is properly recognizing all of its revenue and not under-billing customers due to these discounts being applied after the fact.
When establishing how long it takes for a customer’s usage to be billed and recognized as revenue, businesses should factor in any fees associated with collecting payments (e.g., transaction fees).
These fees should be included in the overall cost of providing services/products since they can significantly impact how quickly and accurately businesses recognize revenue.
Finally, revenue recognition for UBB requires companies to keep track of changes in accounting standards over time that may affect how revenues should be reported on financial statements.
This includes following GAAP rules for recording revenues at different stages of service delivery, such as when goods are shipped/delivered versus when customers pay invoices.
Keeping track of changes in accounting standards helps businesses ensure accuracy in their financial statements.
Billing Platforms for Usage-Based Billing
Usage-based billing software platforms are typically composed of several components, such as an analytics engine, a service or product catalog, a payment gateway that processes payments online through various methods like credit cards or PayPal, and finally, a reporting module that provides insights into consumer behaviors and help identify areas for improvement to maximize revenue opportunities or cut costs.
There are several comprehensive platforms available today for businesses looking for an efficient way to manage their billing operations and take advantage of usage-based billing models.
These billing platforms allow enterprises to monitor real-time usage data and quickly generate invoices based on individual customer needs.
They also provide features such as automated payment processing, which ensures that customers pay accurately and on time while providing additional ways to save money through discounts or special offers tailored to specific groups of customers.
The functions of a usage-based billing software are:
- Determine the product or service metric
- Collect and reconcile usage data
- Track and rate usage
- Bill the customer
By implementing usage-based billing systems, businesses gain more control over what goods or services they offer consumers at what price points based on real-time demand patterns and preferences.
Therefore, this software can help businesses optimize resources while increasing profitability.
People Also Ask
What is a usage-based billing example?
There are examples of usage-based billing across many industries. For example, many cellular phone carriers offer plans based on usage, allowing customers to pay for minutes and data according to their individual needs.
This type of billing is also popular in cloud computing environments where businesses can rent computing power on an as-needed basis from providers like Amazon Web Services or Microsoft Azure.
With usage-based pricing, these providers only charge customers based on their actual usage of virtual machines and other services provided by the platform. This ensures that businesses only have to pay for what they consume during any given period.
Usage-based billing is also often seen in industries such as healthcare and energy. For example, hospitals might be billed per patient visit or procedure. Similarly, utility companies may charge customers differently depending on how much water or electricity they use.
What is usage-based billing for SaaS?
Usage-based billing, a prevalent model in SaaS billing, charges customers based on their software use rather than a flat fee or subscription. This method has been gaining popularity due to its scalability and flexibility.
Under this billing model, SaaS vendors typically monitor the customer’s software usage over a specific timeframe, charging them accordingly. This billing process happens on an ongoing basis, keeping pace with the customer’s actual use.
For instance, a customer who spends more time using the software or uses more resources could be charged for additional features or services related to their increased use. The precise rate will be contingent on the vendor’s specific pricing structure.
Unlike the traditional flat-rate or subscription models, usage-based billing aligns costs more closely with the value received from the software, removing the need for long-term commitments or large upfront costs. This aspect of SaaS billing makes it particularly appealing for startups and smaller businesses, who often grapple with cash flow constraints when considering new software solutions.