December 14, 2020
Written by
James Davis
Written by James Davis
Senior Technical Writer at United Thinkers

Author of the Paylosophy blog, a veteran writer, and a stock analyst with extensive knowledge and experience in the financial services industry that allows me to cover the latest payment industry news, developments, and insights. Read more

Reviewed by
Kathrine Pensatori
Product Specialist at United Thinkers

Product specialist with more than 10 years of experience in the Payment Processing Industry. I help payment facilitators and PSPs solve their various payment processing issues. Read more

From Recurring Billing to Usage-Based Billing

Key Takeaways:

It looks like we are witnessing a new phase of the usage-based billing evolution. Legacy billing software is no longer able to accommodate all the functions its users (and their customers) need. As a result, subscription billing software has to evolve into something more sophisticated. Traditional recurring payment processing and invoice software are supposed to bill the buyers of a subscription-based service or product at regular time intervals. However, consumers, hit by unexpected lockdowns and recession, started counting their money more carefully. Now they want to pay only for what they are really consuming.

So, billing models based on ordinary recurring payments no longer work so well as before. At the same time, the progress of the internet of things has induced the need for more complex payment functionality. IoT platform providers need to handle multiple recurring and one-time payments, made by millions of customers using different devices worldwide, around the clock. In some cases, implementation of a usage-based billing model seems to be the correct response to these challenges.

Why is this Billing Model so Popular?

The cloud usage-based billing model is a symbiotic arrangement, beneficial for both business and their customers. Usage or cloud usage based billing technique is largely based on the “smart metering” approach applied by utility companies. Or on “pay-as-you-go” subscription management tactics.

If a company acts smart, it can increase its revenues, even under “bearish” economic realities. It turns out that what customers need most is not some product or service, but flexibility. Freedom of choice: “to buy or not to buy”, as Hamlet put it. A business, that is able to grant this freedom to its customers, wins. The opportunity to pay just for actual consumption amounts attracts new customers. In addition to that, the business can design innovative agile pricing models, incorporating one-time and recurring payments. Such hybrid pricing creates additional benefits for the business and incentives for its customers. 

Payment Gateway Project

How to Implement a Usage-Based Billing Model

According to consumption-based billing experts, the implementation of the model includes 4 conceptual phases.

  • Determining proper indicators and units of consumption and value. They will allow you to devise a flexible usage-based pricing model.
  • Aggregating user data from all your systems.
  • Implementation of advanced consumer intelligence mechanisms. They will allow you to track usage and take it into account in your pricing model.
  • Charging proper amounts at the proper time (for each customer).

As you can see, all these tasks are quite challenging. They require lots of both analytical and development efforts.
Moreover, if you are an IoT business, you must be ready to manage multiple customer devices, currencies, payment plans, and types across the globe.
However, if you manage to understand customer behavior patterns and develop proper consumption-based pricing models, you will get significant benefits.

Don’t hesitate to contact our payment experts. They will help you analyze all the pros and cons of usage-based billing model implementation in your business case.

Useful articles to help you: