Metered billing (also referred to as usage-based billing) is a billing structure that charges customers based on their monthly usage of a product or service. This system typically relies on a defined unit of usage that has an assigned dollar price, and it may also include a monthly service charge or base price.
For example, if your business provides an email list verification service, you might charge by the number of email addresses in the list. Or, you could charge a base monthly rate that allows for a certain number of emails to be verified, and offer tiered packages for larger volumes.
Although metered billing has long been the standard for services such as taxis and home utilities like electricity and water, it has only become popular in the software as a service (SaaS) realm more recently. According to a survey conducted by OpenView Partners, 39% of SaaS businesses charged based on metered usage in 2021, which is up 16% from 2014.
It simply makes sense—customers pay only for what they use, making them more likely to purchase. And, if your potential customers are often smaller businesses or startups, this model allows them to start small by trialing the software, and then presents a seamless path to expansion in which you share in the success of your customers.
HubSpot learned about this seemingly effortless route to expansion when it switched to metered billing over a decade ago. Its net revenue retention (NRR) jumped from 70% to nearly 100% as a result, without impacting new customer acquisition.
Sounds like a dream come true, right?
Before we get too carried away, note that metered billing isn’t necessarily suitable for every SaaS business. If you have a complicated product that isn’t easily broken down into units of usage, it may not be the right choice. But, especially if your business’s overhead costs increase in direct proportion to the level of customer usage, metered billing can be an optimal solution.
So, how do you implement a successful usage-based billing structure?
Begin with these eight best practices.
1. Clearly define usage tiers
First, you need to ensure your customers understand your metered billing structure and know what to expect, whether you’re transitioning existing customers from a different pricing model or onboarding new ones straight into metered billing.
The best place to start is by defining your usage tiers in crystal-clear language. Establish your usage-based value metric for your customers—for example, a music streaming service may charge by the hour of music streamed, the number of songs played, etc., while a credit card processor may bill as a percentage of each transaction or on a per-transaction basis.
You may also wish to simplify the pricing scheme and give your customers some leeway by creating tiers that encompass ranges of usage.
Kyle Poyar of OpenView Partners recommends, “There are many usage metrics you could use in your pricing. Make sure the one you choose grows consistently across your customers, helps you communicate your product’s value, and can be predictable.”
By setting the expectation from the beginning and providing clear information, you can avoid angry customers at the end of the billing period who might have racked up a huge bill because they didn’t understand the usage-based pricing system.
2. Offer volume discounts and other incentives
Offering rewards to loyal customers in the form of volume discounts and other incentives can encourage increased usage and ultimately create power users.
You may also wish to introduce new features in free or lower paid tiers as GitLab does—its new offerings typically “land in the free or lower paid-tier to spur adoption, encourage contributions and gain feedback from the wider user base. Over time, the team can then add more features[…]that will be placed in the paid-tiers.”
Providing this type of value leads to happy customers, and happy customers stick around. Since acquiring new customers often costs 5X as much as retaining customers, building a loyal customer base through perks, incentives, and high-value products is essential.
3. Provide usage alerts
Implement a system that automatically notifies customers when they are approaching their usage limits, whether that is:
- a limit imposed by the tier the customer has signed up for, or
- a usage limit they set for themselves to keep track of their spending.
That way, customers aren’t surprised at the end of the billing period when they find a huge overage fee on their bill.
This leads us to…
4. Have a clear overage policy
In addition to your usage tiers and value metric, establish and share an overage policy with your customers. Let them know what the cost per unit will be for overage usage and whether a fee will be assessed.
Again, this helps you avoid dealing with disgruntled customers at the end of the billing cycle.
5. Integrate your product with your billing system
SaaS billing is already fairly complex even without throwing the metered pricing model into the mix—especially if you’re relying on manual billing processes. Fortunately, modern billing software can “talk” directly to your software product to simplify the whole process.
Integrating an agile billing solution to your tech stack can save your finance team weeks of work, huge headaches, and pesky manual errors. The billing software can calculate precisely metered charges based on customers’ exact usage levels—no manual number-crunching necessary.
6. Make it easy to track usage
No one likes to be kept in the dark, especially about their usage and their upcoming bill amount. Eliminate this pain point by providing customers with a user-friendly portal or dashboard that provides real-time usage data, their billing history, and information about their next bill.
7. Offer self-service options
Once you’ve got the portal set up, you can add self-service options for customers such as the ability to upgrade or downgrade their plans or add or remove usage limits. This not only empowers the customer to access information and make changes quickly and easily, but it can help cut your operating costs and allow your business to operate at peak efficiency.
Major win-win. We love those!
8. Use data to optimize pricing
We’ve said it once, and we’ll say it a hundred more times: data is king. It’s especially useful when you’re determining your pricing structure and as you continually evaluate it over time since it can help you identify which customers are most profitable.
Andrew Rivers, Director at 345 Technology, reinforces the importance of data for the metered billing model, saying, “[A] well-designed billing system for SaaS applications needs to be set up for the typical user – but should also work to bill heavy users so that all users can be served and be profitable for the platform operator. Getting the balance right in order to serve all users well is essentially a data problem, where the requirement is to record all the jobs a client requests and to measure the resources required to run each job.”
Where do you get this data? Choose a usage-based billing platform (that integrates with your product as per point #5) that provides you with accurate, real-time data you can use to inform and optimize your pricing.
Embark on the path to seamless expansion with metered billing
Usage-based billing isn’t a magical key to success—it’s essential to evaluate honestly whether it’s a good fit for your business and if so, to follow these eight best practices to ensure that you nail the implementation. A metered billing structure offers four key advantages:
- it’s fairer for your customers,
- can lead to a higher customer lifetime value (CLV),
- provides unique insight into customer behavior and usage data, and
- empowers your customers to vary their usage and spending as necessary.
Plus, since you’ll share in your customers’ success as they grow, you can benefit from that effortless expansion path. That’s certainly worth the effort of experimenting with your pricing structure!