Internet of things and lockdown-induced developments in electronic payments industry create new challenges for billing software providers. One of the effects is that conventional recurring billing is gradually vacating the floor for usage-based billing.
The concept of usage or consumption-based billing is not a new one. Utility companies already use “smart metering” to charge their customers, say, for electric power. Telecom operators offer “pay-as-you-go” subscription plans.

Here is a commonly-known arrangement, exemplifying consumption-based billing concept.

Example

A telecom operator charges recurring payments in the form of a regular fee for its services. This fee covers a limited amount of text messages, call time, and Internet traffic. What happens if the subscriber exceeds any of these limits? He will be additionally charged. And the price of each minute of calls or gigabyte of content will be different from the subscription-based price.

Subscription billing software with minor adjustments can handle the consumption-based billing system, described in the example. However, IoT platform providers often face much more challenging tasks than telecom businesses. They have to manage multiple services, provided to customers through different devices according to various payment plans in geographies across the globe. These functions go far beyond conventional recurring payment processing. Legacy recurring billing and invoice software would be unable to fulfill them. In such cases, agile approaches, such as usage-based billing, prove more effective.

Benefits and Challenges of Usage-based Billing Model

Nowadays, both choosy IoT consumers and ordinary buyers, unexpectedly struck by pandemic-driven recession, need flexibility more than ever. And usage-based billing grants them this flexibility. Your customer wants to pay only for the actually used amount of the product or service. Moreover, he wants to pay for it only after he decides to use it. If you manage to give him such freedom of choice, you will significantly expand your customer base and the income it brings. At the same time, you will prevent customer churn. In this sense, the benefit of the usage-based billing is two-fold. The model is mutually lucrative for both businesses and their customers.

3 Fundamental Components of the Model Implementation

Pricing strategy In order to capitalize on the benefits of the model, you have to devise a truly agile usage-based pricing strategy. Those who consume larger amount of your product or service should be charged more (like in the example above). At the same time, you can attract large numbers of new customers, who need “just a little” of it. They shouldn’t be scared away by high subscription prices.
Customer intelligence. In order to be able to build an agile pricing model, you need to closely monitor consumer behavior. For example, to outline the category of “heavy users”, you have to know how they spend money and how much they are willing to pay. That is why, advanced customer intelligence mechanisms are an essential component of a viable usage-based billing model.
Usage metering. In order to measure product consumption among users, you need to have clear indicators and units for your product value. Moreover, these indicators and measures should be easily quantifiable and predictable.

All these components (and much more, if you want IoT functionality) should be implemented in your billing system if you want it to be cost-effective. Anyway, it makes sense to start any consumption-based billing project with a good old reality check.

You are welcome to consult our payment specialists for targeted advice on how your specific business can benefit from usage-based billing system implementation.