What Is Metered Billing? 6 Things To Consider Before You Make The Switch

~ 13 min read | September 11

Subscription billing can be incredibly useful for simplifying the customer buying process, but it can cause a huge issue for SaaS companies whose customer usage varies.

Picture this…

You’re a cloud computing service with a number of enterprise-level customers who pay a monthly subscription fee. In certain months, there are four or five of your customers whose usage skyrockets, and this has a major impact on your operating costs.

You simply can’t predict that. And you definitely can’t control it.

After all, they are paying their subscription cost with an uncapped agreement.

If this situation sounds all too familiar, then your company could be a prime candidate for adopting a metered billing pricing structure.

It’s not a perfect fit for every business, though. And there are a few key factors to consider before you jump straight into metered billing.

This guide will give you a complete breakdown of what metered billing is, highlight the deciding factors, and help you make a more informed decision about whether metered billing is the right choice for your company.

This is a comprehensive resource. To navigate straight to the section which interests you most, click the link below:

What Is Metered Billing?
Examples of Metered Billing
4 Benefits Of Metered Billing
Metered Billing Benefit #1: It’s Fairer for Your Clients
Metered Billing Benefit #2: Leads to Higher Customer Lifetime Value
Metered Billing Benefit #3: Offers Insights Into Customer Behavior and Usage
Metered Billing Benefit #4: It Puts Power in the Hands of Clients
2 Challenges Presented By Usage-Based Pricing
Usage-Based Pricing Challenge #1: Choosing The Right Pricing Model
Usage-Based Pricing Challenge #2: Unpredictable Revenue
Conclusion

What Is Metered Billing?

Where subscription-based billing can mean single users get more than their fair share of usage, driving your overheads up and causing headaches for your company, metered billing can be a more obvious, value-based approach.

Metered billing is a billing structure that charges users based on their monthly usage, such as the amount of storage space they use, or the number of API calls completed within that month.

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Metering billing is relevant because it enables companies to more accurately and more fairly price their services, rather than charging an arbitrary monthly cost.

Typically, metered billing (also known as usage-based billing) incorporates a unit of usage (I.e., for a VoIP phone company, this may be per minute) and charges a fixed dollar amount per unit.

Of course, metered billing may not be appropriate for all business types.

More complex SaaS platforms with multiple products and features may struggle to break their service down into these bite-sized chunks.

A good rule of thumb is this: if your company’s overheads or running costs increase in direct relation to customer usage, then you could be a prime candidate for switching to metered billing.

Examples of Metered Billing

It’s worth noting that metered billing is not an entirely new phenomenon.

We’re more than used to the concept in the B2C space, with most power providers taking a usage-based approach (though they may also incorporate a fixed daily charge) to your utility bill.

Ridesharing companies such as Lyft also commonly use metered billing, where the user pays based on the number of miles traveled.

In the B2B SaaS world, companies that incorporate usage billing include cloud computing, APIs, and VoIP and communications platforms like Twilio.

4 Benefits Of Metered Billing

Metered billing can be an incredibly powerful and worthwhile avenue to explore if your company is a good fit for the model.

Here are a few ways your business can benefit from implementing a usage billing pricing model.

Metered Billing Benefit #1: It’s Fairer for Your Clients

A major benefit of using metered pricing is the perceived fairness of the pricing model.

That’s because your customers can see the specific value of their actions and consumption, knowing that the more they use your product or service, the more they’ll pay.

We take comfort in knowing that when we jump in a taxi, we’ll be paying for a fare based on the distance of our trip. If you’ve ever had a cab driver attempt to negotiate a fixed fare, you’ll understand the feeling that you may not be getting a fair deal.

Using an equitable pricing model might seem obviously positive, but there are a few hidden benefits to this approach as well.

One of which is the impact on customer retention rates.

It goes without saying that a fair and just pricing model leaves customers feeling happier. But when 68% of customers leave a brand because of poor customer service, you can see how increasing customer happiness can impact your potential earnings.

Deciding between subscription billing and metered billing can mean big changes for established SaaS companies, but it’s even more vital for startups.

Nearly 20% of startups fail purely as a result of choosing the wrong pricing model!

That’s because if you’ve adopted an inappropriate pricing model, even if the price-point is correct, it becomes very difficult for customers to understand the value that your company offers.

MessageBird, an SMS, Voice, and Chat API, is a great example of a growing SaaS company that got their pricing right from the outset, opting for metered billing over subscription invoicing for their API integrations.

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Metered Billing Benefit #2: Leads to Higher Customer Lifetime Value

If there’s one metric marketing executives love to track (and hopefully drive upwards), it’s CLV. If your company is a good fit for metered billing, then you could also be looking forward to increases in CLV.

Those increases don’t simply come as a result of customers paying more; they’re a consequence of improved data and reporting on customer behavior.

In order to accurately invoice customers for their usage, you’ll need to be able to track and report on that usage. You’ll probably want to be able to do that in real-time too, so your customers know exactly where they’re at during the month.

As a result, you’ll have access to in-depth, time-specific usage data that tells you exactly when and in what quantities your customers are using your product or service.

If you’re a savvy marketer, you can then use the information to further influence customer behaviors by creating targeted guides and marketing campaigns that see your customers getting even more value out of your product.

Here’s an example: It’s not uncommon for customers to leave certain aspects of a given software untouched, purely because they don’t understand them properly.

By tracking usage patterns and identifying trends in non-usage, you can create marketing collateral to educate such clients and get them using more features of your product, which you can in turn invoice for.

And because the CLV calculation uses Average Order Amount (AOA), when you lift the AOA you consequently improve your CLV.

Formula for CLV (Customer Lifetime Value): MT x AOA x AGM x ACR
MTNumber of Monthly Transactions
AOAAverage Order Amount
AGMAverage Gross Margin
ACRAverage Customer Retention (in Months)

Metered Billing Benefit #3: Offers Insights Into Customer Behavior and Usage

The insights that a metered billing model can offer your business can improve more than just customer lifetime value; they can help you to understand the need for potential future developments.

75% of software providers rely on customers’ usage and behavioral analytics to inform major product developments, but the challenge can often be getting accurate data.

A metered billing system means you need to be able to track a customer’s actual usage in real-time, which can give your product development additional valuable insights into the way your customers are using your product, beyond simply login times and frequencies.

Not only this, but because you’re able to track this in real-time, you can also display it in real-time.

Giving your customers an accurate and timely usage record allows them to feel more empowered and ensures they can accurately predict their end of month charge throughout the billing cycle.

This will ensure no nasty surprises come the end of the month, and will contribute to overall customer happiness levels and retention rates.

There’s an added benefit for your sales team, too, as they may also be able to access real-time customer usage and influence potential additional usage.

This data could trigger a friendly call to let them know their usage has been high this month, or an education-focused email campaign, improving engagement.

Metered Billing Benefit #4: It Puts Power in the Hands of Clients

Though in general, customers have come to terms with the subscription plan, people still aren’t huge fans of being locked into contracts.

That’s exactly why companies like internet service providers always have to throw something in for free to ‘sweeten the deal’, and to distract from the fact that you’re making a two-year commitment.

By implementing a metered usage billing method, companies can put the power back in the hands of the customer, as it were.

Interestingly, this has a number of benefits not only for customers, but for businesses as well.

The most notable of which is the potential revenue gains to be had when customers are (or at least feel) more empowered.

Amazon Web Services, an on-demand cloud computing platform, achieved nearly 34% year on year growth by adopting a methodology that ensured customer empowerment.

Cloud Service ProviderQ4 2019 (US$ billion)Q4 2019 Market ShareQ4 2018 (US$ billion)Q4 2018 Market ShareAnnual Growth
AWS9.832.4%7.333.4%33.2%
Microsoft Azure5.317.6%3.314.9%62.3%
Google Cloud1.86.0%1.14.9%67.6%
Alibaba Cloud1.65.4%1.04.4%71.1%
Others11.638.5%9.342.4524.4%

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If you’re planning on adopting metered billing as your only form of charge, you’ll also be making the decision-making process easier for clients.

SaaS pricing can be pretty overwhelming, especially when there are several different options for company size, billing period, and payment types. So much so that as many 39% of customers leave websites because they find them too overwhelming.

2 Challenges Presented By Usage-Based Pricing

Metered billing isn’t appropriate for every company, and there can be a number of reasons why a flat rate recurring charge might actually be a better option, depending on your business model.

Let’s take a look at two challenges that usage-based payment can present, and how they might impact your company’s future.

Usage-Based Pricing Challenge #1: Choosing The Right Pricing Model

Metered billing tends not to work if you aren’t able to accurately pinpoint specific tasks that users regularly undertake, and then assign a relevant dollar amount to them.

For some companies, your product may simply be too complex for a metered billing charge to make sense.

Consider a sales CRM such as Pipedrive.

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Their software simply has too many features to implement metered billing effectively. They’d need to assign charges to each individual action, which would be incredibly complex. This is why they’ve opted for another common SaaS pricing model: subscription billing.

For SaaS companies like Pipedrive, this is a more common approach, with only 38% of SaaS platforms opting for usage billing models.

You’ll also need to examine your current customers’ actual usage before opting to implement a meter billing model.

If their usage doesn’t vary much month on month, then there may not be any real benefit in doing metered billing.

Consider the fact that you’ll need to convince your customers that this is a worthwhile change, as you may be met with some reluctance. If you aren’t able to accurately describe how this pricing model change benefits them, then they probably aren’t going to want to switch.

At worst, you could see an increase in churn.

The best and most accurate way to determine whether usage-based pricing is an appropriate model for your service is to consider your company costs.

If your costs are fixed, that is, they don’t change regardless of customer usage quantities, then it might not be a good fit.

If, however, your overheads are directly impacted by increases in customer usage, and you find yourself with higher costs in months that are associated with high usage amounts, then metered billing could be a smart option, especially for managing profit margins.

Cloud computing, API, cloud storage, and data companies tend to be good fits for metered billing pricing models.

Take Clearbit, for example. Their service offering is perfect for usage-based pricing.

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To make things a bit simpler for their customers, Clearbit offers a base plan with a fixed number of API requests on a recurring fee, with each overage charged using metered billing.

Usage-Based Pricing Challenge #2: Unpredictable Revenue

A major benefit of subscription-based billing is that it enables you to accurately predict your monthly revenue based on the number of active subscriptions you have.

With metered billing, this is a bit more difficult.

Most SaaS companies use the following data to predict their future revenues:

Revenues from existing contracts
Revenues from renewal contracts
Revenues from new contracts (projected)

Though this information can still be used to forecast revenue when using metered billing, it is understandably more volatile, and therefore potentially less accurate.

That’s why it’s important to understand whether your overheads fluctuate with usage.

If they are fixed, and you switch to metered billing, you’ll still have the same outgoings even when usage drops. Of course, this also means you have the potential of experiencing months of high usage where your outgoings are relatively low, but you’re taking a risk here.

On the other hand, if your company’s overheads are directly tied to total customer usage, then your associated costs will fluctuate with that usage, so you know that when outgoings are high, revenue will also be.

If you’re savvy, though, you can counteract this and make your revenue more predictable.

Rather than opting for an all-out usage-based billing structure, which essentially has a $0 monthly minimum and no guaranteed revenue for your business, you could implement a hybrid pricing model.

Hybrid models integrate subscription billing with metered billing, where customers pay a base rate or minimum charge each month for access to a certain number of features or usage instances, paying over and above that for each additional instance.

In the above example, Clearbit offers customers 1,000 API calls per month for a fixed charge, with each API call after that charged individually.

Another solution is to offer both options.

Mailgun, a transactional email API service, allows users to choose from monthly packages or a Pay As You Go plan, which ensures customers only pay for what they send.

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Conclusion

So, are you ready to embrace metered billing and transform your SaaS customer invoicing processes?

If you are, then you’ll be soon reaping the benefits of fairer pricing, higher CLV, better insights into customer behavior, and more empowered customers.

Chargebee’s subscription billing software is designed to help you grow and retain revenue, mitigate churn, and scale your B2B SaaS.

Learn more about Chargebee’s metered billing here, or schedule a free demo!

 

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Bhargavi P

Product Marketer at Chargebee. Coffee Addict, Music Explorer, Avid Reader, Poet.