What is metered billing?

Metered billing is a flexible payment model that revolves around service-based payments. As per the concept, in metered billing, consumers must pay according to what they consume of a service. This is just as you pay for electricity or water consumption. Metered billing involves customer subscriptions to a package that involves a base amount for a certain amount of usage. For the usage of any additional unit over the threshold, they must pay an additional fee. This billing is based on a predefined unit or metric for measurement of consumption of services.

The concept of metered billing is generally more suited to subscription-based businesses where a single consumer uses more and increases the payment due. Metered billing is better in terms of flexibility and agility then pay as you go models. The pay as you consume allows them to bear the fluctuating demand and supply of that service and do not have to worry about having wasted money on unused resources. Metered billing is a win-win for the consumer and the service provider; however, it requires a proper strategy for accurate implementation.

Example of metered billing

Cloud-based applications are examples of metered billing. They are designed to calculate charges relying on how much of a service a customer uses. For a cloud storage service, a customer can use 15GB of storage at the rate of $10 per month. However, overage charges are applicable if by any chance the consumption goes beyond the set limit.

Scenario 2: Usage Exceeds Base Plan Limits

Customer: Jane Smith

Storage Used: 20GB

Base Plan Charge: $10.00 (for the first 15 GB)

Overage Charge: $2.50 (for the additional 5GB)

Total Monthly Charge: $12.50

How does metered billing work?

There are several benefits attached to usage-based billing for businesses and customers alike. But understanding how the entire process works is important.

Usage Tracking

Metered billing demands continuous supervision of users’ consumption of a service, regardless if it’s data, minutes on call, or the number of API requests.

Billing cycle establishment

Before charging the customers, businesses set a billing period, i.e., monthly, weekly, or fortnightly, and when it ends, users are billed on the basis of their consumption. The billing period must be communicated to customers when they sign up for a service.

Determining the Rate

A rate is designated for usage metrics such as per hour of service, per gigabyte data, etc. This rate determination eases billing and makes the calculations easier.

Data access

In most cases, users have a portal where they can view their current consumption in real time. This keeps them aware of their consumption and pattern of usage.

Automated calculations

As soon as a billing cycle ends, customers are charged based on tracked use and predefined rates. This process is crucial to mitigate chances of error and ensure billing accuracy for customers.

Invoice generation

After the amount is calculated, an invoice is generated and sent to the customer. This invoice offers a breakdown of the service consumed.

Notifications

To help avoid overages, customers are notified via emails or in-app messages to avoid exceeding their threshold.

Payment flexibility

Consumers are given multiple payment options owing to varying prices based on consumption history. They can use digital wallets, bank payments, credit cards, etc.

Resolution of disputes

In case an unhappy customer charges a dispute, businesses have the roadmap and mechanism to address them.

What benefits does metered billing offer?

Metered billing has a broad range of business benefits as well as advantages for the customer. These are as follows:

Payments based on usage

Metered billing holds significance as it is a model in which customers only pay for what they consume based on usage. As they are charged on a set fee based on a monthly yearly plan, it gets easier to scale up or scale down depending on the need of the time.

Reduced Costing

One crucial benefit of metered billing is that customers face reduced costs. As customers pay more when their usage rises and pay less when usage decreases, they can save up.

Clarity of Spending Behavior

Getting a clear picture of your consumption behavior allows responsible consumption. When customers have insights about how they are using a service, they can adjust their spending habits accordingly.

Avoids overprovision

When customers are monitored based on their usage and billed accordingly, businesses can enjoy accurate billing. This helps to avoid overprovision of services, which means zero wasted services. It in turn allows keeping the costs down on the part of a business.

Scalability

Another benefit of metered billing is that it can scale according to shifting demand. When customers’ utilization grows or diminishes, so too do the attendant charges, meaning service providers can set their charges in line and prevent prices from being based solely on fixed costs.

Incentivization

When customers optimize resource allocation, it leads to efficient service usage. This, in its turn, suits both parties—providers get greater efficiency rates, and customers are the ones enjoying lower costs pertaining to their services. Furthermore, providers usually motivate customers who successfully utilize their services by granting discounts on future charges or free supplementary resources, encouraging a win-win situation even further.

Identification of growth opportunities

Metered billing allows a 360-degree view of customer usage patterns and the latest trends in usage. It can help in molding the services as per customer needs and also allows for the identification of new growth opportunities for the business based on usage and performance data.

What are some limitations of metered billing?

Although metered billing has a variety of advantages, there are certain drawbacks to this type of billing model.

Revenue Unclarity

With metered billing, businesses have to estimate usage of customers, thereby making revenue recognition a challenging task. During every cycle, businesses have to deploy resources to accurately estimate per-user consumption.

Pricing incompatibility

Metered billing relies on the premise that you can precisely measure the volume of usage of a product or service in terms of user activity. If you cannot precisely measure the usage, you cannot put a monetary value on it. Without value metrics, this pricing model is useless.

Metered billing is based on measuring usage correctly and charging the customer in proportion. You must be able to monitor and measure the precise action taken by the customer and attribute a correct monetary value to each action. Therefore, you must look at your company’s costs to decide if this is the most effective and efficient charging mechanism. If your costs are fixed, this will not be the best solution.

What are some best practices for metered billing?

In order to implement metered billing, businesses must strategize smartly. The best practices to run a successful business with metered billing are:

Clarity with tiered usage bills

If you choose tier-based pricing, it is best to opt for clarity of tiers. You can communicate the simplicity of the model, indicate usage-based value metrics, and create tiers according to usage levels. It is crucial to note that value metrics may vary based on your business model and the product you are selling.

Benefits for all

A two-way pricing model satisfied the consumer as well as the service provider. You must ensure that the model you implement encourages customers to efficiently use resources. When they are incentivized to reduce overconsumption, it will lower costs for the business as well. Less resources needed would mean less supply needed.

Opt for a well-suited model.

You must implement a business model based on user preferences and behaviors. Thorough evaluation of each pricing model and deep study of the pros and cons can all be beneficial.

Conduct Regular Audits

Regular audits and updates are necessary for the upgrade of your model, thus ensuring efficiency.

Real-time usage tracking

Offer customers real-time usage monitoring and clear billing. This will establish trust and allow customers to know their usage and expenses. Periodic updates and alerts can also avoid surprise overage fees.

What is flat rate billing?

It is a pricing model used by businesses to set up prices for products and services. It involves setting prices at fixed rates regardless of how much a customer consumes. It allows customers to know what they are consuming upfront and also helps revenue recognition for businesses. Subscription-based pricing is the most common type of flat-rate pricing, and customers must pay a fixed amount each month. The services where this model applies are:

Subscription-based services: Software-as-a-Service (SaaS), streaming services, and membership schemes

Telecommunications: Mobile phone service plans, internet services, and cable television

Utility services: Electricity, gas, and water supply utilities

Insurance services: Health, life, and motor insurance premiums

Software licensing: Per-user or per-device license fees

Gym memberships: Fixed monthly membership fees for use of facilities and services

Cloud storage: Fixed pricing for storage capacity, irrespective of actual usage

Web hosting: Fixed pricing for hosting services, irrespective of website traffic or usage

What is metered billing vs. usage-based billing?

Although both concepts may seem similar, there are slight differences between the two. In usage-based billing, customers are charged based on actual usage or consumption of a good or service. The pricing is often dynamic and varies as per changes in customer usage. This type of billing is more suitable for conditions where usage can be accurately measured. The examples are gas, water and electricity bills, data, SMS, voice calls, and cloud computing resource utilization.

In the case of metered billing, customers are expected to pay based on usage by a predefined metric such as GB, hours of usage, or transactions. In this case, pricing is tiered, and varying rates are applicable on different usage levels.

Some key differences are:

Pricing dynamics: UBB pricing is more dynamic, whereas MB pricing is generally tiered and more deterministic.

Measurement granularity: UBB usually needs more detailed measurement of usage, whereas MB can utilize more summary measures.

Variability in usage: UBB is more appropriate for services with highly variable usage, whereas MB is appropriate for services with more regular usage.

What is a rate plan?

A rate plan is a rate structure that determines the rates to be charged to customers for a given product or service, depending on their usage or consumption. It establishes the rules of pricing, such as:

Rates: The fees levied per unit of use (e.g., $/GB, $/hour).

Tiers: The various usage levels, each with its own rate of pricing (e.g., 0-100 GB, 101-500 GB).

Usage measures: The quantifiable units of use (i.e., data consumed, minutes utilized).

Billing cycles: The interval at which bills are created and mailed (e.g., monthly, quarterly).

Discounts: Any applicable discounts for bulk usage, loyalty, or other promotions

Rate plans can be beneficial for businesses as they allow simplified pricing, increased transparency, and increased usage through incentivization of discounts. Moreover, they allow management of revenues by setting the prices that balance company revenue goals.

What is automated billing?

Automated billing allows sending invoices to customers after carefully generating them from automated software. This type of automated work saves the need for manual intervention and involves the given process:

Data collection: Obtaining usage data, customer data, and price data from multiple sources.

Bill calculation: Applying predefined price rules and rate plans to determine the bill amount.

Bill generation: Producing a bill document, either electronically or in hard copy.

Bill delivery: Delivery of the bill to the customer through email, postal mail, or online portals.

Automated billing has numerous business benefits, such as:

• Precision and accuracy
• Time efficiency
• Scalability
• Improved customer experience
• Constant revenue streams
• Security and compliance
• Flexibility to grow with market changes