Usage Metering for SaaS Billing: How it is a Game Changer

Think about your electricity bills…they charge you on the basis of the units you consume. Now apply the same logic to SaaS businesses. Many businesses have already adopted usage metering for SaaS billing, and achieved success. This model has changed the payment game for merchants and customers alike.

For consumers, it has facilitated easier perception of value. And for businesses, it has improved alignment between operational expenses incurred and revenue gained. So it’s a double win for both, making pricing fair, and operations sustainable.

Read on and learn how billing based on usage metering has made that possible, and how successful companies manage this billing model today.

What is Usage Metering for SaaS Billing?

When we talk about usage metering, we mean a system that monitors, captures, and records a customer’s service usage—how a customer interacts with a service. This system then uses this acquired usage data to transform it into billable metrics. In other words, it calculates a user’s bill based on their consumption level.

Usage metering is especially popular when it comes to SaaS billing. Cloud-based service businesses are modifying their billing practices to accommodate growing customer expectations, and increase customer satisfaction. Usage metrics differ according to the nature of each service. Some commonly used metrics are API calls, active user seats, and data storage units.

This billing model has connected charges directly with usage. Meaning, businesses don’t charge flat fees, instead, they charge those amounts that align with customers’ consumption. This paves the way for fair and transparent billing, where heavy and light users don’t have to pay the same price.

Users that consume more pay more, and users that consume little pay little. This gives businesses the opportunity to generate more than only fixed revenue from their heavier users. And at the same time motivate their lighter users to keep using services at lower prices.

Why Usage Metering Matters Today

Customers require fairness, and traditional billing models don’t provide that. If each customer pays the same amount of money for a service, it means that their usage holds no importance for the business. It doesn’t matter if a customer is barely using a software, or pushing its limits…everyone is handed the same bill. Such bills can be equal for all customers, but they are far from fair.

To combat this challenge, usage-metering helps a lot. It makes subscription payments flexible, and fair for all. These are some major benefits of this approach:

Works for both high and low usage clients

A B2B SaaS service may have both small scale and enterprise level clients. Would these clients pay the same subscription fees? No. Each of them can freely use the software according to their needs, and then anticipate their charges with peace of mind.

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Otherwise, if the business decides on a fixed price for their plan, they would risk losing either of these: small scale customers or potential revenue from big clients. If they price their plan keeping the enterprise clients in mind, they would raise the entry barrier for smaller businesses.

And if they go the other way round, they would basically allow the enterprise level clients to use as much as they want and still pay less. Hence, usage-based billing eliminates standard pricing in such cases, so that each party pays their fair share of the charges.

Usage is directly linked with revenue

Businesses can scale revenue alongside the consumption level of their customers. If customers utilize a SaaS service heavily, it means more earnings for the service provider. Standard price plans neglect this aspect, allowing heavier users to use more than they pay for. And that incurs extra operational costs to be covered.

Operational costs are covered better

Since users are charged only for what they utilize, businesses generate funds that align with the actual cost of service delivery. This gives them an excellent opportunity to cover expenses better. It also eliminates the mismatch between the operational costs incurred by high-usage customers and their fixed payments.

Easier to gain customer trust

It’s easier to attract customers when pricing is fair. Customers are not over- or undercharged, and their invoices display their consumption-based amounts clearly. This model also lowers the subscription entry barrier for lower-budget customers as they don’t have to pay anything upfront.

Subscription billing software makes these payments more transparent, as it lets customers monitor their own usage via their self-service portals. It prevents unintentional spikes in consumption, and surprise charges.

Manual Billing Management is Simply Not Possible for Growing Businesses

Businesses aiming for growth shouldn’t let manual billing practices hold them back. It’s even truer for those wanting to implement usage metering. Beyond a certain point, it gets impossible to keep up with all your customers’ usage levels and their billing calculations. Here’s why:

Billing mistakes become more frequent

Converting usage units into billable metrics is not an easy task. Admins can’t expect machine-like precision from their employees that can lead to the creation of inaccurate bills. And such bills defeat the entire purpose of usage-based billing i.e. fairness. They create confusion around payments making them more obscure than transparent for customers.

Moreover, when the customer volume exceeds a certain threshold, it becomes easier to lose sight of your key figures: usage units, billing calculations, and incoming payments. It causes customer frustration due to mistakes in billing, and prevents you from collecting your correct revenue amount.

Usage tracking is not real-time

Manual usage metering can never be real-time. Employees can’t possibly monitor all the usage climbs and declines themselves. When a usage portion is overlooked, bills don’t take that into account, and are hence calculated inaccurately. Usage tracking requires advanced metering systems that can gauge even micro-usage, and aggregate it precisely.

Micro-transactions are easier to overlook

Micro-transactions occur when users consume very little. Say, they consume only 5 API calls per day, and one API call costs only $0.001. Now this amount might not seem much in the first glance, but in aggregate it represents serious revenue.

Manual billing practices can easily overlook these amounts especially when they are very high-frequency. They can also round them off for convenience, unknowingly letting a lot of revenue slip through the cracks.

Revenue recognition is not straightforward

Recognizing revenue is easier when recurring payment amounts are fixed and predictable. In usage-based models, that is not the case. Businesses have to categorize their earned and deferred revenue themselves, and these are made up of random amounts. Each customer’s contribution to the revenue is different, so their recognition calculation is different too.

User experience becomes full of friction

Users can’t instantly change plans or payment method. Every action requires confirmation from the customer support team. That’s because there’s no billing system acting as a backbone overseeing all changes and generating dynamic invoices itself.

Nor can users get real-time insights into their consumption levels. This takes the smoothness out of their experience, and can make them lose patience.

Leverage Maximum Power of Usage-Based Billing with SubscriptionFlow

Successful SaaS companies have solid billing foundations that meter usage for them automatically, providing their customers with a seamless and transparent payment experience.

You can reap the maximum benefits of usage metering by conducting billing the right way. SubscriptionFlow makes sure that you don’t leave any revenue on the table, and that you accurately convert usage into bills. Here’s what billing with SubscriptionFlow unlocks for you:

Automatic usage tracking

All usage tracking takes place in real-time according to the usage metrics you define. SubscriptionFlow doesn’t overlook even the tiniest consumption portions, and creates bills with precision. Moreover, the system is built to scale with your customer volume and their increasing usage, letting you satisfy both high- and low-usage clients.

Usage-based + hybrid billing

You can either bill entirely according to usage, or implement a hybrid payment model instead. The hybrid model may consist of both fixed and usage meter-based charges. How that benefits you? It helps retain some of your revenue predictability thanks to the small fixed charges that can be collected at the start of each payment cycle.

And you can let the remaining portion of payments stay usage-based, supporting flexibility for customers.

Real-time invoicing

As usage is tracked in real-time, the bills get updated in real-time as well. Dynamic invoices are sent to customers’ accounts and show charges corresponding to their most up-to-date consumption levels.

The same goes for when clients change plans, for instance, when they upgrade them. Their invoices get instantly revised as well, and they enjoy seamless plan transitions.

Custom billing rules

Businesses can freely set up billing rules in SubscriptionFlow. They can choose to round off customer bills, keep them true to their original figure, define maximum and minimum usage thresholds, and much more.

Customer portals for self-usage tracking

The billing software also provides your customers with intelligent self-service portals that reflect their consumption in real-time. For example, how many hours of a streaming service they have used, or how many GBs they have used. Customers can use this transparency to keep their usage and charges in check.

Accurate aggregation of usage data

The system does not miss any micro-usage. It records every usage instance when it occurs, and stores it safely in its database. When a billing cycle is over, it aggregates all the logged usage events, and generates a comprehensive invoice for the customer.

Usage data aggregation is important because you wouldn’t want your customers to receive an invoice for every micro-transaction with the service.

Do you also need automatic usage metering for SaaS billing? Join the successful businesses using SubscriptionFlow—we make your usage-based billing elegant and stress-free.