Event-based billing for SaaS: The ultimate guide

It’s clear for anyone who’s needed to build a billing infrastructure: building an accurate and scalable system is really difficult.

When your solution relies on individual instances (or events) to bill customers, a subscription-based model is not enough.

Instead, teams with event-based usage metrics should consider using event-based billing.

In this primer, we’ll explore what event-based billing is and why it’s an excellent system for SaaS companies with growing customer bases.

We’ll go over:

• A definition of event-based billing
• Some real-world examples of SaaS companies using event-based billing
• A step-by-step guide for implementing event-based billing
• Some pitfalls to avoid during implementation and potential solutions

Let’s get started.

What is event-based billing?

Event-based billing (or event billing) is a way of charging customers that goes beyond the familiar subscription model. Instead of a flat monthly or yearly fee, with event-based billing, you only pay for what you actually use.

This means each customer's bill reflects their specific actions and interactions with your SaaS product.

Think of it like this: Traditional subscription billing is similar to a gym membership. You pay a set amount whether you visit the gym daily or not. Event-based billing is more like a pay-per-ride bus ticket. You're only charged for the trips you take.

So, how does this translate to SaaS products?

Imagine your product offers features like file storage, specialized analytics, or API calls. With event-based billing, each of these features would have a price associated with it. If a customer uses 20GB of storage, makes 100 API calls, and runs 5 detailed analytics reports, their monthly bill reflects exactly each individual billable event.

Event-based billing for SaaS: Real-world examples

As you know now, instead of offering one-size-fits-all subscriptions or tiers, event-based billing allows for a granular approach based on the specific actions users take within the product. Let's dive into two real-world examples that showcase the power of this approach:

1. Stripe Radar: Smarter fraud protection

Stripe Radar, a fraud protection service offered by Stripe, provides a compelling example of event-based billing in action.

Here's how it works: Every single transaction processed by Stripe generates a wealth of data points. These data points, including details like the cardholder's location, purchase amount, and product type, are essentially individual events within the Stripe Radar system.

The power of event-based billing lies in how Stripe utilizes this event data for pricing. Instead of offering a single, flat-rate fee for fraud protection, Stripe assigns a specific cost to each event.

For example, analyzing a transaction for potential risk exposure might incur a smaller charge compared to receiving a real-time alert about a suspected fraudulent purchase. This granular approach ensures that businesses only pay for the level of protection they genuinely need.

2. OpenAI: API calls as single billable events

OpenAI, a leader in artificial intelligence research, offers a wide array of language models and image-generation tools. Its approach to event-based billing hinges on API calls and tokens.

The number of tokens used as input for a task and the number of tokens generated in the response determine the final cost. However, users can pay for a set amount of tokens beforehand. But OpenAI takes it a step further — individual API calls are treated as billable events.

This means that more complex API requests requiring significant processing power from their AI models will incur a higher cost than more straightforward tasks. Developers aren't restricted to rigid subscription plans. Instead, they can choose the exact AI model suited for their specific project, paying for the API calls consumed during the process.

A quick step-by-step guide for implementing event-based billing

Transitioning to event-based billing unlocks a robust pricing model for your SaaS business. However, careful planning is crucial. Let's explore the key steps involved:

Step 1: Event identification

The first stage focuses on identifying the actions within your product that will trigger billing. This essentially means pinpointing what activities generate value for your customers. Here's how to approach it:

• Customer value: Start by analyzing which features or functionalities within your product provide the most significant benefit to your users. These could be specific actions like generating a complex data report, integrating with a third-party tool, or performing a high-volume API call.
• Your costs: It's equally important to consider the events that consume the most resources on your end. This might involve storage usage for large datasets, processing complex computations, or handling intensive support requests.

The goal is to create a list of events that aligns with the value delivered to your customers, while also ensuring your pricing structure reflects the costs you incur to provide those services.

Step 2: Event tracking

Once you've identified the billable events, you must implement a system to track them accurately. Precision is paramount in event-based billing. Here are some key considerations:

• Tracking mechanisms: Decide whether to integrate event tracking directly into your product's codebase. Alternatively, you can leverage specialized usage-based billing platforms like Orb that handle this task for you. These platforms offer robust tracking features and can simplify your implementation process.
• Real-time vs. periodic tracking: Determine if your billing needs require real-time event tracking for up-to-the-minute reporting or if periodic updates are sufficient. Real-time tracking provides a more granular level of insight.
• Data aggregation: Consider how you want to handle situations where grouping events together might be appropriate for billing purposes. For instance, you might choose to charge based on the total number of API calls made in a day rather than billing for each individual call separately.

Step 3: Pricing your events

There comes a time when events need to be translated into actual pricing. This step requires careful analysis and might involve some adjustments as you gather data:

• Value-based pricing: The core principle here is to link the cost of each event to the value it delivers to your customers. Events that provide significant user benefits should command a higher price point compared to less impactful actions.
• Cost considerations: The same recommendation from step 1 stands — don't lose sight of your operational costs. Factor in the resources required to support each event type. If an event is expensive for you to deliver, your price needs to reflect that cost.
• Tiered models: Consider offering various pricing tiers based on the volume of events a customer triggers. High-volume users (power users) might benefit from discounts or lower per-event charges. This can incentivize bulk usage and generate predictable revenue streams.
• Experimentation: Be prepared to adapt your pricing strategy as you analyze actual usage patterns and gather customer feedback. There might be a need to adjust event prices or introduce new tiers to optimize your billing structure.

Step 4: Billing and invoicing

The final piece of the puzzle is ensuring your billing system seamlessly integrates with your event tracking solution. Here's what to focus on:

• Integration: Your event tracking system needs to communicate flawlessly with your invoicing software. This ensures accurate and timely bills are generated based on tracked events.
  
  
• Transparency: Provide customers with crystal-clear, itemized invoices that break down exactly what they're being charged for. This transparency fosters trust and avoids any confusion about billing.
  
  
• Flexibility: Make sure your system can handle future changes with ease. This includes updates to pricing models, introducing new billable events, or creating custom pricing plans for specific clients. An adaptable system ensures you can adjust your event-based billing as your business evolves.

Why use event-based billing in SaaS?

Event-based billing moves beyond traditional subscription models with advantages that enhance customer focus, transparency, and your bottom line. Here's why:

• It’s customer-centric: Event-based models allow you to align your pricing directly with how customers use your product. This means they only pay for the value they are getting out of your service.
  
  Of course, you can also create flexible plans catering to power users who frequently access premium features and more casual users.
• It fosters transparency and trust: Event-based billing shines when it comes to building trust-based relationships with your customers.
  
  Itemized invoices clearly showcase what a customer pays for, allowing them to see a direct correlation between usage and cost. This creates a sense of fairness in your business practices and avoids billing surprises.
• It fuels long-term growth potential: Event-based billing offers advantages that translate into sustainable growth. The fairness and value-driven approach leads to satisfied clients who are more likely to stay with you long-term.

This billing system also provides detailed insights on which events customers use most, helping you make data-driven decisions about product development and future pricing adjustments.

Three key considerations when using event-based billing

While event-based billing offers significant benefits, implementing it effectively requires thoughtful consideration. Here are some common challenges and how to address them:

1. Educating your customer base

A key challenge lies in ensuring customers fully grasp how events are tracked and how those events translate into billing charges. It's crucial to prevent any confusion or perceived unfairness that might erode trust in your pricing model.

Solution: Provide clear documentation that outlines which events are billable and how their pricing works. Offer examples to illustrate potential scenarios. Be receptive to customer questions and consider having a readily accessible FAQ section addressing common concerns.

2. Handling multiple events at once

If your SaaS product has numerous billable events, tracking complexity increases. You'll need robust systems to ensure every event is accurately captured.

Solution: Evaluate the pros and cons of building your in-house tracking system versus a dedicated event-based billing platform. Platforms like Orb are explicitly designed for this complex task, simplifying event tracking and pricing calculation.

3. Integration with financial systems

Event-based billing may require modifications to how your systems generate and process invoices. Frictionless integration between event tracking and your invoicing software is critical.

Solution: When choosing either an in-house built or external event-based billing system, pay close attention to how it interacts with established financial systems. Look for solutions that have APIs or pre-built integrations with commonly-used invoicing software. This simplifies the setup process and reduces the risk of errors.

Pro tip: Introducing event-based billing alongside traditional subscriptions can sometimes ease customers' transition. This hybrid approach allows users to become familiar with the concept while minimizing any potential disruption to your existing business model.

Next steps

Now that you have a solid understanding of event-based billing and how it can boost your SaaS growth, implementing this powerful model can be complex, especially as your business scales.

One of the first hurdles is ensuring precision and efficiency in tracking the multitude of events that drive your billing. Thankfully, specialized solutions like Orb can simplify this entire process.

Orb is a done-for-you billing management platform with a complete suite of tools designed to help you easily implement and manage event-based billing.

Here's how Orb supports your journey:

• Robust event tracking: Orb's flexible data warehouse-native infrastructure captures your usage data, transforming it into a single source of truth. This ensures your billing always reflects real-time customer usage.
• Flexible pricing models: Evolve your pricing strategy with confidence. Orb supports a wide array of pricing models, including metered, hybrid, and, most importantly, event-based pricing. Easily test and refine pricing without engineering bottlenecks.
• Transparent invoicing: Orb's invoices provide crystal-clear breakdowns of usage and charges, building trust with your customers and minimizing billing disputes.
• Adaptable to your growth: Orb scales with you. Whether you are a fast-growing startup or evolving towards larger contracts, Orb's price change configuration options ensure your billing model keeps pace with your changing needs.

Learn more about how Orb can solve event-based billing for you.