What is metered billing?

Alvaro Morales

Looking for a pricing model that boosts customer satisfaction, maximizes ROI, and cuts overhead costs?

Metered billing does all this for you. Read on to find out how your SaaS company can benefit from this pricing strategy. 

This introduction to metered billing will cover the following: 

  • A definition of metered billing and an overview of how it works
  • A quick rundown of its main advantages 
  • The types of industries that benefit from metered billing
  • A step-by-step guide for metered billing implementation
  • Pitfalls you might encounter and how to avoid them
  • A list of metered billing best practices

Let’s jump right into it. 

What is metered billing exactly?

Metered billing is a pricing model where customers are charged based on their actual product or service usage, ensuring they only pay for what they use.

Customers are billed based on their actual consumption instead of paying a flat fee whether the service is used minimally or extensively. This approach gives you flexible billing options compared to subscription plans or fixed fees.

This model is also sometimes called consumption-based billing, pay-as-you-go billing, or usage-based billing (though they aren’t exactly the same). Metered billing is widespread in the SaaS industry since these companies already track how much of a service their customers are using.

How does metered billing work?

At the heart of metered billing is accurately tracking how much of a product or service a customer is using. Specialized software platforms, such as metering and billing software, are designed to monitor and record usage data.

These platforms can track a wide range of metrics, depending on the nature of the product or service in question. 

Example: The key metrics tracked for cloud computing are the amount of storage space or processing power used. For an app, tracking the number of user logins during a specific timeframe, transactions processed, or features accessed is more beneficial. In the telecom industry, companies monitor the amount of data or minutes used. 

The collected usage data is then typically fed into a billing system. This system applies the pricing model associated with the customer's plan to calculate the final bill. 

You can include simple per-unit pricing, where each unit of usage has a fixed cost. Alternatively, you can add more complex tiered pricing, where the price per unit changes depending on the total amount used. 

Some standard pricing models include:

  • Per-unit pricing: Customers are charged a fixed price per unit of usage.
  • Volume-based pricing: The price per unit decreases as the total usage volume increases.
  • Tiered pricing: Different pricing tiers are set for different usage levels.
  • Overage-based pricing: Customers are charged a fixed fee for a certain amount of usage and then pay extra for any usage that exceeds that limit.

It’s important to point out that some billing platforms (such as Orb) can track usage and use the data collected to create invoices. These extra features save companies the hassle of working with separate platforms to turn usage data into accurate bills. 

Why use metered billing?

Metered billing offers a win-win situation for customers and SaaS companies, especially given that recent SaaS market reports show that B2B SaaS revenue is growing. Let’s look at it from both perspectives. 

Why is it good for customers?

  • Fairness and transparency: Metered billing fosters a sense of fairness because customers are charged only for what they use. This transparent pricing structure aligns costs directly with consumption so that customers can manage their expenses more effectively.
  • Reduced upfront costs: Metered billing often has lower upfront costs than traditional subscription models, as customers do not pay for a set amount of usage in advance. An exception to this would be SaaS products that require users to purchase prepaid credits. 
  • Flexibility: Customers can adjust their usage to match their needs and budget. These options can lead to lower costs compared to flat-rate subscriptions when their usage is low. Pricing adaptability is particularly beneficial for businesses with fluctuating demands.

Why is it good for SaaS companies?

  • Resource efficiency: Metered billing encourages customers to use resources responsibly where they’re most needed, as their costs directly reflect their consumption. 
  • Business scalability: Metered billing allows businesses to scale their service delivery to match customer demand. By charging based on usage, businesses can easily accommodate fluctuations in demand without incurring unnecessary costs for unused resources.
  • Long-term revenue growth: Metered billing can also lead to increased revenue for businesses when customers increase their usage over time as they grow. 

Which industries benefit most from metered billing?

Metered billing is gaining popularity across various industries thanks to its adaptability and potential for cost reduction. 

Here are a few key sectors where this pricing model makes a significant impact:

  • Telecommunications: Mobile phone providers usually use metered billing to charge for data usage, call minutes, and text messages. This approach allows consumers to pay only for the offerings they use.
  • Utilities: Electricity, gas, and water companies use metered billing to charge customers based on their actual consumption levels. This method promotes conservation and responsible resource usage.
  • Cloud services: Cloud computing providers typically charge based on storage space, processing power, or database usage. This model allows businesses to scale their resources up or down.
  • SaaS: Many SaaS companies are adopting metered billing, allowing customers to access specific features or services on a pay-per-use basis. This billing approach eliminates the need for large upfront payments.

A simple guide on how to implement metered billing 

Metered billing is easy to integrate once you’ve decided to charge customers based on their actual usage of products or services. 

Implement metered billing by following these key steps:

Step 1: Get your infrastructure all set up

To start with metered billing, you must first establish or upgrade your existing systems to accurately measure and report usage data. Ideally, you want software that tracks and records customer activity in real time. 

Depending on the nature of your product or service, you may also need to implement hardware sensors or APIs for exhaustive data collection.

Good infrastructure is crucial to make sure your metering system and billing platform are integrated for automated invoice generation. Billing platforms like Orb combine usage-tracking analytics with billing easily in one system.  

Step 2: Develop your pricing strategy

A well-defined pricing strategy is fundamental to the success of metered billing systems. Businesses need to determine how prices reflect different usage levels. Set your prices according to the overhead costs, customer demand, and competitor pricing. 

Choosing the right pricing model is also vital. Linear pricing is one simple alternative where the price increases proportionally with usage. 

Tiered pricing offers more adaptability with different price levels for different usage ranges. Volume-based pricing promotes higher consumption, where the price per unit decreases as usage increases.

Step 3: Communicate to customers clearly with constant support

Clear communication is critical to successful metered billing implementation. Businesses must confirm that customers understand how the system works. Create docs and a guide for customers, including how usage is tracked, what pricing model is being used, and how billing cycles operate. 

Providing complete customer support is equally necessary. Clients appreciate detailed FAQs, email support, or live-chat features to address billing-related questions promptly.

Step 4: Make sure your security is compliant 

Metered billing involves collecting and processing sensitive customer data, making compliance and security paramount. 

Businesses must guarantee that their metering and billing processes adhere to all relevant regulations and standards, particularly those related to data protection and privacy, like the GDPR in Europe and the CCPA in the United States. 

Implementing robust security measures like data encryption and regular security audits will safeguard customer information and maintain their trust in your business.

How to solve problems during implementation

While metered billing presents numerous benefits, it's essential to understand how to prepare for potential challenges.

Complexity in billing will likely increase

Challenge: Metered billing can introduce complications in billing processes, particularly with various pricing structures, multiple service tiers, or high volumes of usage data. These intricacies can make calculations and invoicing more difficult.

Solution: Consider using advanced billing software designed to handle diverse pricing models and large amounts of data. These platforms automate calculations, generate detailed invoices, and provide clear insights into billing data to simplify the process for businesses and customers.

Customer resistance to change might get in the way

Challenge: Some customers may initially resist metered billing, especially if they are accustomed to fixed-price subscriptions. They might be skeptical about potential cost fluctuations or perceive metered billing as less predictable.

Solution: Overcome this skepticism by implementing transparent billing policies and educating customers about the benefits of metered billing. 

Clearly communicate how usage and billing are measured, and the potential for cost savings and greater control over spending. Demonstrating the value and fairness of metered billing makes it easier for customers to accept.

Technical issues may arise

Challenge: Technical challenges may occur in accurately tracking usage and managing large volumes of data. Inaccurate data collection or system malfunctions (such as bugs and constant crashing) can lead to billing errors and unhappy customers.

Solution: Address potential technical challenges by partnering with reputable tech providers and regularly updating your systems. 

Choose billing software that is known for its reliability and data accuracy. Implement redundancy measures to ensure data backups and system continuity. Regularly monitor and maintain your metering infrastructure to prevent technical issues and maintain accurate billing.

What are some best practices for metered billing?

To maximize the benefits of metered billing for both you and your customers, consider these best practices:

  • Conduct regular audits and updates: Review your metering and billing systems regularly to guarantee accuracy. Make sure these audits inform future updates to make sure your metered billing system keeps charging users fairly.
  • Have flexible pricing options: Offer multiple pricing plans to cater to different customer needs and usage patterns. Choices could include tiered pricing with varying usage allowances and rates or volume-based discounts for high-usage customers.
  • Transparent reporting: Provide customers with detailed usage and cost reports that are easy to understand. Clearly show how their usage translates into billing amounts, including any overage charges or discounts. Transparent reporting builds trust and helps customers manage their usage.

Next steps

You should now have a much clearer idea of how metered billing works. If you plan to use this method for your SaaS company, you might wonder how to implement it without interrupting your services or straining your finance team. 

The answer lies in using Orb.

Orb is a complete billing management platform designed for metered billing. Our platform’s features are tailor-made to the needs of SaaS businesses that need to simplify metered usage. 

Here’s how Orb helps:

  • Integration becomes a non-issue: Thanks to integrations to S3, Segment, and Orb’s REST API, getting started is easier. Orb quickly ingests usage data from your app or data warehouse. 
  • You can define the usage metrics of your choosing: Whether it’s the number of API calls your SaaS makes or the amount of storage your customers are using, Orb simplifies the process of tracking and billing for those metrics by letting you choose. 
  • Pricing plans are easier to design: Orb supports many pricing models, from detailed per-unit charges to tiered pricing systems based on usage levels. Our Plan Builder lets you do that without coding a single command. 
  • Billing cycles are automated: Orb automates the entire billing workflow. Everything from usage tracking, fee calculations, discounts, invoicing, and billing adjustments can be pre-programmed. 

Learn how Orb can help you solve metered billing with zero hassle.

June 7, 2024

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