CONSUMPTION BILLING

The Ultimate Guide to Usage Pricing

Discover the strategies and solutions to successfully launch and scale your consumption business model
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THE BASICS OF USAGE

What is consumption-based pricing?

A consumption-based pricing model, also known as usage-based pricing, is a strategy where customers are charged and billed based on how much of a service or product they use. This could be anything from the number of API calls or gigabytes of data used, to the hours of service accessed.

This flexible pricing approach provides value and transparency to customers and helps build trust and loyalty. Consumption models are used across multiple industries, including cloud computing, utilities, and telecommunications, where they allow businesses to scale their services according to customer needs and usage patterns. Usage-based pricing and hybrid models are also quickly becoming the model of choice for AI and GenAI offers, both for vendors and their customers.

What are the keys to consumption success?

Make your usage-based pricing strategy a success—across the business

Capture, consolidate, and mediate usage events
Ensure optimal pricing and packaging
Track and tweak your pricing metrics
Support finance and accounting

How do you mediate usage data?

Ingest

Stream real-time consumption data from multiple sources

To begin mediation, you’ll need to collect and transform usage data. Mediation tools can help make that data more manageable, accessible, and secure.

Meter

Measure usage and identify key metrics

Now that you’ve captured usage data, it’s time to analyze and measure. This process, called metering, helps identify key metrics to utilize for pricing, rating, and billing.

Track

Give customers and your teams usage visibility

To link all of these steps together and help you continually iterate on pricing and packaging, you’ll need a system to track usage data from collection to revenue recognition.

How do you accurately bill for consumption?

After raw data has gone through the process of mediation, and you’re tracking a value metric, you then need to rate and bill a customer for their consumption. Rating is the process of gathering all the necessary information, such as account data, contract details, and metered records and processing charges based on that information.

Consumption rating and billing may not happen simultaneously. Because consumption is happening continuously, it’s important to have insight into consumption that has been rated over a billing period but not yet billed.

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“The new Mediation Engine in Zuora for Consumption enables customers to easily import, clean, and transform high-volume, raw consumption data so that consumption can be flexibly rated for any type of pricing scheme with a drag and drop interface.”
-Mark Thomason
Research Director for Digital Business Models and Monetization at IDC

What are common consumption pricing models?

From pure usage to a mix of models, find the right strategy for you.

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Per-unit or pay-as-you-go

Offers the most flexibility for customers, allowing them to pay only for what they use.
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Volume

Charges based on the volume purchased and works well for use cases like API calls.
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Tiered or step pricing

Allows you to progressively change pricing as the volume increases, but charges vary by tier.
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Overage

Gives customers a certain quantity of included units per billing period. Anything over is charged per-unit based on the overage price.
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Pre-paid with drawdown

Charges customers upfront for a set of units or a balance that is drawn down from over a period of time.
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Minimum commitment

Allows you to charge customers at their commitment level on each invoice, even if they don’t consume the committed usage amount.

What are hybrid consumption models?

Line graph comparing 6-year cumulative growth by business model in the SEI SAAS sector, including consumption, non-consumption, and software services.

Recently, hybrid consumption models that combine predictable subscription approaches with more variable usage models have stepped to the forefront as drivers of recurring revenue.

Although the SaaS sector is still fine tuning these pricing and packaging strategies, the results are promising compared to non-consumption models.
While pure usage revenue can be less predictable and more volatile, hybrid consumption models can be a good fit for SaaS offerings—particularly cloud services and generative AI. These hybrid, agile models can help provide predictability, while also improving value to the customer by tying pricing and payments more directly to usage and actual demand.

What are the benefits of consumption pricing?

How do you know if a consumption or usage-based pricing model is really the right option for your customer or product? The following are some of the potential benefits:

  • Customer-centric approach: Aligns costs with value, enhancing customer satisfaction and loyalty.

  • Flexible and scalable growth: Lowers barriers to entry, letting customers start small and scale as needed.

  • Differentiated value proposition: Helps your offer stand out in the crowd by using metrics tied to usage.

  • Transparency and control: Offers customers real-time usage insights to manage costs and avoid overages.

  • Visibility and tracking: Empowers Sales, Customer Success, and Finance teams with accurate usage data.

  • Recurring revenue growth: Adds predictability and grows recurring revenue when used in a hybrid model.

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How do you track and recognize consumption revenue?

Consumption models require granular, real-time visibility, not just to total up usage at the end of a billing period, but also to monitor customer usage at any given time. In addition, consumption forecasting capabilities must be in place, enabling revenue teams to anticipate how much revenue will be gained. 

The revenue policy for a consumption model can be complex. Revenue accounting teams will need to evaluate whether variable consideration should be included and how it should be treated.

Revenue teams can usually leverage existing estimations as a starting point for new consumption revenue recognition policies. For example, if the decision to adopt consumption has been pushed by sales, then someone in sales should be able to present a business case with estimations around usage and revenue.
How ASC 606 and IFRS15 will impact consumption-based pricing models is also an important consideration.

What is the right technology to support consumption?

The right technology will impact the success of a consumption-based model.

Out-of-the-box support for a variety of monetization models
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A mediation engine that can capture, consolidate, and monetize
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Near real-time visibility and analytics capabilities
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Automated consumption revenue recognition policies
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Keep learning more about consumption

RESEARCH REPORT

See whether consumption pricing is right for you

Learn the proven strategies and tools to launch and scale a consumption pricing model. Our research has shown that SaaS companies with a hybrid model (consumption and subscription) outperform all other businesses when it comes to recurring growth.
STRATEGIC GUIDANCE

Launching a consumption-based pricing model

Whether you’re adding a new product or implementing usage pricing, you need to launch quickly—before your competitors catch up. Learn the tips and tricks to build your consumption-based pricing model for maximum scalability and growth.
STRATEGIC GUIDANCE

Why a consumption-based model is key to monetizing AI

When it comes to AI, traditional flat rate pricing simply can’t scale quickly enough to match the evolving customer use cases and demands. Discover how consumption-based pricing can help your business align monetization with the unique value proposition of AI.

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The Ultimate Guide to Usage Based Pricing and Billing

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