Usage-based pricing is quickly gaining traction across various industries, appealing to a broad spectrum of consumers, including a significant portion of Gen Z. This model offers transparency and control over payments, aligning costs directly with consumption. However, while the concept of “usage” might seem straightforward from a customer’s perspective, the underlying business and technical processes are more complex. Let’s break it down.
First, let’s start with examples of usage pricing. A classic is utilities, paying electricity and water based on how much you consume each month. Other examples include paying based on device storage (Google Drive, Dropbox), mobile phone data used, and the distance of a ride (Uber, Lyft). At its core, usage pricing requires a system that can collect, measure, and track data about how customers use a product or service. This happens in three main phases: ingestion, metering, and rating.
The first step to usage billing is ingestion. This is about taking in raw telemetry data — like minutes used, articles read, data consumed, or API calls made — across your offerings. Ingestion requires infrastructure that can support jumbo scale and throughput so that as you scale to billions of usage events daily and your system can support it out of the gate. Note: this event data often comes in various formats and needs to be normalized before it can be accurately evaluated. That act of normalization is often referred to as mediation. You can think of mediation as the process of collecting, cleaning, transforming and completing the data so it is a standardized format for further processing.
Next is metering, the process of measuring the actual usage of a service or resource by a customer. Metering is about quantifying the usage in a way that is meaningful for the business and for the customer. For example, in a cloud computing context, metering might involve tracking the number of CPU hours, GBs of storage, or data transferred by each user. Instead of tracking every CPU second, a cloud computing provider can create a meter to summarize by the hour. Metering systems keep an ongoing tally of usage over time, ensuring that every unit of service used is accounted for.
Once the usage data has been metered, rating comes into play. This step involves applying the predefined pricing rules to the measured usage data to determine the monetary value of that usage. For example, if a customer has used 10 GB of data and the rate is $0.10 per GB, the rating process will calculate the charge as $1.00. Rating systems can be complex, accommodating different pricing models, discounts, surcharges, and other factors that influence the final charge.
Here’s what the three-step process looks like …
As customer usage event data streams in, a metering and rating solution quickly processes, measures, and sorts the data, then categorizes and assigns a price based on billing arrangements. This also enables businesses to easily create bills, understand usage patterns, and offer alternative products or pricing structures based on customer needs. Internally, it helps track and document revenue generation.
Understanding the intricacies of metering and rating — and ensuring you have the right technology in place — is crucial for businesses for five main reasons:
- Data management: One significant challenge in implementing usage-based pricing is managing the volume and complexity of data generated by customer interactions. According to MGI Research, over 70% of organizations cite data challenges as a key cause of billing project failures, including inconsistent data formats and the inability to process data in real time. Without an effective metering and rating solution, these issues can lead to billing errors, costing companies revenue and customer goodwill.
- Pricing flexibility: Businesses can implement various pricing models, such as tiered pricing or volume discounts, to cater to different customer segments and preferences.
- Accurate billing: Ensuring customers are billed accurately based on their actual usage fosters trust and transparency, which are essential for long-term customer relationships.
- Customer transparency: This is a big one. Providing customers — and auditors — with clear insights into how usage is measured and billed enhances overall customer experience and protects a business’s reputation and legal standing. In other words, you need to be able to explain how it all works!
- Revenue optimization: By aligning prices with usage patterns, businesses can maximize revenue and capture the full value of their offerings. This is especially valuable for AI monetization, where traditional seat-based pricing may leave a lot of money on the table. Collecting and metering customer usage data can help identify and capture the value the offering is providing to the customer.
This technology is not something you should build from scratch. Instead, you should invest in a metering and rating solution, because otherwise, your engineers would be responsible for it. This would create a huge burden on them, including managing every single pricing change, processing and completing requests from revenue teams for usage data, and collecting data to investigate customer disputes. Engineers should be building products, not a homegrown metering tool.
Usage pricing is a monetization model that more people will talk about in the future and come to expect as a payment option. For some companies, only offering a usage-based pricing structure makes sense. For others, it would be better to offer it as one of several models for customers to choose from. Companies that adopt such hybrid consumption models see higher growth than competitors that do not.
Ultimately, it all comes down to what makes the most sense for a business and its customers. We know that customers want options. They said as much in our recent consumer survey. A customer-centric and future-proof approach to monetization is the leading strategy for matching pricing and packaging with the demands of the market. That strategy can only be implemented with a modular monetization platform, which empowers businesses to seamlessly present multiple offerings to their customers and experiment with them without breaking their infrastructure. This allows businesses to move quickly and immediately match the ever-shifting demand of the customer base.
This monetization strategy is about deeply understanding what your customers want, and a modular platform is about giving it to them. Usage pricing is one of many ways to meet demand. When you invest in these strategies and platforms, you’re telling your customers that what they want matters, and they will always reward businesses that center them in their work.
