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Four usage-based pricing challenges and how to overcome them

What’s not to like about metered or usage-based pricing? It enables businesses to respond rapidly to changing business and customer requirements, shortens the purchasing cycle by eliminating the need for customers to make up-front investments, and improves customer satisfaction, retention and lifetime value. 

Then there’s the ability to adjust prices based on supply and demand, to gather invaluable insights into customers’ usage patterns and behaviours, and to offer cost effective options for consumers and businesses of all stripes and sizes, from start-ups to global behemoths.

In short, the opportunities for businesses that adopt usage-based pricing are considerable but – and there’s always a but! – as a revenue model, it’s not devoid of issues. Understand and manage those issues and you’ll be better placed to capitalise on the opportunities.

Here are some of the most common pitfalls businesses can encounter when making the switch.

Bill shock

The term bill shock was originally coined to describe the sensation experienced by mobile phone users when their monthly bills contained additional or higher than expected charges. Greater transparency and the prevalence of fixed price packages has resulted in it becoming a less common phenomenon in the telecoms sphere in recent years.

It can, however, be an issue for suppliers in other sectors, however keenly priced their goods and services may be. And because it can result in customer dissatisfaction and churn, it makes sense to mitigate it. You can do so by being transparent about your costing model, offering a variety of pricing tiers, putting caps on spending limits and informing customers when they’re about to be charged more than usual.

Commitment-phobia

Sign customers up on an annual contract and they’ve no choice but to stick with you until the renewal date rolls around. Not so with usage-based pricing. The lack of lock-in is one of its chief attractions – for customers at least. For suppliers, it means having to work extra hard, month in, month out, to minimise customer churn.

Delivering an exceptional customer experience, and empowering your sales reps and contact centre agents to provide discounts and special offers to subscribers who are ready to walk, can help keep the customer satisfied and the cash reliably rolling in.

Unpredictable revenue

A revenue model that centres around upfront purchasing of goods and services tends to generate a relatively predictable revenue stream. Usage based pricing not so much, because customers’ usage patterns can vary considerably from month to month. Having someone monitor and report on fluctuations is essential. Excellent cash flow management skills, rigorous contingency planning and a substantial cash reserve may also be needed, to prevent cash flow crunches and ensure overheads are covered.

Inadequate billing and payment infrastructure

While a metered or usage-based pricing model may hold considerable appeal for customers, its charm can wear off very quickly, if the supplier lacks the foundation technology necessary to generate detailed, accurate customer invoices. 

A traditional billing system is unlikely to answer. They’re designed to generate fixed price invoices and track and manage payments, not calculate how much of a product or service a customer has used and what that should cost them.

What’s required is a next generation cloud-based revenue management platform that covers the revenue cycle from end to end, capturing and consolidating usage data in the process. Ideally, it should integrate seamlessly with a CRM system that tracks and manages customers, and with the ERP solution that powers the enterprise.

The platform should make it easy for the supplier to analyse customers’ consumption data over time. Doing so can enable it to develop and optimise pricing plans and packages that best meet customers’ current and emerging requirements.

Also on the nice-to-have list: the capacity to establish a self-service portal which allows customers to access their account information, view their usage, make payments and download statements.

In the absence of a robust, well supported solution that provides these features, billing delays and errors are a distinct possibility, particularly if usage-based pricing has been rolled out at scale. That’s bad business and bad for the brand, with some evidence suggesting buyers will take their customer elsewhere if they’ve been incorrectly billed. In a report by CMO Council, billing problems, including inaccurate charges and billing disputes, were identified as key contributors to customer churn in the telecommunications industry.

Towards a stronger future

In 2024, the popularity of usage-based pricing continues to grow, in the B2B and consumer spheres alike. For businesses looking to expand their reach and revenue, pivoting to this model can create unparalleled opportunities. If your organisation plans to make the switch, investing the time and resources necessary to ensure it’s a success from the get-go will undoubtedly prove an excellent move.

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