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What Is metered billing and why it might be right for your business

Saturday, December 05, 2015

Metered billing is a pricing model in which the amount a client pays for a product/service is directly tied to the amount in which they use it. It’s also often referred to as “pay-as-you-go” or a consumption-based model.

One of the most popular areas for this type of billing has been with public utility companies. These companies provide products that fluctuate vastly in use from customer to customer (water, heating, electricity), so metered billing makes sense for them, because:

  • If the business offers a flat rate that’s too high, they’ll lose out on low usage customers and face sharp criticism every pay period from customers who feel they’ve been overbilled.
  • If they offer a flat rate that’s too low, then they’ll lose money when their operating costs exceed their profits due to customers overusing their services.

So, for utility companies, it makes the most sense to disregard any flat fees, complicated conditional charges, or payment tiers, and instead formulate a unit of usage, and then simply charge a fixed cost per unit (e.g., 3¢ per gallon, 10¢ per kilowatt hour, etc).

Companies that use metered billing also often incorporate usage limits and time-of-use costs, which this article will breakdown later.

Because some businesses have not fully considered metered billing as an option, or others may be interested but curious if it’s the right fit for their specific company, this article will focus on breaking down the benefits of metered billing, exactly how it works, and what adjustments businesses can make to fit their business model.

Benefits of metered billing

It’s fairer for your customers (and you): Just like merchants, customers desire to be treated fairly. A metered billing plan creates a model in which a customer’s bill is directly proportional to the amount of a product or service they bought or used. This creates a more respected relationship between the client and merchant. The reason for this is because the client agrees to the terms (usage rate) and assembles the bill themselves. There is a mutual understanding to the client that for every usage on their end, there is work done in response on the side of the merchant, and this system creates a foundation of fairness.

Increases customer lifetime value: A customer lifetime value (CLV) is a customer’s average revenue created throughout an entire relationship with a merchant.

Metered billing is created with the long-term in mind. Its ability to serve a variety of clients in customizable ways produces tailored services that customers prefer. Additionally, many possible frustrations that might formulate throughout a client’s tenure are solvable on the customer’s side, which means when merchant’s get involved, they’ll be better prepared to help due to not being overwhelmed by customer complaints. Satisfied customers given fair service are likely to be longtime customers, thereby increasing CLV.

Insight into customer behavior and usage: Metered billing provides an abundance of customer usage statistics. This data is immensely valuable in helping determine customer preferences, which in turn helps the merchant offer them a personalized experience and additional services they may be interested in.

In the event of customer complaints, this data is crucial in determining the factors that led to those instances, which in turn can help business owners mend, adjust, and avoid the negative factors in the future.

Empowers customers: Let’s look at this example to illustrate empowering customers:

A client and a company agree to the terms of service and a usage rate, in this scenario, 3 cents per gallon. Later on, a customer turns on their faucet, water flows out, and then throughout a month this process repeats and is formulated into a bill that represents the sum of these interactions.

Looking over the bill, the customer sees that whatever price is calculated is directly tied to their actions. The price is tailored, customized, and representative of their habits and desires. This can be very self-empowering to customers as they can continue adjusting the price however they’d like, ultimately resulting in increased customer satisfaction at no extra cost to the merchant.

Feel like your price is too high? Take shorter showers, rely on rainwater, reduce faucet use, etc. Or, in the event your price is lower than expected and you can afford more, take longer showers, finally make that backyard into the garden of your dreams, etc.

Metered billing allows for customers to customize their service to their specific desires and needs, resulting in deliberate lifestyles, appreciation for provided services, and personal investment over monthly price tags.

Considerations

Ability to quantify and value metrics: The biggest factor in determining whether a metered billing model suits your business is how well your services or products can be broken down and simply valued.

For instance, if your business is a roofing company, it may be tempting to offer metered billing at a “per roof tile” rate. But this can be easily taken advantage of due to an issue in valuing. Each house and each roof needs to be personally examined and given an estimate regarding the level of difficulty in transporting tools up to the current safety and condition of the roof, etc. So, a “per roof tile” rate simply can’t be properly valued due to roofing being complicated and each homeowner’s particulars affecting the cost of the tiles.

The companies that benefit the most from metered billing are those that offer seemingly limitless resources to their customers at all roughly the same value. An example of this could be a content writing company made up of a group of writers who essentially can offer an endless amount of written words to a client. The company could easily charge their clients a “$__ per 500 words” rate, and then simply charge their clients as the services are used.

Many online platforms and business-to-business organizations benefit and support metered billing. Many payment processors, for example, charge their merchants a “per successful credit card transaction” rate. They’ll then offer additional services that have less consistent average use for flat monthly or annual prices.

It’s important to offer metered billing for services that clients will use continuously, and the online marketplace is a quickly growing platform to house these types of services.

How customer consumption drives your costs: If customers take advantage of your services, metered billing could be a good fit. Furthermore, if there’s potential for customers to take advantage of your services to such an extreme that it would be costly for you, then metered billing could be beneficial. Metered billing allows you to offer unlimited services, but deters consumers who might be tempted to pay a monthly cover and then eat up your resources way beyond that of the average consumer.

If you offer a limitless resource and clients are consistently underusing your product, then a subscription-based model may make more fiscal sense until your consumer base or average usage increases.

Metered billing and subscriptions

Consumers are growing more independent and expectant that they’ll be able to personalize almost all areas of their lives, and their billing plans are no exemption. Subscription plans can be limiting, rigid, and too strict for certain clients, in which case metered billing is a breath of fresh air.

However, subscription billing still has its place, and flat fees are desirable for merchants who want to have predictable revenue, an easier time calculating prices, and simpler billing periods. And for customers, the subscription model also provides invoice consistency and encourages additional usage.

Metered billing modifications

Usage limits: Increased usage and overhead costs to a company could potentially not mix well, in which case some companies set up usage limits in which once customers pass them, the usage rate is either increased or decreased. This is a simple and efficient way to guarantee that in the event a client goes overboard in usage that you’ll still make a profit and they’ll be unable to refuse the bill.

Time-of-use: Some businesses find that during certain times of the day they either:

  • Have increased costs to offer services.
  • Lose out on potential revenue.

In both of these events, charging increased usage rates during these time frames allows merchants to take advantage of time-based factors that can affect their overhead.

An example of this situation is with mobility service providers (Uber, Lyft) who typically offer a “per mile” rate (on top of different car model options). During peak travel times, these companies charge increased rates due to the sudden and temporary rise in demand from consumers. Furthermore, peak times could mean cars are sitting in traffic longer, which results in increased costs on the side of the merchant provider. After these peak hours subside, they’ll return to their typical rates.

Closing thoughts

Metered billing isn’t for every business, but allowing clients to pay for services as they use them is quickly growing in the age of ecommerce and web-based services, in particular with API and SAAS businesses (software as a service) that lend out their software and tech support to companies with varying usage rates.

Additionally, a metered billing cycle can be beneficial not only for consumers, but merchants as well, as it encourages longer term clients, provides valuable consumer behavior data, and solves various problems.

Looking to team with billing experts?

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