Usage-based billing: how subscription businesses can drive more value for customers in 2023

Chargebee’s CMO Sanjay Manchanda outlines why turning to usage-based billing means more predictable revenue despite an unpredictable economy, and why it takes technology, process, and cultural transformation to succeed.

Many businesses are seasonal or have variable sales volumes throughout the year. But the Software-as-a-Service (SaaS) platforms they use to run their operations often charge a fixed monthly or annual fee. As a result, they end up having to pay for maximum capacity each month, regardless of circumstances and usage. This model has worked for years, but as companies face tighter budgets in uncertain economic conditions, having flexibility will be critical to success.

Put simply, offering usage-based billing (UBB) can be difficult for vendors. They need to come up with a reasonable, measurable unit of usage and need a tech stack to manage it. They also need to think differently about predictable recurring revenue as it relates directly to customer interactions.

In other words, transforming billing is simply the end of the process. It is part of a more extensive transformation around pricing and product-led growth. Yet, despite the potential challenges ahead, in 2023, more and more organisations will embark on the journey to provide usage-based billing. Doing so can help drive continued value for the customer and future-proof operations, with benefits during any economic cycle.

UBB is becoming more common. In fact, based on a recent study on SaaS benchmarks in collaboration with OpenView partners, over 55% of respondents have at least tested usage-based pricing and seen higher median Net Dollar Retention (‘NDR’) in the past year. Despite the perceived difficulties, two-thirds of companies within the USD 3 – USD 100 mln SaaS segment are implementing it or planning to do so, according to internal Chargebee research, to maintain cashflow.

The potential revenue opportunities are just part of the reason why companies are taking the plunge – UBB is also a means to deepen customer relationships. Since they optimise the product for outcomes, vendors can tangibly exhibit better ROI and adopt an inherently more customer-centric revenue model.

Starting down the UBB path means first finding a value metric that means something to customers. A billing system, for example, might meter based on numbers or invoiced amounts. A developer platform might meter based on application programming interface (API) calls. Using calls to meter a billing system would frustrate and confuse end users who do not understand the technical specification of the tools they use. Moreover, for some companies, their products may be too complex for a metered billing charge to make sense.

First and foremost, SaaS vendors must ensure their platforms have the necessary telemetry to capture usage. Building or using metering capabilities is an integral part of the technology planning for offering UBB to customers. But vendors need more than metering alone. The right vendor tech stack should be able to assign a dollar amount to metered units and feed that into Accounts Receivable and Billing functions. Doing so can be especially complex when UBB is based on a fixed amount plus overage charges for anything that exceeds the allotted amount (such as the amount of GB or the number of transactions).

UBB is a departure from the predictability of monthly and annual recurring revenue. As a result, vendors looking to adopt UBB must learn to be comfortable with some degree of unpredictability. Luckily, there are multiple ways to maximise revenue predictability. For example, some vendors offer a hybrid model of tiered pricing with usage-based add-ons, while others allow customers to pre-pay and draw down a fixed number of units.

Regardless, UBB can be more challenging for vendors that have high fixed overhead costs and easier for those whose costs also vary with usage. It also creates challenges for periodic invoicing, proration, tax computation, and revenue recognition. However, vendors should be assured that best-in-class recurring billing platforms are offering features to help manage that complexity.

UBB affects more than a tech stack and accounting department. It also has a direct impact on demand generation, sales, and customer success. Rather than basing targets and incentives on upfront contract value, customer-facing teams need to take customers’ usage into account.

Transforming a pricing strategy must also go beyond remodelling revenue collection, billing, and invoicing modules. It requires, in equal parts, company-wide alignment on how an altered pricing strategy works for the business, a platform-readiness check with product and engineering teams, and training customer-facing teams like sales and marketing on the nuances. As a result, the nature of interactions with customers will change from pre-sale to ongoing support and retention. Many vendors stumble when they give this cultural change short shrift.

SaaS vendors increasingly view usage-based billing as an acquisition lever, with 45 percent of them already using some form of UBB. With the underlying rationale centred on the customer’s best interest, it’s not hard to see why such a strategy will be popular with organisations in 2023.

Billing every customer on usage-instance instead of asking them to commit to subscription plans reduces barriers to entry and breeds confidence for adoption. The evolution of UBB best practices and tools is helping more and more businesses tap into those vital benefits, especially at a time of potential economic challenges.

About Sanjay Manchanda

Chargebee CMO Sanjay Manchanda leads the company's entire marketing arm, including product marketing, go-to-market, demand gen, and communications. Sanjay is a former enterprise tech founder and CEO himself and has helped rapidly scale new product businesses, contributed to building a multi-billion dollar SaaS business, and delivered successful go-to-market and demand gen strategies for tech leaders Microsoft and Box.

About Chargebee

Chargebee is the subscription management platform that automates revenue operations of over 4,500 subscription-based businesses from startups to enterprises. Chargebee helps subscription businesses manage and grow revenue by automating subscription billing, invoicing, payments, and revenue recognition operations. It also provides key metrics, reports, and business insights and now offers Chargebee Retention and Chargebee Receivables. Founded in 2011, Chargebee counts Okta, Freshworks, Calendly, and Study.com amongst its global customer base.