Building and forecasting a usage billing business

Usage-based billing is becoming an increasingly common way for recurring revenue companies to do business with their customers.

This style of revenue collection has numerous advantages that have contributed to its rising popularity:

• Flexibility for your existing customers: If your current customers would like to increase their use of your services or pull back slightly to save some money, they have the freedom to do either.
• Approachability for curious prospects: Usage billing has a unique benefit for your potential SaaS customers. In most cases, the financial barrier to entry is so low that it’s pretty much one step away from a free trial.
• Multiple revenue scaling options: SaaS companies who leverage usage billing tend to have higher NDR (net dollar retention) rates than their competitors who use other billing strategies. This is because many other subscription models take the “all or nothing” approach: either someone has a subscription or doesn’t. Usage billing capitalizes on customers’ varying levels of commitment to your brand.

This article will cover some best practices that can make usage billing profitable and straightforward for any SaaS company.

Give Your Customers Clarity

One of the potential drawbacks of usage-based billing is that it introduces some elements of uncertainty for the customer. How much will they use your software? How much can they expect to pay for different levels of use across time?

These are natural questions when debating whether to purchase an item or service. But you can take steps to make them easier for your customers to answer, such as:

• Implementing hybrid pricing: Hybrid pricing is a combination of two different billing methods. There are endless potential pairings. The most common, though, involves a baseline payment in exchange for a set amount of use. After they’ve hit their baseline threshold, users can switch to a “pay-as-you-play” model and only pay for the additional monthly use they engage in.
• Having a pricing calculator available: This can help customers make projections about exactly how much they’ll pay for different usage amounts. That’s even more important if you sell to highly price-sensitive individuals or companies.
• Minimize pricing variables to a core few: Choice is undoubtedly a good thing, but too much of a good thing can become problematic.

That’s only half of the equation for creating predictability around usage billing systems. Let’s dive into the second part.

Create Internal Predictability

Creating internal predictability for your employees and coworkers also plays a key role in effectively implementing usage-based billing.

In particular, you’ll want to track your SaaS metrics across three distinct aspects of the customer journey:

• Customer onboarding: For recurring revenue companies, this is where everything begins. The key metrics you’ll want to track for this part of the customer journey include new monthly and annual signups and account activations.
• Subscription renewals: Keeping churn rates at a minimum is one of the most critical tasks of any SaaS CFO. Your key metrics to track for this are churn, account renewals, and account upgrades if applicable.
• Post-sales relationship nurturing: Once customers subscribe to your service, it’s important to keep the relationship going. Don’t be overbearing, but do what you can to boost customers’ interaction with your brand. Your engagement rates and NDR are two of your most essential metrics for keeping an eye on this part of the customer journey.

Now you know the two aspects of predictability that all well-run usage billing companies need. But what does it take to achieve that clarity around your ARR and bottom line?

Embrace a Modern Accounting Workflow

Accounting automation is something that all CFOs should be taking full advantage of, whether they’re in the SaaS space or not. The advantages of a streamlined and automated accounting workflow are undeniable. Companies who embrace automation will unlock growth at much quicker rates than their peers who continue to use manual accounting methods.

Some of the standout benefits of accounting automation software include:

• Frictionless accounting entries: Automation makes errors a thing of the past. And there’s no need for double entries, either.
• Distributed data: With modern accounting software, you can make sure that all your company’s departments have access to the information they need when they need it. Real-time updates across departments mean you can say goodbye to wasting time gathering or authenticating data across departments.
• Automated invoicing: In the recurring revenue world, an invoicing mistake is two things at once. First, it’s an inconvenience to your customers. Second, it’s an extremely poor reflection on your company. And it only has to happen once for your reputation to be tarnished. In this respect, investing in automation acts as reputation insurance.

With these day-to-day tasks automated away, you’ll be able to focus on the long-term strategic questions that will enable your business to achieve strong usage billing results quarter after quarter.