In recent years, the IT services sector has shifted away from traditional metered billing models. Once favored for their flexibility and fairness, metered billing allowed customers to pay based on their actual usage of resources like cloud storage, APIs, or computing power. However, subscription-based and flat-fee pricing has gradually replaced this usage-based model.
With businesses prioritizing revenue predictability and customer simplicity, the decline of metered billing in IT services marks a significant change in the industry’s pricing strategy. Let’s explore the causes driving the shift from metered billing.
Organizations define metered billing as a pricing model in which a business charges customers based on how much they have used a particular product or service. It means the billing amount is based on product usage. This billing method is mostly used by businesses that offer variable products and services. Here, one customer’s product usage will vary greatly from another customer’s.
Several components comprise metered billing in IT services, including the following.
● Usage metrics to determine user activity and consumption
● Tracking and measurement systems to record the consumption of products or services
● Billing cycles to determine how often customers are billed for their usage
● Reporting tools to provide customers insights into their usage, enabling them to manage their consumption
● A pricing scale or tier that can lead to a decrease in the price per unit with increased consumption, thereby incentivizing higher usage.
● Alert notification systems to notify customers when their usage reaches predefined levels and prevent bill shock
● Billing adjustments in the case of system errors, promotional offers, and customer disputes.
● Customer support to quickly resolve customer queries and issues, and maintain customer trust
Did you know HubSpot’s net revenue retention (NRR) jumped to almost 100% in 2014 after it introduced a usage-based pricing model in 2011?
Following suit, 61% of businesses adopted some form of metered billing in 2022.
Let’s explore the numerous benefits of metered billing in IT services and why it drives businesses to adopt this pricing model.
● It offers businesses a gold mine of data and insights into customer behavior and how they use a particular product or service.
● It leads to higher customer lifetime value (CLV).
● It’s fairer for customers because they can see the actual value of their actions and usage. They also know that the more they use a product, the more they’ll have to pay. Customers may be comfortable knowing what they’re paying for. It makes them feel in control of their expenses and increases customer retention.
● Businesses can generate higher revenue by combining the subscription and metered billing models. The first brings in a steady stream of monthly income, and the latter ensures revenue based on user consumption.
One of the biggest drawbacks of metered billing is that it doesn’t work for complicated products or services that businesses can’t break down into measurable units.
Now, let’s look at other major reasons behind the decline of metered billing in IT services.
With metered billing, businesses have to estimate a customer’s usage and how much they’ll pay each month. It makes it difficult to predict revenues. It does not give them a steady monthly revenue and enables them to accurately predict their income, unlike subscription models.
Metered billing is based on the concept that businesses can accurately measure product or service usage depending on a user’s activity. If they fail to accurately measure the usage, no monetary value can be assigned to it. This pricing model is of no use without actual usage metrics.
Metered billing requires businesses to accurately measure product usage to charge customers properly. They should be able to track and monitor user activity and put a monetary value to each action. Whether this is the most effective charging method will depend on a company’s expenses. Metered billing wouldn’t turn out the best option if the costs are fixed.
One of the biggest reasons for the decline of metered billing in IT services is the growing demand for predictable costs. Businesses are shifting to subscription-based or fixed-rate models. It allows them to budget more consistently and reduce the risk of fluctuating bills. Alternative options like flat-rate or tiered pricing models offer reliability and simplicity. Even customers find flat rates more appealing since they don’t incur any additional costs with usage spikes.
This pricing model is better aligned with modern business strategies. It enables businesses to focus on customer retention and offer long-term value. With predictable costs, businesses can better plan their investments. It also helps them avoid disruptions caused by varying costs.
Factors to Consider Before Choosing the Metered Billing Model
Here are some factors businesses should consider before choosing the metered billing model.
● Determine how quantifiable a product or service is. Customers should be able to easily understand how product usage is measured in specific units.
● How well customers understand metered billing. They should be able to understand they’ll be charged for how much they use a product, enabling them to make better decisions.
● Value metrics to determine how a product or service will be monetized. This can vary from one business to another, as well as the type of product or service offered.
● The impact customer consumption will have on operating expenses. One customer may not impact operating costs, but a huge customer base will.
Here are some best practices businesses can follow to successfully implement metered billing:
The decline of metered billing in IT services reflects an industry-wide evolution in response to changing business needs and customer preferences. Metered billing introduced complexity and unpredictability, both for service providers and their customers. Other straightforward alternatives offer a stable revenue stream and simplify cost management for clients. However, the future may see a hybrid approach that combines the customization and fairness of metered billing with the convenience of subscription-based models. For now, IT services will continue to adapt to the dynamic demands of both the market and technology.
Do you want to transform your business with top-tier IT solutions? Look no further than Imagine IT! We can advise you on the best way forward for your business, whether it’s implementing metered billing or a subscription service.
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