What is metered utilization? An easy guide for SaaS companies

Did you know? About 98% of SaaS businesses have reported positive outcomes following core changes to their pricing models. You might be wondering why this is the case.

The truth is that finding the sweet spot between the value you’re providing to your users and how that impacts your operational costs can be tricky.

SaaS companies that thrive have identified this pattern and have switched their strategy to metered utilization as their go-to pricing model.

In this article, we’ll explore why this pricing strategy is so valuable, especially for SaaS businesses that truly value transparency and accuracy when charging their users.

We’ll go over:

• A quick definition of metered utilization and its benefits
• An overview of some industries that use metered utilization
• Key considerations before implementing metered utilization
• Some pitfalls to avoid and how to solve issues related to this pricing strategy
• Tips and best practices for metered utilization

Let’s jump in.

What is metered utilization?

Metered utilization (also called pay-per-use, metered billing, or consumption-based pricing) is a pricing model where we charge customers or users based on how much of a service or resource they actually use. This means customers pay in direct proportion to their consumption.

This type of billing becomes particularly useful in industries where usage varies significantly between customers or even within an individual customer's usage patterns over time.

For example, with cloud computing services, we can charge based on the amount of storage, processing power, and data transfer a customer uses.

Similarly, we might offer metered pricing for a subscription service, where users pay for extras when they surpass their initial allowance of features or activity.

What’s so good about metered utilization?

Metered utilization offers significant benefits to both customers and service providers. Let's break down some of the key advantages:

Fairness and transparency with costs and usage

Perhaps the most significant advantage of metered billing is the way it promotes fairness. As mentioned in the previous section, customers only pay for the resources they use.

This eliminates frustrations associated with subscription models, where you might be paying for a package of services even if you don't use them all. Metered billing also adds transparency, giving customers complete visibility into their usage patterns and how that will eventually appear in their bills.

Adaptability for your business

For businesses offering SaaS products, metered utilization allows them to match revenue directly to the resources they provide. This scalability is ideal when demand and usage patterns fluctuate.

Providers can easily adjust how they supply services without worrying about over-provisioning resources that might go unused or being caught short when demand spikes.

Flexibility for customers, too

Customers also benefit from metered billing's adaptability. If their needs change, they can modify their usage accordingly.

For example, a business using cloud computing services might have high and low activity periods. Metered billing ensures they pay fairly during both the busy and quiet seasons, making it a cost-effective model.

Which industries use metered billing?

Metered billing changes how businesses and customers interact across a wide range of industries. Let's look at some key examples:

• Cloud computing: Giants like Amazon Web Services (AWS) extensively use metered billing. Customers pay for their computing power, storage space, and other cloud-based resources.
  
  This allows for on-demand scaling, so you only pay for what you need, whether you're a small startup or a large enterprise.
• Telecommunications: Mobile phone plans are perfect examples of metered billing. Users might have a base allowance of data, calls, and texts, but they’re charged based on extra usage if they exceed those limits.
• Utilities: Traditional utility companies, such as electricity and water providers, have always used a metered model. Users have a meter that tracks their consumption, and they’re billed based on how many units they use within the billing cycle.
• SaaS companies: Many SaaS businesses use metered billing models. This could involve charging based on the number of active users on your account, the volume of transactions processed through the software, or even specific actions taken within the platform.

AI SaaS companies (which offer features that require API calls and work on a token system) also use metered billing. Individual API calls cost money, and it’s key to monitor them to avoid unexpected expenditures after each billing cycle.

Key aspects to keep in mind when considering metered utilization

Adopting a metered billing model involves careful consideration of several elements to ensure a smooth transition and accurate tracking. Here are three of the most important ones:

Know your infrastructure requirements

The first step is building the infrastructure to track customer usage accurately. This often involves specialized metering tools and software integrated into your service delivery systems. These tools should accurately register how much of a resource or service a customer uses, providing the essential data for billing calculations.

That’s why a solid SaaS billing platform that handles usage-tracking, invoicing, and payment processing, such as Orb, can save you precious time you’d otherwise waste setting up an in-house billing system.

Have your pricing strategy sorted out

Setting the correct prices per unit of consumption is crucial. Your pricing needs to align with market rates to stay competitive and avoid going into the red.

Analyze your costs, competitor offerings, and the perceived value of your service to determine fair and sustainable pricing. You might even consider multi-tiered pricing, with discounts for higher usage or other incentives to ensure your model benefits both you and your customers.

Keep your customers in the loop

Open communication is essential when implementing metered billing. Be sure to clearly explain how your pricing model works and how usage is tracked.

Provide customers with easy-to-understand dashboards or usage reports to help them monitor their consumption and avoid unexpected charges. This transparent approach enables you to build trust and allow customers to feel in control of their spending.

Challenges of metered utilization and how to solve them

Challenge: Billing disputes

Customers might disagree with their invoices if they don't understand how charges are calculated or if they believe their usage was tracked incorrectly.

• Solution: Provide customers with easy-to-access dashboards to monitor their usage in real time. Clearly explain your pricing plans, including tiers, overage charges, and how usage is measured and billed.

Challenge: Usage estimation errors

Even the best metering systems can occasionally have inaccuracies. This could lead to underbilling or overbilling, which can cause customers to feel distrustful.

• Solution: Implement rigorous quality control measures to ensure your metering system is as accurate as possible. Regularly audit your processes, test your tools, and identify potential errors.

Remember to have a game plan for when you need to address and rectify any billing mistakes quickly.

Challenge: How customers perceive your billing method

Some customers might find metered billing less predictable than a flat subscription fee. The variability could create anxiety about costs, leading them to be wary about their costs to the point it damages your customer-provider relationship.

• Solution: As with billing disputes, you need to help customers understand that costs directly track their usage patterns and provide tools to predict potential charges.

For added predictability, consider offering hybrid pricing models that combine metered billing with a base subscription fee.

Extra tip about customer support

Across all these challenges, responsive and helpful customer support is a must. Make it easy for customers to contact you if they have questions about their bills, want to adjust their usage, or have any other concerns.

Good customer service helps build trust and loyalty, even when a problem arises or things don’t go according to plan.

Tips and best practices for metered utilization

To get the most from metered billing, here are some essential tips and best practices to consider:

• Set clear usage thresholds: Clearly define your pricing tiers and the corresponding consumption limits so customers know exactly when they'll transition to a higher pricing bracket. This will save you and your customer from nasty surprises when bills arrive.
• Implement usage alerts: Actively notify customers when they approach their usage thresholds. This allows them to adjust their consumption accordingly or upgrade their plan, helping avoid unexpected overage charges. Keep them always in the loop.
• Use a SaaS billing platform: Specialized billing tools can help you and your customers better understand usage patterns. They can also help you with billing automation and pricing changes if you add features or your operational costs have gone up.
• Be adaptable: Review and adjust your pricing models when you have to. The market and customer needs change, so keeping plans in line with demand and your own costs is essential for long-term success. To do so, make sure to gather customer feedback regularly.

Next steps

Now you understand how metered billing can accelerate your SaaS growth. However, implementing it yourself can be tricky. You need to track usage accurately, handle complex pricing models, and create clear invoices.

Orb is a done-for-you billing solution designed to take the hassle out of metered billing.

Here's how Orb supports your metered strategy:

• Accurate usage tracking: Orb records detailed usage data, so you never underbill or overbill customers. You don’t have to sift through different analytics tools to audit the system and see how customers are interacting with your SaaS solution.
• Flexible pricing models: Orb supports a wide range of pricing structures, including tiered pricing, volume discounts, prepaid credits, overages, and more. Orb even lets you pre-schedule changes and backdate migrations all in a straightforward UI.
• Clear and transparent invoicing: Orb generates invoices with detailed breakdowns of usage and charges, giving your customers complete visibility into their costs. Orb also lets you surface past-due invoices and recover failed payments with its smart retry logic.
• Real-time reporting: Get up-to-the-minute insights into usage patterns, revenue, and customer behavior. This data lets you fine-tune your pricing and optimize your offering. The best part? You can view detailed reports automatically.
• Usage alerts: Proactively notify customers when they approach usage thresholds, helping to avoid unexpected overage charges. Orb lets you set up webhook alerts based on usage and reach out to customers in real time.
• Integration made easy: Orb connects with your existing tools and data feeds (thanks to its data warehouse-native nature), ensuring all your systems work together smoothly and data comes from your internal source of truth.

Learn how Orb can help you solve metered utilization and make your pricing implementation a breeze.