Quantity-Based Pricing vs. Usage-Based Billing: What’s the Difference?
Any subscription commerce brand knows that getting its plans and pricing just right is critically important. Because subscription business models rely on recurring, not just one-time, transactions, you need to price your product(s) or service(s) in a way that’s sustainable long-term for your business while also fair to your subscribers.
Many subscription model businesses approach this challenge by charging based on the quantity of goods or services they provide to their customers. There are two main ways to do this: using a quantity-based pricing model or usage-based billing model. And while both of these strategies sound quite similar, they are distinct, and you should know when to use one method or the other.
The difference between quantity-based pricing and usage-based billing
“Time is on my side, yes it is!” proclaimed the Rolling Stones, and while they probably weren’t singing about subscription billing, they were right on the money. The difference between these two pricing models all has to do with time.
Quantity-based pricing is when subscribers are billed in advance and pay for a certain amount of goods or services, regardless of how much they actually might use. For example, a subscriber to a sock subscription service might sign up to pay $10 a month for one pair of socks, $18 for two pairs of socks, or $25 for three pairs of socks, and his card will be charged for the appropriate quantity of socks at the beginning of each billing cycle.
There are actually three specific sub-types of quantity-based pricing, all of which Recurly supports:
Tiered: a company defines certain pricing tiers and charges a total amount per tier based on the quantity ordered. For instance, a paper supply company might charge $10 per ream for the first 10 reams of paper, $8 per ream for reams 11-20, and $6 per ream for more than 20 reams.
Volume: per-unit pricing differs based on the volume of goods or services ordered. For example, a phone service provider that provides unlimited talk, text, and data might charge $35 per line for up to two lines, $30 per line for three lines, and $25 per line for four lines.
Stairstep: a fixed price is charged based on the highest tier reached. As an example, a streaming movie service might charge $10 for the ability to stream on two devices at once and $15 to stream on up to six devices at once. Whether a family decides to stream on three, four, five, or six devices at one time, they’ll pay $15 per month.
Note that in all of these cases, the subscriber pays at the start of the billing cycle. This is important to point out because in a usage-based billing scenario, subscribers pay after a billing cycle ends based on—you guessed it—the quantity they actually used during the billing cycle.
As ubiquitous as quantity-based pricing might seem, usage-based billing is also extremely popular. Many utility companies, for instance, monitor how much heat, electricity, or water their customers use every month and then bill them at the end of each month (or in the middle of the following month) based on their usage. Another example: a cloud storage provider might charge users by the gigabyte up to a cap, so customers with extremely low data needs aren’t forced to pay the same price someone who needs a lot of storage in the cloud might pay.
When should I use one or the other?
Both quantity-based pricing and usage-based billing have their places.
The former is useful when companies want to balance the business need to keep costs predictable while still scaling based on demand for their goods and services. Quantity-based pricing is an excellent way to incentivize subscribers to purchase more since they’ll receive a discount on a per-item basis. This is why, for instance, so many people gravitate toward family plans instead of individual cell phone lines.
Usage-based billing, meanwhile, is an excellent way for companies to only charge for what subscribers actually use. It’s perhaps the easiest way for companies to directly connect revenue to costs and, therefore, to predict profits: if you’re a power company, for instance, and know that every kWh (kilowatt-hour) costs you $0.10 to provide, you might charge $0.15 per kWh and be guaranteed a $0.05 profit on each kWh your customers use. Additionally, by providing subscribers with greater transparency into their usage, you’ll be better equipped to upsell them to higher plans. Usage-based billing is ideal for businesses in industries like financial services, IoT (Internet of Things), and software tools.
Can I use both?
Both quantity-based pricing and usage-based billing have their advantages, and using them in tandem can unlock a lot of flexibility for your business. There are two ways you can leverage both billing models.
First, you can charge subscribers a certain amount at the beginning of a billing cycle and then adjust these charges based on actual usage. For instance, say you’re a SaaS provider that charges per seat. If your customer initially asks for (and pays for) 50 seats, but five users don’t even log in to their account during the billing cycle, you might only charge that customer for the 45 seats they actually used. (This would be a great way to engender customer loyalty).
Second, there’s the hybrid subscription model, in which you might combine a fixed recurring fee with a one-time charge. Again, say you’re a SaaS provider, but this time you sell a CRM solution. You might charge a flat fee just so customers can use your platform (say that’s $15/month/user), plus an additional amount per month based on the number of leads and contacts stored in the database (usage-based billing).
No matter which way you go, combining quantity-based pricing and usage-based billing can benefit both your bottom line as well as your subscribers.
Improve acquisition through billing flexibility
Pricing, packaging, and promotions form a well-rounded subscriber acquisition strategy. The efficacy of these marketing efforts comes down to understanding what competitors are doing and how consumers respond.
While both billing models have similarities, they’re different enough to warrant further investigation. Finding the right pricing model can mean the difference between a wildly successful business and one that doesn’t meet your subscribers where they are.
Benchmark data is critical to designing specific tactics for your business. Recurly has compiled the data of over 2,200 leading subscription brands to inform your acquisition strategy.
Check out The State of Subscriptions: The acquisition chapter to get the most recent trends, how they impact the subscription industry today, and how Recurly is changing subscriber acquisition as we know it.