A Guide to Metered Billing
Even though it’s not a term found in our popular lexicon, we’ve all had experiences with metered or variable-price billing. From electricity to long-distance calls to the milkman’s delivery, there are many instances of metered billing in our recent (and not-so-recent) past. In all of these scenarios, the customer is billed on a regular basis and the amount varies based on how much of the product or service they use.
There’s rarely (if ever) a month where a house doesn’t use electricity, but in the days of prevalent landlines and long-distance calls, there could be a month where no long-distance calls were made. So there is the option to have billing cycles that result in zero charges for certain products, while others can be attached to base subscription plans.
Metered billing, according to TechTarget’s IT encyclopedia, is “any type of payment structure in which a customer has access to potentially unlimited resources but only pays for what they actually use.”
Metered billing works similarly to subscription billing, in that a customer agrees to ongoing billing up-front. After that, the two diverge: subscription billing assumes a fixed billing amount for each billing cycle.
In the case of metered billing, customers are billed for variable amounts of products or services based on usage. Many billing models combine the subscription and metered billing models, using an ongoing fixed fee in addition to a variable charges based on usage.
At first glance, metered billing might seem complicated to implement and hard to monitor. However, there are numerous tools in the online marketplace that enable straightforward metered billing with minimal effort.
So how do you know if metered billing is a fit for your business? Your best first step is to make sure you have a thorough understanding of your products and services. Here are a couple of questions to consider:
What is the purchase frequency of your customer base?
Purchase frequency measures how many times a customer purchases from you in a given time period. Let’s say you have 100 customers, and in three months those 100 customers make a total of 2,000 purchases. The purchase frequency of your customers in a three-month period is 20.
There’s no exact number to shoot for, but in order to make it worth it to your business, your customers’ purchase frequency should be greater than one for a time period of 12 months or less.
For some businesses, the number is irrelevant - you just know by your business’s regular performance whether metered billing is a fit or not. If you sell window blinds, you’ve probably seen enough customer history to know that metered billing is not a fit for your business.
Blinds’ customers are outfitting a new house or maybe one specific room, and probably won’t be back to make another purchase for years (if not decades). For others, metered billing is an obvious fit. Many foods or household goods get used up quickly and need to be replaced.
If you sell coffee, wine, or even fresh produce, you have data on how frequently your customers place orders. These types of products perform well as subscription services, with metered billing for add-ons that customers may want to purchase for special occasions.
What’s the variance in purchase amount?
Let’s say you calculate your business’s purchase frequency and you want to investigate metered billing further. Take a look at the purchase history for a subset of your customer base. For that particular subset, look at the variance in purchase amount from one billing cycle to the next.
If you have a lawn service that includes mowing and edging, how frequently are customers adding on services like hedge-trimming, bagging leaves, weeding, and fertilizing? If purchase amounts vary widely by billing cycle, metered billing may be the right fit for your business.
In other cases, metered billing might be unnecessary given your current setup. Many online software tools offer several levels of pricing. These levels may offer access to standard features (level 1), standard features plus additional functionality (level 2), and premium service that includes all functionality and extra customer support (level 3). These types of businesses are a fit for subscription billing, but without a variation in pricing, there’s no basis for metered billing.
One last thing to consider: if there’s no current variance in purchase amount, is there a way to encourage additional purchases? In the case of the lawn service, customers may not know that add-on services like hedge-trimming, leaf-bagging, weeding and fertilizing are available. If you’d like to add metered billing, it may be worth notifying your customers of your services and allowing time to see if any opt-in.
You can also use incentives like discounts and loyalty points to persuade customers to make more frequent purchases. Credit card companies linked to loyalty programs are a prime example. Many offer rewards or points associated with each dollar spent. Some offer large reward incentives if you apply and are approved, or after a certain amount of purchases within a specific timeframe.
StitchFix, a personal styling service for women, sends each customer a box of 5 clothing items at a frequency of the customer’s choice. The customer pays a $20 styling fee that is applied toward the purchase of any items in the box. If the customer buys all 5 items from the box, they receive 25 percent off their entire purchase.
Would metered billing add a significant amount of overhead?
To answer this particular question, you may need to try out metered billing or seek out advice from other similar business owners. For example, if you run a fitness center, you may already use subscription billing as the main customer billing format. Your customers all receive access to the facility and the exercise classes.
You might decide to add a new type of exercise class, like yoga or pilates, and charge extra for these classes. Think about any extra overhead associated with this variable cost. Do you require new equipment or software to process payment, or does it require extra time from your staff?
If you’re passing some of the profit from customers on to the instructors, you may have a short timeframe where instructors must be paid. Customers might want a longer timeline to use the classes, and you may end up with classes being used long after they were paid for. In some cases, it might be beneficial to the business to stick with subscription billing and slightly raise fees for all customers.
After looking at your business with a critical eye, you might decide to implement metered billing. When setting up metered billing for customers, the key component is to the make the process and smooth and seamless as possible - for you and your customer. Subscription billing is very similar to metered billing, and setup processes are virtually the same. See our previous post on subscription billing for a detailed explanation, and here’s the short version.
- Customers need to be able to begin a transaction, including selecting products or services, billing cycle, payment method and terms.
- Businesses must be able to charge recurring payments to customers in variable amounts.
- Customers and businesses require the ability to make changes to the customer’s account or cancel the order.
Given that metered billing is slightly different from subscription billing, there’s one additional step: the variable charges customers incur need to be transmitted from a business’s point-of-sale systems to an invoicing tool. Many online invoicing tools offer ways to communicate with metered billing via API calls.
In this instance, the business would create a standard way of listing variable charges - possibly by attaching them to a subscription plan. The business would be able to invoice customers for metered charges based on API calls.
Metered billing is a pretty common way to charge customers for products and services. After all, many of us would prefer to pay only for what we use. Though metered billing may seem complex, it can be a profitable and efficient way to charge customers. Understanding the purchase history and behavior or your customers is the best way to know if metered billing is right for your business.