The Appeal of Usage-based Billing

May 30, 2018

One of the strongest drivers of customer satisfaction is a customer’s perception of value for money.  Value for money is judged by how much a customer pays in return for what value they receive as a product or service.

Environmental and Ambient Data

Applying this logic to service billing models, we can deduce the following patterns;

Fixed Recurring Charges

With fixed recurring charges, the customer will perceive good value for money when their service usage is high in relation to the fixed service charge, but will perceive bad value for money when their service usage is low in relation to the fixed service charge.

In this model, the service supplier wins if service usage is low and the customer’s value for money perception is low, the service supplier loses if the service usage is high.

It can also be said that the supplier wins when the customer loses and the supplier loses when the customer wins.

The pricing of fixed recurring charges tends to be limited by what the customers with low service usage will be prepared to pay, within their perception of value for money.

Usage-Based Charges

With usage-based charges, customers should perceive a consistent level of value for money, regardless of the amount of service usage.  The overall cost of the service will be proportional to the level of service usage. In theory, the value for money perception should be similar regardless of whether customers are high or low service users.

The pricing of usage-based services should therefore not be restricted by a value perception of a subset of customers, but rather the value perception of all customers.

With a usage-based charging model, the supplier and customer can both win at the same time.

Overall Revenue can be Higher for Usage-based Billing

My experience through working with Datagate’s clients, is that when a service supplier replaces a fixed price model with a usage-based pricing model, they can generally increase their overall revenue significantly.

This was demonstrated most recently in a case study for Texas-based Ranch Hill Water Supply Corporation, who achieved a 26% revenue increase after implementing a usage-based charging model, using Kamstrup measurement systems, Datagate billing and Xero accounting software.

 

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