Updated: Feb 17
As someone with over ten years of experience in Billing, Finance, and Revenue Operations, I have seen the benefits and challenges of usage to a traditional SaaS business. Frankly, billing, in general, is complex, but Usage is even more challenging. This really shouldn't be the case, though. Billing is the result of charges from a contract, and so long as the data is passed correctly from CPQ, you'll have no problems.
Why is it then we have massive Quote to Cash initiatives with millions spent on projects to improve and clean this up? In this blog, I hope to cover the key issues faced by SaaS businesses today in this transition and the critical role that Billing and CPQ systems play in making this transition a success.
Why Move to a Usage-Based Model in the first place (I thought SaaS was the best thing since the Wheel)?
Traditionally SaaS has a straightforward billing and revenue recognition model. You have a product and charge from the day of purchase, record the full revenue up-front and charge the same amount each month. You can set a value and forget it until it's time for renewal.
Usage-based billing is essentially the opposite of this and is a model that charges customers based on the amount of usage they consume.
Both are pretty simple, right?
Well, as we will see, it isn't always as simple as it sounds.
Its become increasingly popular among SaaS businesses, who are always looking for ways to increase revenue from their customer base, to charge for variable or usage. Usage Based Billing links closely, though not directly, to a Product Lead Growth Model but is distinct in that it could be combined with other models or on its own. It can be complicated to link to a standard subscription model if Usage is intended to be tied to individual users or products or if you are creating a Bundle with one or more usage components.
An excellent example of this would be during my time as Head of Billing & Collections at 8x8, where they would include a License charge for the use of the Virtual Office, which could be at different levels. Each level would include more countries and additional features.
Each of these features would have an individual SKU and License ID. For example, you could be paying for One virtual office license, but in CPQ, the Product and Billing would contain the:
One Virtual office License could contain
> SaaS Fee
> Call Recording Storage
> Call Usage > Video Recording
> Transcription Service
> International Number
> Local Number
Whilst this is an exaggerated example, it illustrates that within One License bought by a customer, we could see up to Eight SKUs. Five of these components could have different Usage elements, all with a distinct unit of measure and individual pricing rules. These all need to be linked with a license Key and tied to the overall SaaS license so that the right user is charged for the right type of usage associated to them. This information must start with the CPQ price-book creation and roll through the systems.
We will touch more on the logistics of this later, and so before we get too into the weeds on this, let's cover what Usage offers us:
Increased revenue: Who doesn't like that? Usage-based billing allows businesses to charge customers for the exact amount of usage they consume. This often results in increased revenue compared to traditional pricing models and leads to an opportunity for upselling into your more traditional subscription model or to a minimum commit approach for charges. (think old school spend £10 to get 1000 texts kind of thing)
Improved customer experience: Usage-based billing provides customers with more flexible and personalised pricing options, which can improve their overall experience and increase customer satisfaction. This is especially helpful when customers do not want to commit to a fixed contract.
Better alignment with business value: Usage-based billing aligns pricing more closely with the value customers receive from a product or service, which can help businesses differentiate themselves in a crowded marketplace.
I would expect that more and more businesses over the 24 months see this model as an option, particularly those with more transactional products.
What are the risks of a Usage-based model?
Making this move is not seamless and not without its risks—common Issues. Hence, while there are many benefits to moving to a usage-based model, there are also several common issues that SaaS businesses face during this transition. These include:
Data accuracy: One of my biggest focuses as a Rev Ops Director and consultant. Accurately tracking and recording customer usage data is critical for usage-based billing. Inaccurate data can lead to incorrect invoices, disputes, and lost customers. I alluded to this earlier, but passing all of those licenses that have to be unattached to a user so that they are available for provisioning and then linking back who is using which license so that charges can be allocated correctly. Things like taxes are charged per local laws... it's super complicated and essential to get right. Otherwise, you'll be sending credits and have hugely dissatisfied customers.
Billing system flexibility: Usage-based billing requires a billing system that is flexible and scalable enough to handle different usage types, pricing tiers, and periods. This can be more complex than traditional billing systems that use a single pricing model. Overcoming the common issue of the billing for usage, or at least the transaction tracks being in the 'Product' and integrating that to a more generic Billing Platform like Monitizenow.io, Billingplatform.com, or Bluelogix has long been something that causes conflict as well as additional complexity. The different ways to charge usage with the potential for minimum or maximum commits and the potential for Near-Real-Time Charges (where the cost of a call or unit is immediately calculated after the end of a billing event, like a call or meeting) can be costly and potentially cost prohibitive for some smaller businesses.
Integration with CPQ systems: To accurately bill customers for their usage, clearly understanding the products and services they have subscribed to is crucial. A tight integration between billing and CPQ systems is essential for usage-based billing. Ensuring the suitable license has been charged for the usage is critical, and that it has the correct user address for taxation. This information not coming from CPQ was one of the most significant issues on billing accuracy from my time as Head of Billing & Collections at 8x8.
Customer experience: Customers expect a seamless and streamlined billing experience. Inconsistencies between CPQ and billing systems or incorrect invoices can erode trust and cause customer frustration.
Seasonality: Usage-based billing requires businesses to accurately track and bill for usage spikes, which can be challenging to predict and manage. This can be trended over time, but it will always mean peaks and troughs in revenue, making leaner months harder to navigate in those all-important early years of a business.
Compliance with regulations: SaaS businesses must ensure that their usage-based billing practices comply with local laws and regulations, such as tax and data privacy regulations. This can also affect the actual pricing offered to customers for some user types. For example, in the UK, the Non-geographic Call Services have set rates as a result of OFCOM Regulations with the ability to only charge Access Fees on top of your profit for these calls. This can be limiting when trying to navigate new markets. It can be potentially very costly if it has been mismanaged.
Invoicing and payment processes: The invoicing and payment processes for usage-based billing must be efficient and automated to minimise manual errors and improve the customer experience. Having the potential to charge for many types of usage, it can be a highly complex task to make sure all kinds of usage have been accounted for correctly, so incorrect charging is a risk.
Reporting and analytics: Usage-based billing requires detailed reporting and analytics to track usage trends, identify usage patterns, and monitor customer behaviour. This becomes especially important for Cash Forecasting and even more critical for those bootstrapped start-ups having to predict where every penny is coming from.
The Critical Role of Billing and CPQ Systems
To overcome these common issues and successfully transition to a usage-based model, SaaS businesses must invest in robust Billing and CPQ systems. These systems are critical in ensuring data accuracy, customer experience, and compliance with regulations.
Billing systems must be flexible and scalable enough to handle different usage types, pricing tiers, and periods. They must also integrate seamlessly with CPQ systems to ensure that customers are accurately billed for their usage. Automation, efficient invoicing, and payment processes are essential for a successful usage-based billing model.
CPQ systems play a crucial role in helping SaaS businesses to manage their product and pricing strategies effectively. With the right CPQ system like Conga, Dealhub.io or MonitizeNow.io, companies can quickly and easily configure and price their products and services based on customer usage. This helps improve the customer experience and ensures that pricing is aligned with the value customers receive.
Moving to a usage-based model can provide significant benefits for SaaS businesses but presents several challenges with the overall Quote to Cash procedures.
SaaS businesses must invest in robust Billing and CPQ systems and align processes, people and strategies to overcome these challenges. They must ensure a successful transition. These systems provide data accuracy, customer experience, compliance with regulations, and efficient invoicing and payment processes. With suitable systems, SaaS businesses can leverage the benefits of usage-based billing and drive long-term growth and success.
Throughout my career, I have helped SaaS businesses successfully manage usage-based billing. Please don't hesitate to meet with me if you need assistance in making this transition or optimising your Quote to Cash Transformations.