Viewpoint: Software options to support usage-based pricing
Introduction
The move to usage-based pricing has been underway for over a decade. Read any market perspective on this shift and you’re sure to be dazzled by the statistics highlighting the transition from all-you-can-eat subscription pricing to buy-what-you-need usage based pricing.
There is a dichotomy between usage-based pricing (“UBP” from here on out) and Subscriptions that reflects how both providers and users benefit.
In the current belt-tightening economy and with the maturing of the great subscription plays (e.g., Netflix), the move to UBP is accelerating.
UBP provides a litany of flavors and pricing strategies to incentivize consumption (flat rate, tiered, pay-as-you-go, credit burndowns, etc.). This flexibility, paired with creative sellers, often leads to difficult math at high volume, resulting in month-end pressure. Fortunately, an arms race in the software ecosystem is well underway, with many vendors offering new solutions to help monetize services billed on consumption.
In this discussion, we’ll home in on the software side of things by outlining different classes of UBP software, the role they play, and who they are right for. Whether you’re thinking about introducing a UBP pricing strategy, are currently making this shift, or have already gone to market with consumption models, this guide provides a simple frame of reference for your back-office revenue strategy.
Let’s start with a basic understanding of a usage event’s journey from consumption to revenue:
Consumption: A usage event originates somewhere. This could be use of a digital service, a network switch, a dedicated server, or any other physical or virtual offering.
Capture: The service provider detects that something has been used. This may seem obvious, but often it is not. And when it is not, the temptation to offer a subscription often looms.
Warehousing: Once captured, the event is recorded in a database and so begins its journey into one or more business applications.
Routing: The event is made available for a myriad of enterprise systems, especially those owned by Finance and Data teams. Some systems pull this data, others require it to be pushed. These may be BI tools, customer facing applications, or mediation and billing systems, which is where we’ll focus.
Mediation/Enrichment: Optionally, these systems prep usage data for consumption by other applications, such as rating and invoicing tools unable to handle heterogenous data. While mediation tools serve a long list of functions, their primary job in this context is to deliver validated event data to rating and invoicing engines on time with high fidelity.
Rating and Invoicing: Systems to rate and charge for UBP models. These applications receive, or fetch, usage data from mediation or warehouse applications, organize it against a rate card, and generate billable line items.
… And Everything Else: Sprinkled throughout this journey may be tie-ins to other applications for FP&A, data science, customer intelligence, and so forth depending on your technology stack. Each event’s lifecycle will look different from stack to stack and will evolve over time within the same stack.
Prologue complete! Let’s explore the different types of software available to facilitate this journey. We see three different types of software that monetize usage:
Usage Data Management (UDM): UDM systems transform usage data to be actioned by other systems.
Metering and Rating (MnR): MnR systems convert usage data into billable lines to charge a customer.
Billing: Billing systems calculate charges, generate invoices, and send to customers.
Usage Data Management Systems
Usage Data Management (UDM) systems are like well-oiled distribution centers; they take inputs from a variety of sources in all shapes and sizes, package them up accordingly, and route them where they need to go. Traditionally known as mediation platforms, UDMs began in Telecommunications to address high volume and complex usage. They have evolved to cover most industries and blur the functional lines of mediation and iPaaS tools with their improved ability to transform and transmit data between both business and technical systems. The value proposition of a UDM system is delivering validated, usable usage data to dependent systems on time and at scale.
Key Features
Ability to connect to and pull consumption data from many source warehouses (Snowflake, Redshift, sFTP sites, etc.)
Usage Normalization and Mediation (deduplication, cleansing, aggregation, correlation, enrichment, and complex transformations).
High volume processing and load throttling to downstream applications.
Prebuilt connectors to common data warehousing tools, lessening the engineering burden for implementation and maintenance.
Key Limitations and Considerations
Rating beyond Price x Quantity is generally not supported, requiring integration to a rating/invoicing system.
Mid-market/enterprise SaaS billers are encroaching this area of the landscape with maturing mediation bolt-ons to their core billing product.
Ideal Customer Profile
The intrinsic value of a UDM lies in the system's ability to consume and organize high volume, complex data and deliver it in the required structure. UDMs are not a necessary component of a UBP architecture. A UDM is useful if you:
Have consumption data captured in many source databases and formats, and normalizing this information is required for supporting billing and BI tools to function. This often results from frequent M&A activity or hyper-scaling companies with high-value offerings on disparate stacks.
Capture and process high-volumes of usage data (100M+ events/month) and/or are subject to surges in activity during tight windows (such as spikes in consumer activity around Christmas).
Find yourself continously troubleshooting billing and rating errors because of poor usage data quality.
Will introduce new applications dependent on reliable usage data. This could be due to a modernization initiative or M&A push.
Sample Vendors
Metering and Rating Systems
The new kids on the block! In the SaaS space, this emerging class of software is devoted to ingesting high volumes of data, rating it against simple or onerously complex rate cards, and shipping out chargable line items to proper billing application. The value proposition of a MnR system is rating highly complex pricing agreements, at scale, with a shortened time to value and smaller monetary investment.
Key Features
Support for complex pricing strategies, such as tier-based pooling, pay-as-you-go, burndown, and multi-variable price calculations.
Prebuilt connectors to common data warehousing and billing tools, decreasing the engineering effort required to introduce new pricing strategies.
Real-time and near real-time event rating and bucketing (aka, “aggregation” or “metering”) provide current insights to revenue trends throughout the bill cycle, not just at month end.
Key Limitations and Considerations
A billing solution is also required to manage all billing operations in a customer lifecycle.
Generally, the vendor landscape is comprised of high-growth companies just starting to mature with leaders now emerging.
Ideal Customer Profile
MnR systems are tuned to a usage-based architecture. A MnR is useful if you:
Hold your breath until invoicing is complete to figure out how much consumption-based revenue has been generated.
Leverage reporting tools and big Excel workbooks to manually calculate charges each month, and then upload even bigger csv’s into a billing application.
Struggle to grow revenue without increasing the size of your billing team to manually price usage and calculate invoices.
Are happy with your current billing system, that integrates with a MnR solution out of the box.
Are looking to incorporate real-time usage alerts, discounting or pricing increases.
Sample Vendors
Billing Systems
To make the value proposition quite clear,. without a way to invoice customers, you’re hosed. The SaaS billing landscape is crowded and competitive, which is great news for companies looking for more efficient ways to align billing operations to customer demands and close the books in a timely manner. Today’s best applications extend far beyond calculating charges and sending invoices, with the top dogs supporting complex UBP and hybrid pricing strategies, direct and indirect customer invoicing, revenue recognition + general ledger booking, and effective revenue recovery workflows.
Key Features
Ample support for traditional billing functions (which is not true for our other software classes)
On platform revenue and accounting functions book transactions to proper ledger accounts and financial periods, automatically.
Rapidly improving support for complex pricing and charging strategies, leaning toward full automation of billing operations.
Localization capabilities supporting multiple currencies and languages, prebuilt integrations with global payment providers and tax engines.
Key Limitations and Considerations
Require implementation from accredited SI or vendor Professional Services.
Higher levels of engineering may be necessary to integrate usage and order feeds, and ERP/Financial Management Systems .
High volumes and high complexity usage may require a UDM platform to help with scale.
Ideal Customer Profile
Unlike UDM and MnR applications, nearly every company in the world already has some way to invoice customers. ASaaS billing tool is the right fit if you:
Plan to modernize your order-to-cash processes and tech stack.
Track contracts and calculate invoices manually or in a non-scalable fashion.
Find a solution with turnkey integrations to your SaaS taxation, payment processing, and bookkeeping applications.
Delay month-end-activities with lengthy and/or error prone bill cycles.
Track contracts and calculate invoices manually or in a non-scalable fashion.
Sample Vendors
Capability Summary
Capability summary by software class for common revenue management functions
While bucketing dozens of applications and platforms has required some over-generalization; the real point is:
There are different solutions to different problems.
This is a shifting and dynamic landscape (future blog post alert!) with products fighting to own more of the usage event journey.
We are here to help you sort out your path to succeeding in a usage-based strategy.
At Ravus, we keep our pulse on the modern software landscape to provide clients and curious folks alike with a foundational perspective to successfully compete. While this blog is quite system-focused, we believe technology must be paired with planning and execution to drive business outcomes. If this percolated any thoughts - we’d love to hear from you at info@ravusinc.com.
Thanks for reading,
Mitch Colyer, Co-Founder
