Discover how usage-based pricing can transform your business model. Learn about volume pricing, tiered pricing, bundles, and more strategies that align customer value with revenue growth.
Have you ever paid only for what you used like your electricity or mobile data? That's the idea behind usage-based pricing. Many businesses now a days are choosing this smart pricing method where customers are charged based on how much they actually use a product or service. It's very fair, flexible, and makes people feel they're getting good value for their money. Whether it's a software tool, cloud storage, or internet service, usage-based pricing keeps businesses (as white topping) customers happy. In this blog, let's look at some common strategies companies use when they go with this model.
In the volume pricing model, different tiers or slabs of quantities are decided and if a service or a product falls within a particular slab, the price decided for that slab will be applied to the entire quantity. Higher the slab, higher the discounted price. This pricing strategy is designed for offering a volume discount on purchase of large quantities.
For example, the price may be $1.00 per unit until it reaches 100 units after which the price can fall to $0.80 per unit. In this example, a quantity of 150 units will attract a discounted price of $0.80 per unit for all 150 units, making the total chargeable amount as 150 × $0.80 = $120.00.
Wholesale businesses, bulk purchases, enterprise software licenses where higher volumes deserve steeper discounts across the entire order.
In the tiered pricing model, each slab's rate is different but this rate is applied only to the incremental quantity falling in that slab, not to the entire quantity as was the case with volume pricing. For example, consider following rate tiers and pricing:
Thus a quantity of 250 will be charged as follows:
Cloud services, API calls, data storage where each tier represents a different usage bracket with progressive pricing.
The bundle pricing strategy involves offering bundled products together in a plan offering, applying a subscription fee which is a fixed monthly sum, and then lowering the price on bundled products so that the offer comes across as a discounted offer. More consumer base is attracted to the discounted pricing of bundles whereas the business can secure it's revenue and margin from the subscription fee.
For example, a company selling IoT devices for vehicular health and diagnostics may sell its subscription plan that gives a bundled offering as follows:
If the IoT device is bought independently outside the above plan, it would be $300 one time cost along with the SIM charges and there would be a monthly bill of data transmission charges from the phone company. To avoid a high upfront cost, the customer would be tempted to join the subscription model and get the additional value added service of a mobile app that provides automated alerts and insights into a vehicle's condition.
Subscription services, telecom plans, IoT devices where combining multiple services creates higher perceived value and customer lock-in.
In graduated pricing, the first bucket of the quantity is given free and if the consumption goes above the free bucket, then a metered price applies to the overage units. For example, this type of pricing can be applied to tap water supply by a local government body such as a municipality. It can define that about 15,000 liters/month of water is given free per home and after that extra the consumption would be charged at a metered rate of $0.01 / liter.
Utility services, cloud storage, API services where offering a free tier helps customer acquisition while ensuring revenue from heavy users.
The graduated pricing with Cap is the same as the graduated pricing except that the final amount arrived at is capped at a certain amount. If the final amount after the usage calculation exceeds the capped amount, the capped amount is charged instead of the calculated amount. This pricing strategy is useful while applying a discount. If the discount amount exceeds a certain amount, then maximum given discount can be applied in order to protect the business margin.
This pricing model protects your business from excessive discounts or unexpected cost exposure while still providing customer value through usage-based billing.
Discount programs, promotional offers, loyalty rewards where you want to incentivize usage while maintaining profitability thresholds.
In burstable billing, the top 5% of the peak usage is ignored (for discounted) and the rest 95% of the usage is charged at a metered rate. This kind of pricing strategy can be applied for charging network bandwidth usage by cloud companies in order to make their rating and pricing more attractive. It protects the consumer from a major bill shock by deducting the top 5% peak bandwidth usage.
Network bandwidth billing, cloud infrastructure, CDN services where temporary spikes shouldn't penalize customers unfairly.
In a teaser pricing strategy, the initial rates in a new promotional offer are lower compared to the usual rates. This pricing strategy, if adopted well, can attract a big subscriber base and then ensure that the margin is protected once the rates go back to their usual rates after the initial offer.
A Telco could provide a 30% discount for the first 3 months on all prices thereby giving a seasonal boost to the number of subscribers.
New product launches, market entry strategies, competitive positioning where initial customer acquisition is prioritized over immediate profitability.
Choosing the correct usage-based pricing strategy can really make a good impact on overall business. It helps businesses earn more without making customers feel that they are overcharged for the services they used. Ultimately, it's all about giving value to customers while keeping the business profitable.
By understanding your customers and trying out what works best, you can build a pricing plan that supports both your growth and your customers' needs.
Discover how EarnBill's flexible pricing models can help you implement the perfect usage-based pricing strategy for your business
