Understanding Usage Based Pricing Strategies: A Simple Guide for Businesses

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 helps businesses rise while keeping customers happy. In this blog, let’s look at some common strategies companies use when they go with this model.

Some of the Usage Based Pricing Strategies are shared here :

Volume Pricing

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 x $0.80 = $120.00.

Tiered Pricing

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:

$1.00 price per unit for quantity from 0 to 100

$1.10 price per unit for quantity from 101 to 200

$1.20 price per unit for quantity Graduated Pricingmore than 200

Thus a quantity of 250 will be charged as follows:

Graduated with Cap(100 x $1.0) + (100 x $1.1) + (50 x $1.2) = $270.00

Bundle 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:

Premium Monthly Plan Fee $50 / month

Number of IoT Devices included in the plan: max of 2 (with no price or zero amount)

Number of SIMs: 2 (one time price of $5 each)

Unlimited data transfer on SIMs (no monthly bills for SIMs data usage)

Access to Cloud based platform from mobile app (free)

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.

Graduated Pricing

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 15000 litres/month of water is given free per home and after that each litre consumed would be charged at a metered rate of $0.01 / litre. Thus a water bill for 20,000 litres of usage for a month can be (5,000 litres overage quantity x metered rate of $0.01 / litre) = $50.00.

Graduated with Cap

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.

Burstable Billing

In burstable billing, the top 5% of the peak usage is ignored (or 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.

Teaser Pricing Strategy

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. For example, a Telco could provide a 50% discount for the first 3 months on all prices thereby giving a seasonal boost to the number of subscribers.

Conclusion

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.