Imagine you’re making final preparations to open a large tennis club. You have no idea what to charge people, but you’ve landed on two distinct options:
- You charge a flat fee of $300 per month for membership, which gets the member unlimited access to the courts.
- You charge $15 per court per hour, open to anyone who’d like to come play.
If you’re like most tennis clubs, you’ll either choose to implement a) both pricing strategies, or b) the second, per-hour pricing tier. Why? Because a flat rate doesn’t work for everyone. And if you want to kickstart acquisition & growth, you’ll make it as easy and fair as possible for people to book courts. Most tennis clubs do this. It makes business sense.
This concept is often called metered billing: It’s a structure that charges people based on how much of your product they use. Also referred to as usage-based billing, metered billing is a stark contrast with the classic, fifty-bucks-a-seat billing structure you’ve seen for most of your life.
Implemented well, metered billing helps with the following:
- Acquisition: Metered billing is fair. You’re charging customers based on what they use, not some arbitrary amount. This usually makes it easier to acquire customers, especially when budgets are tight.
- Monetization: Once you find the metric you’d like to bill on, metered billing makes monetization a whole lot easier, and more flexible, for your startup.
- Retention: Because it allays customers’ fears of being overcharged and provides significantly better value, metered billing can provide a serious lift to your retention. This depends, of course, on why customers are leaving—but metered billing can probably help.
Below, we’ll expand on each of these three pieces.
Metered billing makes it easier to acquire customers
The reason for this may be obvious. Metered billing reduces the barrier to entry for your product, meaning there’s less room for objections before your customers convert. Imagine these two scenarios:
- A company wants to try your product. You charge $250 per seat, annually. If they’ve got a team of fifteen they’d like to onboard, you’re asking for thousands of dollars upfront. This is often seen as a risk.
- A company wants to try your product. You charge based on usage. In this case, there’s no upfront cost associated with your product. It’s practically a no-brainer—and then, if the company likes your product and uses lots of it, you’ll be making just as much (if not more) money.
And, metered billing is fair. Other pricing systems may be fair, yes, but metered billing is the most obviously fair of any of them. Customers get exactly what they pay for.
This can make life a whole lot easier for your marketing & sales teams, who now have the freedom to try out new angles and come up with new pitches for customers. Not all of your competitors can say their pricing structure is as fair as what you’d be offering with a metered billing structure. And that’s a serious advantage.
Metered billing makes it easier to monetize your product
Metered billing is flexible. This means you’ve got more monetization capabilities for your product. And you’ve got the ability to reach more customers you may not have been able to reach previously.
For example, metered billing may mean you’re able to reach businesses with smaller budgets than you could before. If they may not have been able to afford onboarding their teams with a huge annual enterprise fee, they may indeed be able to afford using your product if they’re only paying for what they use.
And then there’s the topic of data. As you get more information about your customers’ usage patterns, you can start making decisions to maximize the amount of revenue you’re bringing in. Instead of a rigid pricing structure, usage-based billing helps your monetization by letting you stay light on your feet, adapting to the things that are going to generate the most revenue.
Metered billing makes it easier to retain customers
Why are customers dropping your product for alternatives?
If it’s anything along the lines of “we couldn’t afford it,” or “we couldn’t justify the value,” then metered billing is almost certain to improve your retention. Because, when customers are paying only for what they use, it’s significantly harder to say they’re overcharged.
When you run up the water bill in your house, for instance, you tend to blame the problem on yourself. “I need to take shorter showers, I need to be more efficient about laundry,” that kind of thing. You’ll rarely blame the water company themselves. Sure, sometimes the company might be charging too much. But you're less likely to drop them for overcharging than if they’re charging you a flat rate.
Why don’t lots of startups use metered billing?
If all of the above sounds too good to be true, that’s because it is. Kind of. Because while metered billing is incredibly powerful, it’s also difficult to set up. Many companies have to end up diverting weeks or months of engineering resources to build out the in-house systems to make metered billing work. Of course, this isn’t great—you’d rather be working on the competency of your core product.
That’s why we built Octane. We help software companies, like yours, bill on any metric—without having to divert your engineers’ attention towards building in-house solutions. In other words, we help you run a well-oiled metered billing machine without any of the traditional legwork that prevents most companies from doing so.
Want to learn a bit more? Book a 1:1 with us and we’ll chat pricing & billing strategy.