Revenue Strategy
Revenue Implications with Consumption-Based Pricing
The quest for flexible, transparent, and value-driven pricing models in SaaS has recently led to the rise of consumption-based billing models such as pre-paid credits and post-paid usage. Unlike traditional flat-rate or tiered pricing models, consumption-based billing charges customers based on their actual consumption or value derived from the service, offering a more flexible and transparent approach.
While consumption-based billing is a pricing strategy that has been prevalent in non-software use cases for a while, such as utilities like water, gas and electricity, it has only been aggressively adopted by software providers only in the recent years with the emergence of cloud and AI feature offerings requiring compute, storage and LLMs.
The Rise of Consumption-Based Billing
The shift towards consumption-based billing can be attributed to several factors. Firstly, it aligns pricing with value, ensuring that customers only pay for what they use. This approach resonates with businesses of all sizes, especially startups as it offers cost predictability and scalability. Additionally, in industries where demand fluctuates or usage patterns vary widely, such as cloud computing or communication services, consumption-based billing provides a fairer and more tailored pricing structure.
Challenges and Considerations for Revenue Teams
While consumption-based billing aligns pricing with customer value but introduces challenges especially for revenue teams.
1. Lack of Predictability
Traditional SaaS subscription-based models had the beauty of consistent revenue inflow, but consumption-billing breaks that model. The key metric is ARR, intended as a fixed number per contract that moves only through upgrades and downgrades. For consumption-based products, recurring revenue is unknown upfront and varies over time, which makes it more ambiguous and harder to predict.
To address this, businesses need combine consumption-billing with upfront commitments (like monthly minimums, pre-paid credits or usage bundles) for better predictability or fully embrace its complexity by creating new metrics to capture repeatable revenue. Effective reporting may involve predictive models, seasonal adjustments, or recent usage data to forecast revenue.
2. Dependency on Engineering
Revenue teams now require up-to-date consumption data from the product to be funneled into data warehouses so invoices can be accurately generated. This becomes additionally complex the more real-time your billing requirements get.
3. Cost
Deploying consumption-based billing solutions come with a hidden catch: they can take a percentage of your revenue. As your business grows, these fees grow too, steadily eroding your profit margins.
In addition, deploying consumption-based billing is a large upfront engineering infrastructure investment especially if home-grown to meet key internal requirements. Maintaining this integration takes engineering capacity and bandwidth away from your core product.
4. CPQ and QTC Systems Need an Upgrade
Consumption-based billing has a deep impact on how software is sold with implications to contract creation, invoicing, feature entitlements. Standard sales and quoting solutions need to now account for this new way of billing customers.
5. Reporting Capabilities
Revenue reporting now needs clear forecasting with consumption-based pricing models along with revenue recognition of pre-paid tokens that may stay in your product with or without expiration.
Mitigate Revenue Complexity with Maple
While implementing and managing revenue reporting on consumption-based billing can be complex, the potential benefits could outweigh the drawbacks depending on your pricing strategy. As the industry continues to evolve, embracing innovative pricing strategies like consumption-based billing will be essential for staying ahead of the curve and delivering exceptional value to customers.
Learn more about how Maple can help you implement, manage, and report on consumption-based billing with ease.