With the concept of “cloud services” and “cloud software”, the implications of billing for the cloud has never been more acute. We briefly mentioned in our last blog post the importance of considering different approaches to pricing your product/service that go beyond static pricing. Many of these approaches can significantly impact your revenue so today we’d like to delve deeper into this topic.

“Telefonica has calculated that if you bundle and target offers effectively, you can increase your revenues by 25 times – not 25 percent, 25 times!”

METERED BILLING 

Metered or usage-based billing is the concept of charging based on units of consumption. The utility bill is a good example with cost usually calculated as: kwh used X unit cost per kwh.

This simple example can easily get complex when you have a fixed monthly fee (typically billed in advance), plus an additional usage fee (billed in arrears). So if you’re a software service provider, your billing may now look like this:

OVERAGE BILLING

You then analyze your data and figure out that you have a small number of clients that are using disproportionately large quantity of storage while most of your smaller clients are typically using less than 10 GB of storage and are moving to competitors with cheaper fixed fees. So you introduce another plan based on overage billing:

BUNDLING and ADD-ONS

At some point this service provider adds additional services, let’s say backup services. Now you’d typically want to incentivize customers to sign up for both services by offering a bundled product offering that is cheaper thanthe sum of the individual products. So a customer on a bundled plan would see something like this:

   Storage and Backup Plan

It is important to note that a monthly feed of raw consumption (typically containing the customer ID and the units consumed) is fed to the billing system so that if the customer switches to the non bundled plan (that has no free servers included), then he’d see this bill:

   Storage Plan

   Backup Plan

Backup service fees (8 X $ 25/server)$  200

ROLL-OVER

So the service provider starts fielding calls from customers who have fluctuating monthly demands. They want to have predictable bills and want the service provider to allow them to carry over unused storage quotas from previous months so that the costs average out. We’re now talking about new levels of usage tracking, since the customer may login mid-month to view their quota balances.

   Storage Plan

TIERED and BULK

Tiered allows users to select from a set of progressively increasing price points to receive the product(s) best suited to their needs. It is typically based on the idea that the more units a customer purchases, the lower price they pay.

As a cloud provider, it is critical to your long term success to provide your finance and product teams with the ability to switch pricing models without getting into a 6 month IT project. Your checklist should include:

1. Do I have a variety of models that I can quickly adopt?
2. If I adopt a new model, do I have the choice to either grandfather existing clients under the old plan or migrate them?
3. Do I have rich reporting capability to analyze the results of new models, and flexible billing systems to evolve my pricing strategy?
4. Can I de-couple my IT operational system from my billing system?
5. How do I tie my new plans into my ERP for corporate finance?
6. How will changing pricing models impact my sales process that are happening inside our CRM today?

“Purchase-to-use is winning, and purchase-to-own is on its way out. Why? It’s simple: We only want to pay for the value we receive from a product or service—and we only receive value when we’re using that product or service.”