Welcome to the new podcast series on the “Consumption Economy” from OneBill. We’ve been talking quite a lot these days about how consumption billing is transforming the industry and why there’s a rapid rise in the consumption-based pricing models. In today’s episode, let’s find out the OneBill’s approach for the rise of the consumption economy and what it meant by it’s mission statement “OneBill is transforming the consumption economy” with Mr. Rajesh Padmanabhan (Raj), VP of Product at OneBill.
Over the last decade, subscription-based pricing has been widely adopted across SaaS businesses in response to customers demanding less upfront product cost ownership. However, the tide is turning as customers are increasingly seeking hyper-personalization and flexibility in how they engage with products and services.
This shift is driving a new wave of SaaS businesses offering consumption-based pricing. Furthermore, moving to this model is not just about keeping customers happy and riding out a new trend. There’s proof in the numbers that consumption-based pricing yields higher revenue growth.
According to Kyle Poyar, Partner at OpenView, companies using the consumption-based model have:
- 38% faster revenue growth rate than their peers.
- Stronger net dollar retention rates (seven of the nine most recent IPOs of cloud companies have shown this).
- 50% higher revenue multiples versus the broader base of SaaS companies.
Let’s dive in to explore 5 reasons why SaaS businesses are turning to consumption-based pricing:
1. Taking seasonality into account
Every customer’s business has their own unique seasonal pattern with months where consumption of a product or service greatly increases due to their sales cycle hitting a peak and other months where usage decreases. Even within one specific industry, the cycle is never the same as each business has nuances due to varying customer bases, geographical regions and other external factors that contribute to fluctuating sales demand. Therefore subscription-based pricing is counterproductive, as it assumes a business is using a product or service the same way every month of the year. It ultimately contributes to resource waste and impacts the bottom line during the months where cost really matters.
Through consumption-based pricing, customers not only have the flexibility to pay as they use each month, but the SaaS provider ultimately has the opportunity to reap as much of the financial returns when their customers are riding through their peak sales cycle. Furthermore, new SaaS providers are also taking advantage of adopting a hybrid model that includes both subscription-based pricing, plus consumption-based pricing to capture additional usage.
This is an ideal strategy for businesses that have customers that incur significant ebbs and flows in usage from month-to-month. This way, SaaS providers can maintain a steady stream of subscription-based revenue throughout the year and leverage incremental dollars when customer usage hits a peak.
2. Enabling hyper-personalization
We are now in a paradigm where customers want the flexibility to hyper-personalize their products to suit their unique business needs and furthermore, have the agility to adapt those products as they journey through growth. Subscription-based pricing models assume that a business’s product needs are static from month-to-month.
Furthermore, bolting on other services on short notice can require a complete plan upgrade and issuing of completely new contracts. These upgrades ultimately end up impacting administrative time and detract from adding true product value to the end customer.
By adopting a consumption-based pricing model, SaaS businesses can have the agility to provide their products and services according to the unique usage needs of their customer’s at the time. They can also give customers the autonomy to personalize and add on services as usage fluctuates.
3. Enhancing data intelligence
Understanding customer’s usage patterns of a product or service can ultimately fuel data intelligence and provide valuable insights to inform future product innovation. These patterns reveal how customers also change their consumption over time and reveal opportunities to provide new products that might meet those emerging needs.
Furthermore, usage patterns can also be a reliable data input to model future revenue cycles for SaaS businesses, and also identify extenuating factors that impact usage. Whereas with a subscription-based model, it is difficult to understand how much a customer can truly ‘scale-up’ their usage as their consumption is capped within the framework of their current subscription plan.
Therefore a consumption-based pricing model gives SaaS businesses a much more granular picture of usage which could inform new opportunities to enhance products to meet customer’s emerging consumption needs.
4. Improving customer satisfaction
There is nothing worse than the feeling of paying for a subscription each month that you don’t necessarily use. The global pandemic has brought a lot of disillusionment and aversion to subscription plans, as many SaaS customers entered long subscription contracts pre-pandemic that they never ended up using, due to having to pivot and drive a different business model in the market.
This disillusionment impacts a customer’s perception of product value and ultimately leads to dissatisfaction and a cancelled subscription.
Contrary to this, if customers can be offered a pricing plan that is suited to their consumption needs at the time, they are going to feel a lot more satisfied that they are getting the most out of their product experience and that it is complementing their own unique business journey. Yes, this may mean that building revenue with this SaaS customer is a slower burn. However, in the long run, greater satisfaction will lead to increased customer retention and more sustainable revenue growth.
5. Driving product ROI
Not all customers need all of the bells and whistles that a SaaS business might have to offer in their subscription plans. Therefore a SaaS business might end up ‘giving away’ certain product benefits and features that ultimately never get used by the customer, leading to resource and overhead waste which can then negatively impact product return on investment.
Let’s say for example that a customer is given five hours of training support per month within a particular subscription plan. They may use that training for the first few months, but then appetite may decrease over time as their team becomes more savvy with their SaaS platform.
In this case, the business may still incur the cost of having to hire staff to cover those training hours which would go to waste. This then results in impacting the associated product cost for the SaaS provider. Through giving customers the autonomy to choose exactly what products and services they require and consuming as they go, supply is in sync with demand. It leads to less overhead and resource wastage and yields a greater product return on investment.
Getting started with consumption-based pricing
While we’ve discussed the factors of why a consumption-based pricing strategy is compelling for SaaS businesses, implementing the strategy requires robust operational business processes in order to ensure the strategy can be executed with precision.
Through using an advanced revenue management and billing software platform like OneBill, SaaS businesses can easily configure products attached to various usage metrics, ensure that customer usage is accurately rated, accurately calculate invoice amounts based on that usage and ensure the revenue from that usage is captured.
We are now in an era where many businesses are flipping their business model and shifting from subscription-based pricing to usage-based models, to better cater to the modern ‘pay-as-you-consume’ buyer.
So What Exactly is Usage-Based Pricing?
Usage-based pricing, also known as consumption-based pricing, enables customers to pay for how much they actually consume a given product or service. According to OpenView Partners, 45% of SaaS businesses adopted usage-based pricing in 2021 (versus 34% in 2020) and it is predicted that 56% of companies will be using this strategy by 2023.
Therefore this trajectory indicates that usage-based pricing will eventually dominate the market and it’s something that SaaS businesses need to keep on their radar!
Let’s unpack the 4 reasons for why we are seeing this shift in pricing strategy.
1. Better aligns with modern consumption behavior
The desire for hyper personalization is driving customers to demand that they only pay for what they actually use. Subscription plans are more so being seen as ‘cookie cutter’ product offers containing features that customers don’t even really need. Furthemore, customers don’t want to have to pay for platform seats that aren’t being occupied.
It also comes down to providing superior satisfaction. There is nothing like when a customer can see the direct value they are receiving for their input (i.e. investment and engagement time with the product).
In order to deliver a flexible consumption-based pricing offer, it is essential that you have an intelligent billing system that can configure your various consumption-based rules so that your products can feel personalized to the customer, but rapidly and easily scaled.
2. Usage-based companies have stronger financial performance
The numbers don’t lie! According to OpenView Partners, “usage-based companies tend to have best-in-class net expansion or net dollar retention rates.”
Also let’s face it, you can only sell so many subscription upgrades, add-ons, seats and adjacent services before you maximize revenue potential with a particular customer. By having a usage-based pricing model, you grow with your customer’s volume, ultimately creating an avenue for compounding revenue growth.
However, offering usage-based priced products is not where it stops. It’s imperative that your back-end billing system is up to the task of accurately calculating usage to the very last decimal point, in order that potential revenue is not leaked.
3. Revenue can be maximized in peak usage seasons
Every business has their natural ebbs and flows in regards to sales revenue cycles. There can be seasons where there is more demand for usage of a product versus other times of the year.
Therefore businesses have the opportunity to ‘ride that wave’ during the peak seasons and maximize revenue from their customers when usage is at an all time high. Furthermore, that extra revenue beyond the baseline can bolster the revenue that is lost during periods where usage is much lower.
One critical element to have in place is accurate reporting where you can monitor future patterns in revenue. Therefore it is important to adopt an advanced billing solution that provides such intelligent analytical tools and dashboards so that seasonality can be comprehended.
4. Getting an insight into customer usage behavior
With the flexibility and transparency of consumption-based billing, customers are more likely to use the products and services which are billed based on their consumption rather than the fixed subscription charges. With this new trend, companies also have the huge advantage of understanding their customers’ usage behavior to come up with better solutions. So, this is why we are seeing a shift in many businesses moving from the simple subscription economy to the consumption-based economy, in order to capture additional returns.
However, there is complexity involved in this as you have to keep track of the entitlement. The subscription entitlement used in a given period of time can be minutes, number of pages, or any resource that you’re metering. Therefore it is imperative that you have an advanced billing solution to start charging for additional usage of services once they cross over the entitlement knot.
SO IN A NUTSHELL…
In order to harness a usage-based pricing strategy, it is essential to have an advanced billing platform that can accurately compute usage so that every dollar is captured. Learn more about OneBill’s advanced usage rating capability today.
Originally published on CEOWORLD Magazine.
JK Chelladurai, Founder & CEO of OneBill, interviewed by the CEOWORLD Magazine on how he channels his 32 years of IT experience and 26+ years of experience in building BSS/OSS solutions for the telecommunications industry to transform the consumption economy with OneBill.
CEOWORLD Magazine: What led you to start OneBill? What were the gaps that you saw in the billing space at the time?
JK: I started working for Portal Software back in 1996 which provided an on-premise solution, where customers had to invest millions of dollars to obtain a licence and then spend a few million more dollars to receive the actual solution. Therefore only very large companies had the resources to afford that kind of OSS/BSS solution. This created a significant barrier to other smaller service providers accessing a solution. So, we saw an opportunity to provide a flexible cloud-based, OSS/BSS solution for businesses of all sizes with varying needs.
At the time we launched OneBill, there were other billing solutions out there offering cloud-based platforms, but they were yet to infiltrate industries such as SaaS. Furthermore, these other solutions were focused on the billing needs of those offering purely subscription-based services. However, we were seeing that this ‘one-size-fits-all’ approach had limitations for other industries such as Communications, which have many nuances when it comes to billing and revenue management.
Other than the reasons above, we identified three gaps which drove us to create our revenue management solution.
We saw that businesses were moving from traditional subscription-based pricing to consumption-based models. Subscript. Whereas with a consumption-based model, customers are billed based on their usage of the product or service. With the flexibility and transparency of consumption-based billing, customers are more likely to use the products and services which are billed based on their consumption rather than the fixed subscription charges. With this new trend, companies also have the huge advantage of understanding their customers’ usage behavior to come up with better solutions. So, this is why we are seeing a shift in many businesses moving from the simple subscription economy to the consumption-based economy, in order to capture additional returns. However, there is complexity involved in this as you have to keep track of the entitlement. The subscription entitlement used in a given period of time can be minutes, number of pages, or any resource that you’re metering. Therefore it is imperative that you have an advanced billing solution to start charging for additional usage of services once they cross over the entitlement knot.
When the new wave started with an increasing number of companies moving from on-premise to cloud-based solutions, we picked up an interesting insight during this period. We found that when the enterprises and the small-medium sized companies were moving to the cloud, the delivery of these cloud services was very different from how the enterprises were traditionally buying on-premises solutions. In fact, these cloud services were getting delivered through relationships with channel partners, rather than direct-to-customer.
Therefore we were seeing that the channel partners played a very major role in taking the cloud services to the last market. Hence, if we were going to build a cloud based solution, we needed to make sure that the channel partners could directly work with the service providers and the service providers could actually bill-on-behalf-of channel partners, so that they can deliver the actual retail invoice.
The whole concept of wholesale vs. retail played an influential role in architecting OneBill. We kept this whole channel ecosystem in mind and built the entire OSS/BSS solution around the channel partners.
We also saw a lot of existing inefficiencies and manual processes associated with time to market. Time to market is essentially the time between when you capture an order, to when you fulfill it. We found at the time there were a lot of swivel chair operations being conducted in order to fulfill an order from the time it was captured. As a result, that longer time to market results in lost revenue. So we saw an opportunity to automate right from the order capture to order fulfillment phase with ZERO touch.
CEOWORLD Magazine: How OneBill is helping companies & what differentiate it from other players?
- In OneBill, we have this concept of a grant. With the grant, you are able to keep track of what is the entitlement for a given subscription, and then it has the ability to manage the validity of the grants, whether the validity is for day, or weekly, monthly or so. You have all kinds of the flexibility to manage the entitlement with various alerts and notifications, so basically, depending on how much they have used, you will be able to be notified on how much they have consumed.
- With OneBill’s multi channel management, we have created a very flexible platform to manage multiple hierarchies of channel partners. So, the channel partners can be the form of reseller who manages the customer, and they can do branded invoices with our support of Bill-On-Behalf. Or, the channel partner can be an affiliate partner who works with you on commission basis.
I would say that OneBill is the only company which can actually do the real-time settlement for channel partners.JK CHELLADURAI, FOUNDER & CEO OF ONEBILL
- In terms of reducing the operational overhead, we have this Service delivery platform. With the service delivery platform, the moment you capture the order we can actually trigger a workflow in the service delivery platform which orchestrates the order across multiple downstream platforms. The workflow can be very complex with different types of tasks, whether it is an automated task or a manual task or a timer task, or even a callback where we do get the notification from the system when the downstream activities are done. All these things are possible with the SDP.
CEOWORLD Magazine: What do you think about the Industry’s current situation? and where is it headed?
- I think the combination of this subscription fee plus metering of services is the way to go in the future. It is not the pure subscription fee, but you need to go beyond just applying the recurring fees. If you look at, subscription services are being offered by many businesses , (e.g. Stripe, QuickBooks etc.). They all offer a simple recurring fee, nothing beyond that. I think businesses could be losing money or leaving money on the table if they’re not actually keeping track of how much their services are being used, particularly during peak sales periods. So, there’s an opportunity for businesses to monetize their services more effectively if they move beyond just applying the subscription fee.
- I also see this whole industry is moving towards a marketplace model where different cloud service providers come in and offer their products and services and those different cloud services are being delivered to the enterprises through the channel partners. That is one aspect of it.
- And, the other aspect I see is that this entire quote-to-cash lifecycle is being automated through a single platform as opposed to businesses having to procure multiple products and trying to integrate.
That’s why in OneBill, we have 5 different products in our suite, starting from CPQ, billing & revenue management, CRM, service delivery platform, and multi-level channel partner management.
- We provide this entire suite for service providers. So, you can think of this as a business management software that enables them to manage the entire quote-to-cash flow.
- Usually, all these products are available as a la carte products where you need to work with different platforms for different tasks, whereas here in OneBill, all of these products are tightly integrated to automate the entire quote-to-cash process.
- You need to have a tool that business can manage the vendors, manage the partners, manage the resellers, and provide everything in a single platform without having to use multiple tools and make it completely automate the whole quote-to-cash process.
CEOWORLD Magazine: What is your Vision for OneBill?
JK: Revenue leakage is a big issue for many of the service providers because most of them may not know how to monetize some of their offerings in the whole consumption economy, where you need to keep track of what the users are actually using, how much they’re using, and how much they are entitled to use. All these different aspects have to be monitored very closely. Minimizing revenue leakage and maximizing revenue assurance is one of the key aspects that we wanted to ensure as a billing and quote-to-cash system. And, we want to eliminate any manual steps in this whole quote-to-cash process and make sure that businesses don’t lose or they don’t leave the money on the table.