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Estd 4.22.2023
Based on the insights in our pricing strategy book, Price to Scale, the choice between prepaid usage credits and postpaid billing for usage-based features hinges primarily on the predictability and measurability of your usage metrics, as well as what best fits your customers’ purchasing behavior.
Here are the key considerations:
• Predictability and Measurement:
– If your key usage metric is highly measurable and predictable (for example, the number of API calls, storage usage, or analytic events), a postpaid billing model can tightly align your revenue with actual customer usage. This approach ensures fair billing based on consumption.
– When measurements are less predictable or harder to track (or if multiple departments share usage budgets), offering prepaid usage credits—or larger usage buckets—can create decision certainty and simplify internal approvals.
• Cash Flow and Customer Experience:
– Prepaid credits offer the advantage of upfront payment, which may benefit your cash flow and reduce billing complexities down the line. They can also help customers manage spending by purchasing a set amount of usage in advance.
– A postpaid approach follows the notion of “pay for what you use,” which is more dynamic and can scale with a customer’s growth. However, it requires a solid measurement system and a customer base that is comfortable with variable monthly bills.
• Sales and Internal Considerations:
– As discussed in our book, sales teams often appreciate the predictability of prepaid models, especially when dealing with purchasing groups that want budget clarity.
– Conversely, if your product’s value is directly tied to usage (like Amplitude’s per-event or Twilio’s per-SMS billing), a postpaid model may resonate better with customers by directly correlating cost with their realized value.
In summary, if your usage metrics allow for granular measurement and you want to closely correlate costs with usage, a postpaid model could be more appropriate. However, if predictability, ease of internal budgeting, or cash flow considerations are more critical, prepaid usage credits may be the smarter choice. Always assess your product’s usage characteristics and customer billing preferences to determine the best approach.
The takeaway here is to match your billing model to the nature of your product’s usage and the needs of your customer base, ensuring both fair value delivery and operational simplicity.