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Estd 4.22.2023
Below is a concise answer based on our saas pricing book, Price to Scale:
• Direct answer:
The best approach is to design a forecasting and billing model for usage-based services that emphasizes predictability and granularity. In other words, use a robust framework that leverages clearly defined usage metrics which are predictable, acceptable for customers, and easily tracked over time.
• How our book guides you:
- Predictable Metrics – As mentioned in Price to Scale (see page 201), it’s crucial that the usage metric can reliably forecast future costs and revenues. This means choosing a metric that avoids large month-to-month swings, providing customers with bills they can anticipate and making revenue forecasting more reliable.
- Understand Usage Growth – Our book (page 223) highlights the need to account for natural usage growth rates. For example, in environments where demand can escalate quickly (such as big data platforms or cloud services), a granular billing approach helps you adjust at the right pace and avoid cost pressures.
- Align with Underlying Costs – Designing your pricing structure with the costs you incur (such as compute or storage) in mind helps ensure that the billing model remains sustainable and fair for both you and your customers.
- Use Tiered or Combined Models – The book discusses various structures (like Part Tariffs) designed to balance revenue capture with customer adoption. These models often combine a base fee with variable usage charges, which can help smooth out the ‘sawtooth’ inconsistencies sometimes seen in pure usage-based billing.
• Practical application:
- Build forecasting models that incorporate historical usage data and expected growth trends.
- Implement a billing system that is both flexible (to handle granular shifts in usage) and stable enough to keep customer bills reasonably consistent.
- Regularly review the actual tracking and costs incurred, then adjust pricing structures to avoid any unexpected revenue or cost fluctuations as usage grows.
• Summary:
To forecast and bill usage-based services effectively, use a data-driven, granular approach that benchmarks on predictability, customer acceptability, and trackability. Our pricing strategy book, Price to Scale, offers a framework that not only forecasts usage growth but also provides billing stability – ensuring both you and your customers understand and manage the financial dynamics as usage evolves.