How usage-based pricing affects billing operations

For SaaS businesses, product profitability is an increasingly urgent question. Finance teams are under pressure to refine their unit economics and maximize returns for every single customer. 

But while traditional subscription pricing models continue to be one of the most common pricing practices in SaaS and have historically powered the growth of recurring revenue models, usage-based pricing (UBP) can actually be one of the most effective ways to achieve the KPIs Finance teams are chasing. Why? Because the consumption model aligns what the customer pays with the value they derive from the product, making revenues more resilient.

The impact of usage-based pricing on BillingOps

Aligning costs with value – sounds great, right? But one of the challenges in implementing usage-based pricing and other sophisticated hybrid models is the significant pressure it puts on Financial and Billing teams from an operational perspective. These models add complexities that existing subscription tools weren’t built to handle, so whether you're filling the gap with manual bill calculation or you built your own tool, it's likely falling short.

For businesses aiming for scalability and compliance, managing the complex workflows to measure usage and create a bill requires a high degree of data sophistication. 

3 types of data needed for usage-based pricing 

To actually figure out how much your customers should pay, it requires incorporating three worlds of data:

1. product usage data, based in your platform;
2. account data, or the core customer record hosted in your CRM; and
3. pricing and order data, stored in a Sales CRM, CPQ, a subscription management system, a separate price book, or some combination of these.

For accurate billing, these data sets need to be combined and the outputs sent to your finance stack, from which you generate invoices, manage collections, recognize revenue, and generate key metrics. 

The practical challenge for UBP is that you need to calculate what goes on the bill for every customer, every month, and also be able to prove the calculations for both your customers and auditors. (The better version would be the ability to calculate and show a running total of the bill at any time.) This involves manual work: recording usage data for every customer, bringing it together with their pricing to calculate the amount, and delivering those calculations to billing and other downstream systems.

The risks of manual usage-based billing

Businesses who lack a specialized system to manage these workflows often attempt workarounds, but DIY in the world of usage-based pricing is likely to cost you in the end.

Some BillingOps teams use a spreadsheet. This involves engaging the Engineering team to set up delivery of key data to an analytics database from which you can export data, then combining that data with pricing and customer account information in a spreadsheet.

As a business attempts to scale, this manual approach gets more difficult:

• Finance expertise – To build your own system requires that your engineering team deeply understand the requirements of finance from compliance and audits to revenue recognition. This is a high barrier to entry to even begin a self-build project.
• Customer volumes – While manual workarounds via spreadsheets and calculations can work when you have 10 customers, they become unwieldy when you have 100 or 1000.
• Pricing complexity – Building an in-house system can be a possibility if your usage pricing is simple, totally standard, and not likely to change. If you’re applying the same numbers in the same way for every customer, then you can build a single system and run it on repeat. But if you plan to drive growth by increasing pricing sophistication and making pricing changes over time, you’re likely to be introducing elements such as different tiers, different prices for different territories, volume-based discounts, or conditional elements. Not to mention the likelihood that your Sales team will want to use specific pricing or structures for individual customers.

Eventually, these difficulties will lead to serious negative effects on your business:

• Lost time – Working manually, it can take days (or even weeks) to finalize billing and send invoices to customers each month, extending time-to-cash and harming your customer experience.
• Wasted resources – Your Finance team loses time to billing every month, which wears them out, raises costs, and distracts them from other priorities.
• Human errors – Human systems produce errors, even with the best of intentions. This hurts you either way: Under-billing creates revenue leakage, while over-billing undermines customer trust.  
• Inflexibility – Brittle systems are unable to accommodate pricing and packaging changes or releasing new features from Product teams, or respond to Sales’ reasonable requests for variations and private pricing deals that they believe will drive customer acquisition and revenue growth.

This manual approach leaves Finance teams balancing competing incentives between what will generate the best return from customers vs. what can be implemented practically. 

You want to be able to monetize and operationalize whatever pricing model will generate the best return from customers, which likely means moving on from manual billing.

A better alternative to manual or DIY usage-based billing 

So, manual usage-based billing is a non-starter. Some may try to build a more involved custom solution, but for most businesses, building a custom solution is not a practical option. The building route takes away valuable development resources from your core product and requires regular updates every time you make pricing changes. 

With usage-based pricing, billing becomes a part of the product and is an interesting engineering challenge. But you don't want to spend your time doing undifferentiated heavy lifting or reinventing the wheel. You should also be looking for ways to reduce execution risk, particularly around understanding the complex requirements of your stakeholders throughout the business (particularly Finance). You need to work smart and take advantage of a new generation of tools that unshackle you and abstract complexity in the right way.

Plus, these projects are slow, expensive, and risky, and in the case of usage-based billing for SaaS, there is a better way. 

What’s needed is a solution that can automate complex bill calculation and fill the gap between your product, CRM & CPQ, and ERP systems – removing undifferentiated heavy lifting from your Finance team and making billing operations automated, scalable, and efficient.