Source: Bessemer Venture Partners
In this hypothetical volumetric pricing model, the rate is $0.06 per API call if prepurchasing within an allotted volume. Overage fees of $0.07 per API call apply when usage goes above the allotment. The formula is:
Total cost = (Base rate x prepurchased credits) + (higher band rate x overage)
Greater or lesser predictability is driven by the design of the unit bands:
- Broad bands: These provide greater certainty for customers, reducing the risk of unexpected costs, but have more limited upside for vendors
- Narrow bands: These increasingly approach a PAYG model, requiring more accurate usage predictions from customers but offering finer control over costs and usage
Adaptive flat/volumetric usage-based models can also be combined with more traditional pricing techniques, such as offering savings for bigger commitments and monetizing overages at a higher rate.
This pricing model is tailored to align customer needs for predictable expenses with the provider's goal of maximizing revenue opportunities, balancing flexibility and predictability.
Annual commit-and-drawdown model
In this pricing model, customers make an upfront commitment to a specific volume of credit units but have the flexibility to adjust based on the actual usage over the contract period.
Depending on the size and nature of the agreement, this model may require robust customer communication on usage levels and potential true-up fees — for example, notifying customers midyear if over 50% of credits have been used. This transparency into drawdown and projected end-of-term charges is essential.
The annual true-up ultimately aligns consumption to upfront commitments, charging for overages or crediting remaining allotments. This blend of flexibility and predictable spending aligns customer and provider incentives.
Other considerations: Tailoring the approach
Rather than a one-size-fits-all approach, vendors should tailor their usage-based pricing strategy while considering several critical dimensions:
Use cases: Some applications have predictable seasonal spikes such as financial period closing activities. Others see variability around events like new product launches or M&A. Models can flex to adapt to known use cases through accrual and true-up mechanisms.
Number and types of users: Within a single enterprise, different groups — power users, knowledge workers, third-party partners — have distinct usage patterns. Units and allotments can be tiered based on each group’s expected consumption.
Customer industry and size: Credit unit needs will vary significantly across verticals like financial services, healthcare, retail, etc. Small, midsize and large enterprise needs also differ. Models should be adapted accordingly, with appropriate baselines and bands.
Vendors should gather data on these dimensions and design tailored pricing bands, credit pools and overage calculations. This reduces uncertainty for customers while maximizing potential value.
Further insights
- Overage models: How should businesses charge customers when usage exceeds initially agreed-upon credit limits under different pricing models? We will explore approaches ranging from PAYG overflow pricing to capped overage pools.
- Billing strategies: Should revenue be recognized through recurring monthly invoices or an annual true-up? A meaningful difference exists between how customer usage accumulates and how actual revenue is captured under flexible-pricing approaches.
As your business evaluates usage-based models, consider that we have decades of experience helping clients implement adaptive approaches to optimize value.
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