What Is Consumption-Based Pricing & Is It Right for Your IoT Solution?

Consumption-based pricing centers on usage, making it a feasible billing strategy for IoT devices. However, implementing this strategy requires a sophisticated billing platform capable of handling the complexities unique to IoT. At its core, consumption billing relies on a platform to track usage data, but the complexities of IoT devices demand additional specifications. 

First, data consumption varies by device type and use case and must be tracked precisely on a device-by-device basis to ensure accurate billing. Additionally, IoT devices have SIM cards that bind connectivity and data usage together. This combination requires a billing platform with the capability for granular usage tracking and connectivity management. 

In this article, we’ll delve into the advantages and disadvantages of consumption-based pricing and compare this pricing method to subscription billing to help you determine which is the right choice for your solution.

What is consumption-based pricing?

Consumption-based pricing is usage-based, charging customers based on the actual amount of a resource or service they use. In the context of IoT, customers are billed according to their device data usage. Consumption pricing is also referred to as pay-as-you-go or metered billing.

Typically, consumption billing operates on a postpaid basis, where customers are allocated a specific amount of data upfront. They are then billed based on their actual usage, and any excess usage beyond the allocated threshold results in overage charges.

The greatest advantage of consumption-based pricing lies in the flexibility and control it offers to customers. With this model, users can actively track their usage and clearly understand the exact charges they will incur based on their consumption levels. This transparency empowers customers to manage their usage efficiently and make informed decisions regarding their expenses.

Consumption-based pricing vs. fixed subscription billing

Subscription billing is another usage-based pricing strategy. But unlike consumption-based pricing, fixed subscription billing allows customers to choose between prepaid data plans and pay recurring charges and regular, predetermined intervals. While consumption billing meters usage for a particular period and calculates a customer-specific invoice, subscription billing prepackages plans into different pricing tiers. 

Both options provide flexibility for customers in unique ways. Consumption pricing prepares customers as they know how much they’ll be charged and allows them to control device usage accordingly. Prepaid subscription plans allow customers to choose upfront how much data they need and provide predictable and transparent charges. 

For both options, using more than the allotted data results in overage charges. However, some subscription billing platforms allow customers to top-up on data mid-billing cycle so they don’t receive surprise overages or have to upgrade for more data than they need. 

For the device manufacturer, revenue with consumption-based billing is less predictable than it is with subscription billing. Subscriptions provide regular recurring revenue, allowing for more accurate financial forecasting and increasing customer lifetime value.

In some cases, consumption-based pricing and subscription billing can be combined. In this scenario, customers subscribe for access to a service and then pay additional charges for data based on metered usage during a billing cycle. For example, an OEM who offers smart home security cameras could charge customers a recurring subscription fee for ongoing live footage and cloud storage. Each retrieval of recorded footage would consume data and trigger metered charges. 

While a combination of consumption and subscription billing sounds like the best of both worlds, it still leads to revenue fluctuations, additional complexity for you and your customers, and customer confusion. The recurring charge for your services must accurately reflect the value provided, or you risk losing customers. 

Advantages and disadvantages of consumption-based pricing

Advantages

1. Revenue tied directly to usage

Consumption-based pricing directly correlates revenue with the amount of data used by customers. This means that the more customers use their devices, the more revenue is generated. The pricing model is especially beneficial in applications where customer usage varies widely.  

For example, an irrigation solutions company's customers, managing golf courses or corporate campuses worldwide, would experience varied water usage and differing data consumption for their irrigation systems. In such scenarios, consumption-based pricing allows the irrigation company to align its revenue with the actual usage of its services. This pricing model ensures fair billing for clients based on their specific needs and enables the company to scale its revenue in tandem with the intensity of service use.

2. Flexibility for customers

Consumption-based pricing offers customers the flexibility to pay for exactly what they use. This can benefit customers with fluctuating or unpredictable usage patterns because they only pay for data consumed during a specific billing period.

3. More conservative use of resources

By directly linking costs to usage, consumption-based pricing motivates customers to be more mindful of their resource consumption. This can lead to more efficient use of resources and services, reducing waste and lowering overall costs for you and your customers.

4. Good for use cases with low-data consumption or variable usage

Consumption pricing is ideal for customers whose devices use little data because they only pay for what they need and no more. Prepaid data plans are not cost-effective if your customer consistently uses less data than the lowest-priced tier or if usage fluctuates significantly. 

For example, A provider of agriculture monitoring solutions may have different customers with vastly different farm sizes and different numbers of deployed devices, among other differences. Because cellular data consumption between customers would vary greatly in this instance, you would likely want to consider leveraging a consumption-based pricing and monetization model.

Disadvantages

1. Unpredictable revenue

While consumption-based pricing can generate revenue based on actual usage, it can also result in revenue fluctuations. Revenue is directly linked to customer data consumption, and variations in customer behavior and usage can make revenue forecasting challenging.

2. Complex billing

Implementing and managing consumption-based billing can be more complex than fixed-rate subscription billing. Rather than having a few set pricing tiers that all subscribers choose between, pricing is determined on an individual customer basis. 

3. Fluctuating invoices

Since customers are billed based on their actual usage, invoice amounts can vary from one billing cycle to another. This variability might make it harder for customers to budget and anticipate their expenses and potentially lead to their dissatisfaction.

4. Costly overages

While consumption-based pricing is advantageous for high-data consumption use cases, it can also lead to higher costs for customers with consistently high resource usage. Customers might find it challenging to predict and manage expenses, potentially impacting their satisfaction with the service.

Why subscriptions are often more advantageous for IoT

The most apparent reason OEMs choose subscription billing over consumption-based pricing is for the predictable recurring revenue stream it provides. Subscriptions are not exempt from revenue fluctuations, as subscribers can upgrade or downgrade their subscriptions. However, customers choosing not to use their devices or to use them less than the previous billing cycle won’t result in less revenue like consumption billing would. Customer lifetime value with subscriptions is greatly extended if you continue to provide value. 

Customers also know what to expect with subscription billing and aren’t caught off guard by charges each billing cycle. Also, if they choose to upgrade or downgrade their data plans, they may do so. You can also adjust your pricing tiers, upsell, or cross-sell based on customer usage insights. 

But both consumption-based pricing and subscription billing require a robust billing platform designed to support IoT devices. Most billing platforms automate invoicing and track usage, but an IoT billing platform like Zipit’s ties connectivity and usage. Cellular carriers provide network access so that IoT devices can transmit data. Without carrier connectivity, the IoT billing platform would not be able to receive usage data from IoT devices. 

The Zipit Wireless billing platform allows you to track, bill, and control data usage and connectivity in one place. You can also choose to offer customer data plans from one or multiple carriers with Zipit SIMs. Through your custom-branded user payment portal, your customers can instantly activate their devices and choose between one of your pre-determined pricing tiers. Our platform will send custom alerts to users when they near their data limit so they can top-up on data if needed or upgrade their plan mid-billing cycle. 

Zipit’s IoT connectivity management and billing platform streamlines your operations, automatically tracks usage at the device level, and provides you the flexibility to implement a billing model or pricing strategies that align with your business goals.

Is consumption-based pricing right for your IoT solution? 

Consumption-based pricing has advantages and disadvantages, but it can be powerful for some use cases when combined with a robust billing platform, especially for applications with low or variable usage needs. When choosing any billing strategy, first assess your target market, the nature of the service or resources offered, and customer usage patterns.

Consumption-based pricing may be a good model for your IoT solution if device usage levels are: 

• Unpredictable
• Rapidly growing
• Fluctuating in demand

Otherwise, subscriptions may be the most sustainable source of revenue for your IoT business. 

Whether you choose to bill customers based on individual usage or offer subscription plans, Zipit’s billing platform can provide you with the insights, tools, and optimized workflow you need to be successful. With Zipit, you have complete control over connectivity tied directly to payment status and device SIMs. It simplifies large deployments, enables recurring revenue, and makes business growth possible. Contact us to learn how you can partner with Zipit to maximize your revenue potential, provide greater value to your customers, and increase end-user satisfaction. 

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