The Impact of Usage-Based Billing on API Adoption and Customer Satisfaction
How usage-based billing is transforming the legacy subscription-based model.
February 21, 2023
Usage-based billing isn’t new to the software space. For many decades, it’s been a key component of industries like telecommunications, logistics, and utilities.
Today, different software products are increasingly adopting the API model to scale. Simultaneously, metered, usage-based billing is usurping the old subscription-based model. This radical shift has significantly impacted API adoption and the extent of customer satisfaction derived from the services.
However, much is still needed to emphasize the importance of this new billing model, especially regarding overcharging and cost predictability. In this article, we’ll discuss the impact of usage-based billing on API adoption and how it affects customer satisfaction. Keep reading to learn more.
What is Usage-Based Billing?
User-based billing or pricing is a metered billing system where users pay for services based on their precise volume usage. As such, user-based billing is flexible and allows users to pay for only what they use – nothing more or less.
This is opposed to the subscription-based billing system that many SaaS platforms adopt, which makes customers pay for services based on a set of fixed, expected needs.
What is Driving the Adoption of Usage-based Billing, and Why Has it Become a Popular Monetization Strategy for API Providers?
Today, usage-based billing is increasingly a popular monetization strategy for API providers. Here are some of the factors driving its adoption:
The Growth of AI Automation Tools
Today, several AI automation tools like Bardeen, Selenium, and recently ChatGPT dominate the software landscape. Many of them have APIs that allow developers to code their functionality into their own disruptive projects.
The worth of these software products and their services cannot be accurately measured according to the number of users. Rather, these services must scale their value based on impact and consumption. Hence, usage-based billing reflects more accurately an API service’s worth rather than a subscription-based model.
Product-Led Growth (PLG)
Product-led growth is a business methodology where the product sells, markets, and develops itself. That is, user expansion, conversion, retention, and acquisition are propelled by the product. Today, product-led growth is the most important source of scalable and sustainable business growth. PLG is driving user-based billing as it gives more leeway to product users, providing a straightforward path to scaling and eliminating most of the obstacles to initial adoption.
Advantages of Usage-based Billing
Here are some of the pros of usage-based billing for API services: Low-entry Barrier for Users API services are increasingly adopting usage-based billing because it makes entry barriers low for product users. Users can simply try out services without significant commitments, knowing they’ll only pay for what they use. As the initial commitments on the part of the users are limited, experimentation and evaluation are encouraged, thereby helping the API provider expand their addressable market.
A product-led growth approach means that API providers can boost revenues without extra marketing effort. The product speaks for itself, with users paying for as much as they use without any sales or marketing intervention needed.
Perhaps its biggest single advantage; usage-based billing means that customers can get full value from their commitments. This way, they don’t bother about wastage or shelfware.
Disadvantages of Usage-based Billing
Here are some of the demerits of usage-based billing for API consumers:
With the regular subscription-based billing models, consumers could know from the very onset exactly how much they’d be spending on a SaaS product. Now, users can find it tricky to decipher their spending and outline their budgets for using the software tools.
Potential for Overage Charges
One potential pitfall of usage-based billing for API users is the matter of overage charges. When a user’s service limit has been reached (API call limit, for instance), they may inadvertently incur additional costs in the form of overage charges.
Lack of Transparency
Not every user will understand the parameters on which the metered billing metrics are based. Users can face confusion and frustration when the value metrics for the billing are challenging to understand.
Usage-based Billing: SaaS Case Studies
Today, many companies are switching to the usage-based pricing model. In fact, a study revealed that nearly half of SaaS organizations were using the billing system in 2021. One can only imagine how that figure has increased since then.
Here are some real-world examples of companies that switched to a usage-based billing system and how it worked.
Snowflake Inc. is one such company. The organization provides data warehouse-as-as-service or cloud-based data storage. Asides from a free trial with zero long-term commitments, the platform charges per second and usage for virtual warehousing, serverless features, storage, and other cloud services. Another company, Twilio, has a billing system that allows customers to choose a hybrid or strictly usage-based system. Similarly, popular email service provider MailChimp provides users with a pay-as-you-go option.
Just as well, the US-based cloud provider, Digital Ocean, was able to establish a core market of growing software companies and software developers with their pricing and billing system. Rather than the fixed, recurring subscription packages, they used a billing system based on two metrics –data/bandwidth volume, and virtual machine activity (billed per hour).
Amazon Cloud Services is another example of a cloud service provider that has adopted the metered, pay-as-you-go model for several years. Today, this model is key to it holding a 34% share in the global cloud infrastructure industry – higher than its biggest competitors: Google Cloud Platform and Microsoft Azure.
The Impact of Usage-based Billing on API Adoption
Today, statistics indicate that 61% of the general SaaS index will have adopted usage-based billing in the future. With API platforms like Google’s Apigee and Autodesk following suit, it’s only a matter of time before the API industry comprehensively adopts usage-based billing.
Additionally, more SaaS solutions providers are on the rise to help companies offer more structured, complex pricing. These companies aren’t leaving anything to chance, including important aggregates like metering, billing, and cost optimization. Finally, API service providers are adopting a more product-led approach due to usage-based billing systems.
As usage-based billing becomes more prevalent, API service providers have a chance to innovate their products and make them more appealing to users.
This is exactly where Archetype comes in. Archetype is an excellent and highly reliable purchase server that allows users to track app transactions in one place. It allows you to create several billable metrics based on parameters like streamed minutes, compute, and storage.
Afterward, you can attach your chosen metrics to the plan assigned to the users with your custom pricing models. Additionally, you can resolve the overage charge issue by opting to check for a return to ensure that thresholds or limits haven’t been exceeded.
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