A Deep Dive Into Consumption-based Charging Model

Consumption-based Charging Model

This article will provide a detailed view of the Consumption-based Charging Model. This model is also known as the Usage-based Charging Model.

Subscribers pay for their actual consumption of products or services in this model. In some industries, like Telecom, it is called the Pay-As-You-Go model.
 
This model has redefined the traditional ways of charging or pricing the service delivery. Here, instead of paying a fixed or flat price, actual usage of services consumption is calculated and charged to the customers. This article will dive into deeper details surrounding this model. 

Key features of this model are as follows –

1. It requires real-time or near real-time service usage tracking to ensure fairness and accuracy in the measurement of service consumption.
2. Customers are charged based on the actual usage rather than paying a fixed/flat amount on a monthly or annual basis. The more customers consume, the higher the charges and vice-versa. This creates a dynamic pricing mechanism and reflects fair pricing.
3. With fair usage tracking, customers get more control in monitoring and managing their consumption. Service Providers also avoid revenue leakage and customer complaints stemming from overcharging or incorrect billing.
4. As customers are fully aware of the charging mechanism, they will be more cautious about overspending or running into dunning actions.

Let’s deep dive –

As understood, the Consumption-based Charging model requires accurate usage tracking. 

Click to enlarge - Consumption-based Charging Model

Consumption-based Charging works as below –

1. The customer intends to consume the Service offered by the Provider.

2. Based on certain criteria (such as available balance, for example), the consumption of service is allowed.

3. During/after the Service consumption, the Usage requests or records are captured.

4. Usage records are processed or enriched as per the business rules. This can be done through a Mediation System.

5. The processed Usage events are measured and rated as per the pricing plan. This is done via a Rating System.

6. The Rated events are captured in the Subscription/Billing Monetization System.

7. It results in the actual balance impact on the Customer account.

8. For Prepaid Customers, a Top-Up can be done to replenish the balance.

9. For Postpaid Customers, a bill gets generated as per the billing frequency, which contains the usage charges. The payment request is created based on the overall charges, discounts, taxes, etc.

As SaaS-based customers with subscription plans are charged upfront, certain SaaS billing products can bill usage consumption towards the end of the billing period by importing the usage records in a file format before the generation and posting of the invoice.

At the same time, we have convergent billing products that can process usage requests in real-time. It can be done by handling protocols like Diameter/HTTP2 to handle session-based services like Data/Voice or Event-based services like SMS, File Transfer over IM, etc. 

Such convergent billing products can also handle usage records in file format to cater to Postpaid customers (paying usage charges in arrears).

We will dive further by discussing the following –

1. Real-time Consumption Model – The charging flow is depicted below:

Click to enlarge - Real-time Consumption Charging Model

Here, the account balance is checked first to authorize the service delivery. Usage requests based on ongoing service consumption are handled in real-time. Once the service consumption is completed, the customer’s account balance gets impacted based on the actual usage charges. The customer gets notified accordingly through SMS, messaging, etc.  

2. File-based Consumption Model – The charging flow is depicted below:

Click to enlarge - File-based Consumption Charging Model

A customer’s credit limit is checked to authorize the service delivery. Usage records are generated based on service consumption by the mediation system. Later, these usage records are delivered or uploaded for rating the events. Once the rating is completed, the customer’s account balance gets impacted based on the actual usage charges. The customer gets notified accordingly through their chosen notification medium. As this mechanism is file-based, there is a slight delay in the processing of usage records.   

Some of the popular types of Consumption-based Charging Models include –

1. Pay-As-You-Go Charging Model: This model refers to pricing based on the number of units consumed. 

E.g. 0.05 Cents per API call

2. Tiered Charging Model: This model involves offering multiple pricing tiers with varying levels of features and services. Each tier corresponds to a different price and offers a different set of features or services, thus allowing customers to choose the tier that best suits their needs and budget. 

E.g. Gold Tier: 5GB data allowed for $20 per month

Bronze Tier: 3GB data allowed for $15 per month

3. Volume Charging Model: This model calculates the charges based on the total usage.

E.g. 1 – 60 Mins Voice call: 20 Cents per min

        61 – 120 Mins Voice call: 10 Cents per min

        121 Mins onwards Voice call: 5 Cents per min

If a voice call is made for 118 minutes, then charge 118 Mins X 10 Cents per minute = $11.80 for the entire duration

4. Minimum Usage Commitment Model: Under a minimum-commitment model, customers agree to a minimum level of usage or commitment during a given billing period. In case of failure to meet this minimum commitment, they are still obligated to pay the agreed-upon amount. For any consumption beyond the minimum committed level of usage, providers may charge customers for the additional usage or spending.

E.g. The post-paid plan $50 per month with a free data limit of up to 2GB. Even if the Customer uses 1.2GB, the entire minimum commitment amount ($50) needs to be paid.

5. Overage Charging Model: In this model, actual usage or consumption that exceeds a predefined limit or baseline included in their subscription or service plan gets charged. In the same context of the Minimum Usage Commitment Model, any consumption beyond the allotted quantity or usage is liable for excess charges.

E.g. Postpaid plan $50 per month with a free data limit of up to 2GB and excess data consumption is charged $2 per 100MB. 

6. Prepaid Drawdown Charging Model: Under this model, customers pay upfront for a period of time to receive defined units. The granted units get consumed against the prepayment balance as per the usage. Any unused units during the period expired or rolled over to the next cycle based on the business rules.

E.g. Online gaming platforms granting prepaid gaming currency credits that get consumed based on in-game purchases or access granted. Gamers can replenish the gaming credits by making additional payments.

Because of the transparency and flexibility of this model, it has gained prominence across several sectors. 

Some of the examples are as follows –

• Telecom: Charging data session as per GB/MB consumption.

• Utilities: Charging the consumption of Water/Electricity as per the actual consumption. 

• Cloud Providers:  Charging based on computing resources, storage used, No. of API calls, etc.

• Entertainment/Streaming: Charging based on No. of Channels, Ultra HD view, Pay-per-View, etc.

Advantages of Consumption-based Charging Model for Customers and Service Providers –

• Customers experience better cost control as the expenses are aligned with consumption. 

• Service providers reduce the risk of revenue leakage or non-payment as customers often pay upfront for their usage.

• Service providers enjoy easy access to the growing markets as it provides flexibility and transparency to the customers while offerings can be scaled up in the future.

• It enhances customer loyalty due to the availability of services based on the actual needs and budget.

• Based on the actual consumption patterns, customers can uptake cross-selling offerings by the Providers. 

• It encourages customers to consume the services more efficiently.

Disadvantages of Consumption-based Charging Model for Customers and Service Providers –

• Due to the consumption-based approach, it can be challenging for customers to manage their expenses or budgets in case of usage overuse. The credit limit offered by providers can be misused in such instances, leading to revenue loss and bad debt. 

• It’s fairly difficult for providers to predict or forecast their revenue due to the charging flexibility.

• Without accurate usage tracking, this model can easily lead to revenue leakage and customer dissatisfaction.

• There are chances to over-provision network and IT hardware/software resources due to fluctuating customer demands.

Conclusion

The Consumption-based Charging Model signifies a tremendous shift in the way services are charged and billed. By encouraging transparency and fairness, it suits both business requirements and customer preferences. As more and more sectors continue to adopt this model, customers can look forward to better personalized offerings and competitive pricing, contributing to customer satisfaction and loyalty. 

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Also Read: 

Overview of Subscription Based SaaS Billing Model

Overview of Tiered-based Billing Model In SaaS

Overview of Flat Rate Billing Model In SaaS

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Glossary: SaaS (Software-as-a-Service), SMS (Short Messaging Service), IM (Instant Messaging), HTTP (Hypertext Transfer Protocol)

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