Consumption-based pricing and bill shock

Consumption-based pricing and bill shock

Consumption-based pricing and bill shock

Over the past couple of years there has been a significant move in SaaS pricing from a traditional subscription-based model to a consumption-based model. This typically offers significantly more value for the user. However, if not managed correctly, consumption-based pricing and bill shock can lead to a decline in both usage and customer satisfaction.

Consumption-based pricing is focused around, the more a client uses or consumes a service, the more they are charged. It offers value to the user, as they are only paying for their usage. It also offers value to the SaaS provider, as the more resources a client is using, the more turnover the company achieves. It also has the bonus, that as the Customer Success Teams drives adoption it will lead to a natural increase in revenue from existing customers.

However, if not managed correctly, bill shock can occur which will not only damage your reputation, but also user adoption and repeat business/renewals.

What is Bill Shock?

Bill shock is where a customer receives a bill much higher than they are expecting, or possibly budgeted for and go into a form of shock. The phrase ‘Bill shock’ was originally associated with mobile phone contracts from around 2005 onwards. Mobile phone contracts were sold from as little as £10 a month. However, providers did little to warn customers off hidden costs and additional charges. With many users going from a Pay as You Go billing model, (where once they hit their limit they would not be able to use the service) straight in a subscription and consumption based model, where the user can continue to consume services outside of their tariff, and start incurring additional charges.

For example, a £10 tariff from 2008 would likely include, 50 texts and 50 minutes per month. But say you are used to calling your partner on the bus on the way home from work every weekday. This is around 30 minutes a day, or 600 minutes a month. Calls outside the tariff are charged at 35p per minute. You would then get a bill for £202.50 instead of £10 without any warning.

Bill shock then occurs, which usually takes one or all the following actions.

  • You make an official complaint to the company.
  • You feel you have been miss-sold too or tricked and voice your opinion to friends and family.
  • You take to social media and review sites to vent your frustration.
  • You stop using the service all together in fear of higher bills.
  • At the end of their contract period, you fail to renew and move to a competitor.

[Side note: In recent years, mobile providers have learnt from their mistakes. The qualify customers better to ensure they are put on the best tariff for their usage no cost. They warn customers who are about to breach their usage limits. On request, they can also block you from going outside of anything not included in your tariff.]

Bill Shock in SaaS

With more and more SaaS businesses introducing some form of consumption model, Bill Shock can occur in an equivalent way to that of the mobile phone sector.

Let’s take an example of a mailing list provider, called company ‘x’. They use the consumption-based model detailed below.

Consumption-based pricing and bill shock

Dependant on how many subscribers the customer has to their mailing list, determines the amount they are billed by company ‘X’.

Company ‘Y’ has been using company ‘X’ for some time to manage their mailing list. They currently have 750 subscribers and have been paying £18.99 a month for the last 12 months. During these 12 months there have been some changes in staff within the marketing team. The new head of marketing knows they pay £18.99 a month but is unaware that there are limits on this.

Company ‘Y’ decides to run an incentive to increase their subscribers. A possibility of winning some free tickets to a football match for everyone who registers over a 4-week period. The campaignwas a tremendous success, and the company gains 25,300 subscribers through the campaign.

Company ‘X’ then sends a bill to company ‘Y’ for £299.99 instead of their usual £18.99. The company is hugely shocked by this. Although not a huge amount they feel angry of not being made aware that this could incur additional charges. The campaign is now over budget and marketing must explain why.

Marketing complains to company ‘X’ and decides to move to a different provider, who charges the same, but just because they feel angry with company ‘X’ and feel in some way cheated. Also, company ‘X’ did not warn them of the growing charges, or that they had breached their usage limits on the current payment band.

The customer has been lost to bill shock. The customer has also stressed their unhappiness on some review sites.

How to avoid bill shock with SaaS clients?

Bill shock is easily avoided if there is clear transparency of a client’s consumption against your pricing matrix. The customer should be reminded of their usage often, especially if it is likely to shortly increase their bill.

Dependant on your segmentation of customers, it can either be in a tech touch form, such as an email, or other notification. Alternatively, there can be a more personal interaction such as a Success Plan that estimates when the client is likely to increase their software consumption.

It is also important to remind the client, often, of the value they are getting out of your product. This is especially important when there have been employee changes within your client’s business. So, where there are bill increases, they will associate this as an increase in the value they are getting and not an increase in cost.

Allow your clients to see their current usage easily, in real-time where possible. If they are about to incur charges outside of the norm for them, notify them of this.

In the example of company ‘Y’ above. If company ‘X’ had made them aware of their usage, and its limits often. Company ‘Y’ would be most likely to still be growing its subscription list with company ‘Y’. Also, likely to become an advocate of theirs.

Key Note: A customer should never be shocked by the amount on their bill, either up, down or remaining constant. Full visibility is best, and visuals can be good for this. Such as a pie chart, around maximum allowed usage for the pricing bracket, and their current usage to date.

I would love to hear your thoughts and comments, so please leave some below.

 

James Harding

Hello! My name is James Harding and I live in small town just outside Cambridge, UK. Currently working as a Customer Success Manager for a UK based SaaS company.

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