Business Models in the Age of IoT: Enabling Usage-Based Pricing

IoT has contributed massively to usage-based billing, mainly due to its easy access to data which businesses can use to track customers usage more easily and charge them accordingly. An IoT "Platform as a Product" (or "PaaP") framework enables you to build IoT products with usage-based pricing without paying PaaS fees to a platform provider.

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Image of a usage graph with a dollar sign on it
Illustration: © IoT For All

The Internet of Things has transformed our world (mostly for the better), and it certainly goes hand in hand with the usage-based or consumption-based pricing.

Businesses know that usage-based pricing appeals to the end-customers due to the low cost of entry. This allows them to drive sales volumes and higher revenues. However, usage-based billing and pricing have their cons, too, but the advantages seem to overweigh the negatives. In short, here is what is happening at the moment.

New Opportunities in Usage-Based Pricing

IoT has contributed massively to usage-based billing, primarily due to its easy access to data. Businesses can use this data to track customers usage more easily and charge them accordingly.

Although the IT, industrial sector and consumer discretionary arena appear to be taking the most advantages, other industries will follow soon. Interestingly enough, technology is advancing at a rapid rate, but tech products are only going to become more accessible at lower price-points. For this reason, IoT seems perfect for usage-based billing.

How Does it Work in Practice?

Let’s say that your company invented a specific type of brakes with sensors. With usage-based billing, you could charge for every time drivers use the brakes.

It’s a great fit for telematics use cases, insurance and lots of other ventures as well. In the old days, usage-based billing used to be quite complex and only reserved for huge businesses. Nowadays, other industries are taking advantage of it, mainly thanks to breakthroughs in platform accessibility, customer support, invoicing, subscription management and automated billing.

Challenges With Usage-Based Pricing

On the other hand, nothing is perfect. Usage-based billing has a few downsides.

The costs aren’t easily predictable in this case. For instance, your expenses will largely depend on consumption, which isn’t always easy to determine in advance. Also, legacy processes cannot handle billing system on the inside due to its constant oscillations. Then, there are different sales channels, complicated product catalogs and high prices.

How to Develop Your Usage-Based Pricing Strategy

Before you decide to take the plunge with usage-based billing structure, think about several factors that can have an impact on your business and profit.

First off, you should have a product that can you can bill this way. Of course, the whole concept of usage-based billing rests on the assumption your product or service is frequently used. Otherwise, there is little sense in incorporating the billing strategy, right?

The billing plan has to offer clarity to the consumers, or your strategy will backfire, and you’ll be dealing with customer complaints. However, that’s not as easy as it sounds. If you build your Cloud service on top of an IoT Platform as a Service (PaaS), it would be challenging to estimate daily or yearly expenses. Your costs would include payment per functionality, connected devices, added users, sent messages, sent API requests and more.

The complexity means that your expenses will increase as your solution scales, raising the question: how much will you charge your customers if you’re not sure how significant your costs will be tomorrow or in five years?

On the other hand, with an IoT Platform as a Product (PaaP) framework, you own a full-featured product that serves as the core of your IoT solution. PaaP allows you to build your IoT product with usage-based billing for your customers. That is to say, it’s available in the form of a fully transparent perpetual license that releases you from complex calculations. Now you don’t have to worry about your monthly costs toward some PaaS provider. You can scale how much and as quickly as you want.

Driving to Monetization

If appropriately used, a usage-based pricing strategy can increase profits while providing end-customers with a lower barrier to entry.