Entrepreneurship is on the rise, with a record number of 5.5 million businesses starting in 2023, per the US Census Bureau. Unfortunately, not everyone will make it into the next few years: according to the entrepreneurship education platform SCORE, 82% of small businesses fail because of cash flow problems resulting from poor budgeting, inventory management, and other complicating factors.
Of course, cash flow issues could depend on the billing model you’re working with — which can be changed. Consumption-based billing adds a layer of complexity to business finances, but it can also be a solution to your cash flow woes. Here’s what you need to know:
The basics of consumption billing
Consumption-based billing operates on a pay-as-you-go system, charging customers based on the amount or duration they wish to consume. Metering systems keep track of usage over a specific billing cycle, and then customers may be charged based on their usage level or through a predetermined price tier system.
While this offers flexibility for customers, it presents challenges for businesses that need to ensure accurate tracking and billing to prevent finance discrepancies. This once-complicated endeavor can now be streamlined with automation: consumption billing software Softrax supports even the most complex consumption and usage billing models. This allows businesses to easily monitor usage levels and manage aggregate, cumulative, and band-tired pricing. Additionally, the software allows for data capture and presentation for ASC 606 / IFRS 15 regulation purposes. By frontloading financial digitization efforts while your business is small instead of waiting until your organization is too large to back-manage, you future-proof all revenue documentation, ensuring compliance and data accessibility.
Consumption or subscription-based billing has given businesses a unique analytical weapon that can help them take control of their inventory and more accurately predict customer usage patterns. According to a report by Fast Company, for example, every $1 that retail businesses sell amounts to $1.35 of inventory still in stock. Using historical data from consumption billing software, companies can advance-order products or ensure the availability of services in anticipation of demand during a specific time period. However, this predictability is not reflected in all subscription-based industries, making it challenging to predict revenue.
Consumption billing and finances
While consumption billing encourages a greater average spend, it typically involves tiered pricing. As millennials’ income grows and Gen Z begins to flex their spending muscles, the overarching trend is that younger consumers prioritize temporary access over permanent ownership. This means that while they may pay a premium for a higher tier, you may lose their business sooner. Over a third of subscribers cancel in less than three months, and over 50% do so after six. The market is also becoming more selective: the average number of subscriptions per person is now 2.9, a drop from 4.1 in March 2022. This can cause financial instability for businesses on a quarter-by-quarter basis.
Our article “Efficient Tips for Managing Business Finances” discusses the importance of implementing risk management strategies to protect your business from financial pitfalls such as this. Businesses can restore some level of stability by providing pause options for subscribers at risk of canceling. This tactic may include price flexibility or more personalized experiences, depending on your industry. Another strategy is to charge consumers based on a guaranteed outcome rather than usage to ensure user satisfaction and retention. Finally, accurate and updated billing systems must be in place to prevent duplicate or overpriced charges, which can erode customer trust.
As customer expectations change, businesses operating on consumption billing must remain agile and ready to evolve. With future-proof software, proactive customer retention plans, and other key strategies, your business can thrive in the rising tide of the expansive subscription industry.