With many different billing models available, it can be tough for a business to choose the right one. Each model comes with certain pros and cons that can have a significant impact on business operations.
If you don’t want to spend too much time on accounting while ensuring timely payments, you need to consider how each billing model applies to your business operations.
Some companies can choose several billing models according to the clients’ and business needs. Others settle for the easiest approach to minimize financial and time-related investments.
Let’s take a closer look at choosing the best billing model for your business.
Different Types of Billing Models
The most common billing models that the majority of businesses take advantage of include:
- Hourly billing – you set a suitable hourly rate and charge clients according to the number of hours worked.
- Flat-rate billing – you set a fixed rate for a project and ask the client or customer to pay it either at the end of the project or in the beginning, according to the contract.
- Usage-based billing – you charge a client according to the volume of services they use. Each month, the bill can be different. Since this type of billing is complex and requires careful tracking, many companies take advantage of usage-based billing software.
- Recurring billing – if you are offering services on a weekly, monthly, or annual basis, you can set up recurring billing. The customer or client would have to pay a fixed fee at the beginning of each period. To make this process easier, it is recommended to read this recurring payment guide to get a better understanding of how recurring billing works.
- Progress billing – this type of billing involves issuing invoices when you achieve progress on one part of the project. Before you start the project, you can set milestones. Once you reach a milestone, you can issue an invoice.
This is hardly an extensive list of billing methods. Many companies opt for creating a custom billing method to suit their needs.
How to Choose the Right Billing Method
Choosing the right billing model for your business begins with evaluating clients’ needs. While it’s imperative to choose something that works for your company, you need to keep clients’ requirements in mind as well. Many companies are willing to change their billing methods to make it easier for customers and clients to pay on time.
What You Charge For
First, you need to determine what you are planning to charge for. This is called the pricing dimension. This metric will become the basis for your prices. For example, if you are an internet provider, your pricing dimension can be a GB. If you monetize your APIs, your pricing dimension can be an API request. If you are a phone service company, this metric can be a minute of phone communication.
When providing a wide variety of services, you can have several pricing metrics. Just make sure they are clear and transparent to the client.
The pricing dimension has to be easy to track. You may need to invest in special software to do so. You should also consider the metric’s scalability. What if your company grows? Can the metric grow with it? Make sure pricing dimensions don’t hinder the company’s development speed.
How much time, effort, and money are you willing to spend on a billing model? Before choosing the billing method, evaluate its costs. For some of these methods, you may need complex software. Others require you to spend a significant amount of time on invoicing.
If you don’t have a large accounting department that handles all the billing nuances, consider choosing something simple. For example, flat-rate billing is less complex than progressive or hourly models. If you choose something too intricate, you are likely to spend many hours on billing and keep your focus away from revenue-generating activities.
Meanwhile, without the right software, usage-based billing can be tedious, time-consuming, and prone to errors.
Depending on the services you offer, you may have a narrow choice of billing models. Coming up with a custom billing model could be a solution. However, it would involve a significant time and resource investment.
If one billing model isn’t enough for your services, consider creating a hybrid model for your customers. Just make sure the methods you choose are relevant to your business.
If you aren’t sure which method suits you best, consider looking over to the competition. In many industries, all industry players use the same billing method. Perhaps, you don’t need to reinvent the wheel.
In case you notice that the competition is taking advantage of an inefficient billing method, implementing a different one could put you one step ahead.
Implementing the Best Billing Model for Your Business
Once you choose the right billing model for your company, you can start implementing it immediately. It’s possible that during the implementation phase, you can discover that the model isn’t as convenient as you initially thought.
Changing the billing model can be tough but not impossible. The earlier you switch to a better option, the easier it will be for your customers to get used to the new approach.