Plenty of business leaders think they know the difference between rating vs billing. But I’m willing to bet most wouldn’t be able to explain the distinction.
Let’s take a look at what the difference is and discuss how both rating and billing can be effectively applied across a variety of recurring billing products, including those that are more unique.
What is rating?
Rating refers to the process of translating metering data into invoice items for a customer based on the pricing plan they’ve chosen.
Rating or “rate columns” are often used in the telecommunications industry. Take for example a cell phone plan—a product that charges you at the end of the month for the usage you consume. Rating is often used for more advanced pricing.
For example, international calls to China, Japan, France, or South Africa would have different rates compared to your domestic rates.
Many SaaS and Internet of Things (IoT) companies are also now making use of rating to charge customers for product and service usage. This enables them to offer usage-based pricing models.
Rating can be applied to more unique products as well, like ongoing projects with multiple delivery milestones.
What is billing?
Billing is the process of creating an invoice for customers on a recurring basis according to the pricing plan they’ve selected, their usage during that time period, and any discounts that may apply.
If you’re a subscription-based business, your billing system should provide a rating engine that can calculate the charges based on usage data over time.
And in some cases, rating calculations may need to be configured if usage pricing varies. For example, some subscription businesses leverage tiered, stairstep, and volume pricing models. As a result, the price of usage can fluctuate as usage increases.
An adaptive modern billing system enables you to apply a combination of pricing models to your recurring billing. For example, an IoT business might charge its customers a one-time fee to purchase a device, and then a recurring usage-based fee to receive ongoing services on the device.
The challenges of usage-based billing for projects
Rating and billing become a little trickier with more subjective usage, such as work completed within ongoing projects.
One of the biggest problems with charging based on usage or pay-per-use business models is they don’t give you, the business owner, a guarantee of payment. You might be generous and ask for all payments to be made on delivery, or you could ask for a deposit upfront and payment as the work is completed.
Either of these options can sound great, but one of the biggest problems is the client. Sometimes you’ll rely on them to provide certain information or to complete tasks and then the information simply won’t materialize, even if they’ve paid a deposit. They might cancel the project and feel they deserve some of the money back—even though you’ve spent a significant amount of time completing part of the work and chasing them for their information.
This can create a customer relations nightmare and a cash flow problem. Without the steady progress of the project, the next installment will be delayed, and this could cause you financial worry.
“While you don’t want to have unprofitable customers, you really need to simplify the buying experience for them,” explains Kyle Poyar, Operating Partner at VC firm, OpenView. “And trying to align how you charge with how someone sees value, and how your cost structure is set up is really on you. It’s not the customer’s responsibility.”
Luckily, you can solve these problems using the right agile billing platform.
Applying agile billing cycles to unique products
Instead of wondering whether your business will be able to progress a project as you see fit to secure future funds, ensure there’s a periodic payment made regardless of the situation. The regular payments could be based on a weekly, bi-weekly, or monthly basis and during each of these periods, a specific amount of work is completed.
This is the same sort of strategy as a subscription business model but instead of being for access to software or content, this can be applied to the delivery of unique products.
The benefits of flexible billing
Agile billing benefits both your clients and your business. With the fixed cost spread over the long term, the cost of the project or product won’t seem too expensive. Instead, it will look highly reasonable, which will increase the number of sales you’ll make and the positive feeling about your product that customers have.
If you’re familiar with the different models of revenue recognition under ASC 606 (and you should be!), the idea of agile billing in this scenario would line up with milestone rev rec.
At the same time, because the periods are pre-programmed into a payment schedule, you’re guaranteed the income for the period making management of your cash flow easier. It also enables you to better assign your resources and therefore be more efficient, limiting your business waste.
For your client, when a regular payment and agreement is in place, they can be sure they have access to you for a certain amount of time during a specific period. This guarantee can be crucial in your customer relationship and enables you to plan your workload better. This limits the stress in your work life and prevents last-minute marathons.
What if they cancel?
There may be times when the client will still want to cancel. This should be expected, but agile billing does account for this. If your customer cancels just before the next payment date, then they keep the project up to that point, they don’t pay any more money, but they also can’t expect the project to be taken any further.
If they cancel during the middle of a billing period, you could offer a certain amount back on that payment period. For instance, considering a weekly period, if they cancel with 4 days’ notice you could:
- return 50% of the period payment, or
- for 2 days, you could return 25% of the period’s payment.
At no point should the entire project cost be refunded as work has been completed and both value (for the customer) and revenue (for your business) have been realized.
Rating and billing with agility means guaranteed revenue
Making a digital transformation to agile business billing is one of the best ways you can guarantee your income and increase the confidence your customers have in your business. In many ways, it’s similar to how subscription businesses work; however, agile billing is also often used for short-term contracts and one-off projects.
To start agile billing for your unique product, you need to determine:
- how much you’ll charge per period
- how long the periods will be, and
- what needs to be delivered within each period.
With this system in place, you can expect to have a better quality of working life, smoother customer relationships, and an easier way to manage your cash flow system.
Do you need ASC 606-compliant recurring billing and subscription management software? Contact one of our experts at [email protected].
FAQs about Rating vs Billing
Q: What is the difference between rating and billing?
Rating refers to the process of translating metering data into invoice items for a customer based on the pricing plan they’ve chosen. On the other hand, billing is the process of creating an invoice for customers on a recurring basis according to their pricing plan, usage, and any applicable discounts.
Q: In which industries is rating commonly used?
Rating is predominantly used in the telecommunications industry, and many SaaS (Software as a Service) and IoT (Internet of Things) companies are also integrating rating to charge customers for product and service usage.
Q: How does a billing system work in a subscription-based business?
In a subscription-based business, the billing system should provide a rating engine that can calculate the charges based on usage data over time. If usage pricing varies, rating calculations may need to be configured.
Q: What are the benefits of an adaptive modern billing system?
An adaptive modern billing system allows you to apply a combination of pricing models to your recurring billing. Moreover, it minimizes billing complications with subjective usage cases like ongoing projects and ensures guaranteed periodic payment, making management of cash flow easier.
Q: What problems can arise from a pay-per-use business model?
With a pay-per-use business model, there is no guarantee of payment which can lead to cash flow problems. It can also cause customer relations issues if the client fails to provide necessary information or decides to cancel the project.
Q: What is agile billing and how does it benefit a business?
Agile billing involves a periodic payment system where a specific amount of work is completed during each paid period. It guarantees income for the period, helps manage cash flow, and allows for efficient resource allocation. Moreover, it enhances customer relationships by providing them with a payment and delivery schedule.
Q: How can agile billing be applied to the delivery of unique products?
Agile billing can be applied to the delivery of unique products by charging for a specific amount of work completed in regular payment periods. The charge per period, the duration of these periods, and what needs to be delivered within each period must be determined beforehand.
Q: What is milestone revenue recognition in the context of agile billing?
Milestone revenue recognition, or milestone rev rec, is an accounting principle which aligns with agile billing scenario. The idea is to recognize revenues at different milestones of a project.
Q: What happens when a client cancels a project during a billing period in an agile billing system?
In case of a cancellation during an agile billing period, a business can offer a certain amount back on that payment period. However, as work has already been completed up to that point, the entire project cost should not be refunded.
