In a recent YouTube video interview titled "Revolutionizing Billing for the Usage-Based Era," Apurv Bansal, CEO of Zenskar, shares valuable insights about implementing usage-based pricing models in SaaS businesses. The discussion reveals the complex operational challenges that companies face when transitioning from traditional subscription models to usage-based pricing structures.
The Origin Story: Why Build a Usage-Based Billing Platform?
Apurv Bansal founded Zenskar about three years ago after observing a critical gap in the market. While working at Google, he noticed how even tech giants were building in-house solutions for usage-based billing:
"At Google, I was seeing how even companies as large as Google were building all this in-house tooling to automate usage-based billing," Bansal explains. "They weren't really using a third party billing tool as such—they were building this in-house from scratch, and there were large engineering teams dedicated just to solve billing."
The problem wasn't that companies preferred to build solutions internally—they simply couldn't find appropriate tools in the market. Most existing billing systems were designed for subscription models that dominated a decade ago, not the increasingly popular usage-based approaches.
The Fundamental Difference Between Subscription and Usage-Based Billing
To understand why usage-based billing presents unique challenges, Bansal offers a compelling comparison using Salesforce as an example:
In traditional subscription billing, all the information needed for invoicing exists within the contract: "You bought 100 seats at $200 per seat… The price is in the contract. The quantity is in the contract." This makes billing straightforward—finance teams can simply multiply the price by quantity and generate an invoice.
However, with usage-based billing, the contract only specifies the pricing structure, not the quantity: "You pay me $1 per contact, but I don't know how many contacts you'll have because even you don't know how many contacts you'll have. So, let's figure it out over time."
This fundamental difference creates a cascade of operational complexities.
The Engineering Challenge: Data Collection and Integration
One of the most significant operational challenges in usage-based pricing is collecting and managing usage data. Bansal explains that companies typically handle this in two ways:
- API Integration: "Your engineering team will use the billing system's API and pipe the usage information onto the billing system."
- Data Warehouse Connection: "A lot of companies already have their usage information stored in a database or in a data warehouse somewhere… If the billing system can plug into your data warehouse, get access to that table that has the consumption information and fetch the information out of that table… your engineering team does not have to send information to the billing system."
The second approach typically requires less engineering effort but depends on how the company's data infrastructure is organized.
Finance Team Challenges: Manual Processes, Errors, and Revenue Recognition
The transition to usage-based pricing significantly impacts finance teams in several ways:
1. Increased Manual Effort
Without automation, billing becomes substantially more time-consuming: "You have to download the information from the data warehouse, get engineering to send it to you, put it in Excel, transpose it, marry it with the pricing information, generate invoice amount."
2. Higher Error Rates
When combining data from multiple systems manually, billing errors increase: "If you're overbilling your customer, trust me, they'll tell you and they won't care. But if you're underbilling your customer, they'll never tell you and you're just losing revenue."
3. Complex Revenue Recognition
With subscription billing, revenue recognition is straightforward—typically recognized on a straight-line basis over the contract period. Usage-based billing complicates this process:
"If it's usage-based, you have to recognize revenue based on usage," Bansal notes. "The first month it's $10 times the price per month, and the second month it's $20 per month… I can't do just a simple 'contract value by 12 every month equally.' I have to take usage into account."
This increased complexity means finance teams spend more time on revenue recognition and face higher error rates.
System Integration Challenges: CPQ, Billing, and System of Record
Another critical consideration is how usage-based pricing affects your technology stack, particularly the relationship between Configure, Price, Quote (CPQ) systems and billing platforms.
Bansal explains that the ideal setup depends on company maturity and existing systems: "If you want 100% automation, then yes, the pricing catalog lives in the CPQ. The CPQ integrates with the billing tool. The pricing information flows from the CPQ into the billing tool and the billing tool does the downstream financial operations."
However, many companies use hybrid approaches, especially when existing systems can't support all desired pricing models. In such cases, companies often use multiple systems in parallel: "For the models the CPQ supports, then they tell us to pull the data from the CPQ. For the models it does not support, they feed it directly into the billing tool."
The Future of Billing in the AI Era
When asked about the impact of AI on the billing space, Bansal highlights how younger companies like Zenskar have an advantage in being "AI native" from the start:
"Our stack is already AI native… we have a bunch of modules where AI is driving faster and higher levels of automation for our end customers as well," he says. "I think any company that's not leveraging AI today is just going to die basically."
He points to Clayton Christensen's innovator's dilemma, noting that established companies often struggle to reinvent themselves due to their existing customer base and revenue streams. This creates opportunities for newer, more agile companies to disrupt the market.
Key Considerations When Implementing Usage-Based Pricing
For SaaS executives considering a transition to usage-based pricing, Bansal's insights suggest several critical considerations:
- Engineering Readiness: Ensure your product can accurately measure and report usage metrics.
- System Integration: Evaluate how usage data will flow between systems and which platform will serve as the pricing source of truth.
- Finance Team Preparation: Prepare for more complex billing and revenue recognition processes.
- Automation Requirements: Consider the scale at which manual processes become unsustainable and automation becomes necessary.
- Creative Pricing Structures: Understand that usage-based pricing enables more flexible models (free tiers, volume discounts, minimum commitments) but also increases complexity.
Usage-based pricing offers compelling benefits for both SaaS providers and their customers, aligning cost with value and enabling more flexible commercial relationships. However, as Bansal's insights demonstrate, successfully implementing these models requires careful consideration of operational implications and system requirements.
For SaaS executives navigating this transition, understanding these backend challenges is just as important as defining the front-end pricing strategy itself.