Print this article | Return to Article | Return to CFO.com
The finance chiefs of small and midsize businesses are key drivers in a move to activity-based billing.
Kathleen Hoffelder, CFO.com | US
August 21, 2012
To keep costs in check, a growing number of small and midsize businesses may soon be launching a customized approach to billing instead of relying on a subscription-based, flat-fee model, a recently released survey found.
Activity-based billing, or pricing based on how customers use a product or service, is gaining more ground as the economic slowdown and sluggish rebound in the United States continues to burden smaller companies looking to compete with larger ones, says market-strategy consultancy iGR, which conducted the survey in March.
The survey found that about half of the 400 respondents investigated changing their business model to activity-based billing. The consultants noted that 28% of the SMBs currently use activity-based billing methods to bill their customers.
The smallest firms in the study, companies having about 10-49 employees, were more likely to use per-unit pricing with or without volume discounts, activity-based pricing, and subscription models. In contrast, the midsize SMBs, such as those with 50-99 employees, preferred to use a subscription-based flat fee per project.
CFOs are behind some of the drive to use alternative billing methods. Chief information officers were making these kinds of decisions last year, but that has now changed to include more CFOs, according to James Messer, CEO of Transverse, a cloud-based billing platform.
CFOs, he says, are actually driving the innovation because they can measure the risks and rewards of this kind of billing. "They are some of the first ones to recognize that, since they are the ones at the end of the day [who] have to justify that budget."
Service providers, such as accounting or legal firms, cloud-based businesses, and telecom network equipment or bandwidth providers, are among the more common users of the activity-based approach.
The movement of smaller companies into activity-based billing makes sense to Gregg Landers, a managing director at accounting advisory CBIZ Mayer Hoffman McCann. "Smaller companies are living day in and day out on cash flow. They are looking at the economy saying, I just don't trust it," he says. These companies, he notes, are moving toward more cloud-based accounting, in particular, which features a pay-as-you-go model.
"For a while, competition forced them (small service providers) into a fixed pricing model," says Landers. Now, he adds, "the marketplace is more dynamic and an activity-based billing model reduces your risk as a service provider."
Service organizations would not be on the hook for unused goods and services in this scenario. But using this billing approach to lower risk also can lower potential financial rewards, says Landers.
Another advantage, however, is that activity-based billing also makes sense to customers. "The economy has made people shy away from locking into a cost structure on some things. In a traditional model, you've already paid for goods. They don't trust the economy is stable enough to lock in a fixed price," he adds.
Not all of the SMBs in the study, however, were jumping to change their billing model. The largest SMBs in the iGR study, such as those with 100-499 employees, were some of the last to adapt to a more customized approach, if they did at all. "It is likely that these larger companies have a multitude of revenue models for different products and services and were therefore unable to select just one," the authors said.
Large firms in general can be slower to adopt technology in all areas of a business. "Quite simply, they have more data to convert over to new technologies," notes Messer. "Cloud-based applications, when it comes to revenue and accounts receivable, were still deemed risky about two years ago," he adds, noting that SMBs are still quicker to realize the benefits of cloud-based applications.