Prepaid Credits vs Progressive Billing for Usage-Based Billing

When it comes to usage-based pricing , choosing the right model can feel like trying to solve a riddle with no easy answer.

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The two most popular approaches—prepaid credits and progressive billing—each have distinct advantages and challenges.

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Prepaid credits offer flexibility but can lead to interruptions when they run out, while progressive billing is transparent and scalable, though it might make customers feel like they’re on a never-ending meter.

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To help you navigate these choices, we’ve broken down each model’s benefits, challenges, and even tossed in some memes for good measure!

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Prepaid Credits: Flexibility with Upfront Commitment

Prepaid credits are like a pay-as-you-go phone plan. Customers pay upfront for a set amount of usage and can access services until those credits are used up. Each action—like an API call, data upload, or feature access—deducts a portion of their balance.

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How Prepaid Credits Work

• Upfront Purchase: Customers buy credits to use at their own pace.
• ‍Deduction per Usage: Each feature or service deducts credits from their balance.‍
• Recharge When Needed: Once credits run out, they’ll need to purchase more to continue using the service.

Pros of Prepaid Credits

• Predictable Spending for Customers: Customers know exactly what they’re spending upfront, making budgeting easier.‍
• Flexible Usage: Customers can use credits as needed, whether all at once or gradually over time.‍
• Simple to Implement: Prepaid systems are relatively easy to set up and track, making them ideal for simpler billing needs

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Cons of Prepaid Credits

• Interruptions in Service: Running out of credits mid-project can be frustrating, especially during crucial times.‍
• Customer Inconvenience: Constant recharges might feel like a chore, especially for high-usage customers. Customers also need to overcome the initial friction of figuring out how many credits they need, and go through the buying process before they can actually use the product: “time to value” is longer.‍
• Scaling Issues: As customers grow, they may prefer a billing model that doesn’t require them to monitor and recharge credits, or to think about how credits rollover when they are unused.

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Example of customer friction with prepaid credits. Source

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Progressive Billing: Paying as You Go, in Real Time

Progressive billing charges customers based on what they actually use over time. Instead of buying credits, customers are billed at regular intervals based on their consumption.

How Progressive Billing Works

• Usage Tracking: Track every customer action, like API calls or data storage, in real-time.
• Automated Billing: Don’t wait for the end of the cycle to generate an invoice. Bill your customers as soon as they reach a threshold. And increase their threshold as you build trust with them. Stop the service if they don’t pay, fight fraud before the tab gets too significant.
• Transparent Payments: Customers are billed precisely for what they use—no need for prepayments.

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Implement thresholds (as many as you’ll need) for progressive billing with Lago

Pros of Progressive Billing

• Real-Time Transparency: Customers can see exactly what they’re paying for, avoiding “mystery charges.”‍
• Scalability: Progressive billing grows with customers, making it great for high-usage or scaling businesses.‍
• Reduced Service Interruptions: Since customers don’t need to top up credits, they avoid interruptions mid-project.

Cons of Progressive Billing

• Variable Bills: Customers who prefer predictable monthly expenses may find fluctuating bills stressful.‍
• Complex Setup: Implementing progressive billing requires precise metering and infrastructure, to manage thresholds and alerting. It can become daunting and a whole engineering project in itself.‍
• Revenue Predictability: For businesses, progressive billing can lead to fluctuating revenue, complicating financial forecasting.

How Lago Supports Both Models

Whether you lean toward prepaid credits or progressive billing, Lago’s billing infrastructure is built to support both, helping you avoid those dreaded billing mishaps.

Prepaid Credits with Lago

Lago makes setting up prepaid credits simple and intuitive. Here’s how Lago enables a seamless prepaid experience:

• Credit Management: Customers can purchase and track credits in real-time through Lago’s portal.‍
• Automated Reminders: Lago sends low-credit alerts so customers can recharge without interruptions.‍
• Flexible Recharge Options: Customers can add credits on demand or set up auto-recharge, ensuring uninterrupted service.

Read more here.

Progressive Billing with Lago

For progressive billing, Lago offers flexible metering and tracking options for a transparent billing experience:

• Advanced Metering: Track every customer action, from API calls to data usage, ensuring accuracy.‍
• Automated Invoicing: Bill your customers as soon as they reach a threshold, don’t wait for the end of the billing platform. And increase their threshold as you build trust with them. Stop the service if they don’t pay, fight fraud before the “tab” gets too significant.‍
• Real-Time Dashboards: Customers can monitor their usage throughout the month, giving them full transparency.

Read more here

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The most flexible progressive billing experience with Lago

Choosing the Right Model for Your Business

When it comes down to it, both prepaid credits and progressive billing have their unique benefits. Prepaid credits offer budget-friendly control, while progressive billing provides scalability and transparency.

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Lago’s platform gives you the flexibility to implement either model (or both), helping you create a billing experience that meets your customers’ needs.

With Lago, billing doesn’t have to be complicated, unpredictable, or—dare we say—a nightmare.

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