Minimum commitment
A minimum commitment is a contractual floor a customer agrees to pay over a defined period, whether or not their consumption reaches that amount.
Also called committed spend, revenue commitment.
Commitments give a usage-based business a predictable revenue base and give the customer a reason to negotiate a better rate. They are the standard way enterprise contracts are structured on top of consumption pricing.
Billing one correctly means tracking consumption against the floor across the whole period, then reconciling any shortfall at the end. True-up terms, rollover and overage rates all have to be modelled explicitly.
Common questions
- What happens if a customer does not reach their minimum commitment?
They are normally invoiced the shortfall at the end of the commitment period, through a charge usually called a true-up. Whether unused commitment instead rolls over or simply expires depends entirely on the contract.
- What is the difference between a minimum commitment and a prepayment?
A minimum commitment is a promise to spend a certain amount over a period, billed as consumption occurs and trued up at the end. A prepayment is money paid up front and drawn down. A contract can contain both.