Note 19: Recurring and usage charges

Posted: 18 July 2006

Recurring charges

A common use of recurring charges is the billing for access to non-network services (e.g. equipment service and support), access to the core network, or to network-specific features (e.g. call waiting on a phone network, priority service restoration on a utility network). Customers pay the same recurring 'access' charge regardless of how intensively they use the non-network service, network, or the network-specific feature. An access charge can be likened to a magazine subscription where the customers is charged the same amount regardless of whether the magazine is thrown in the bin, or avidly read from cover to cover.

Common examples of recurring charges include phone line rental, water utility (access) charges, cable TV subscriptions and flat-rate 'all-you-can-eat' offerings from ISPs. In each case, the recurring charges are levied at the same rate each billing period (e.g. per month). Despite being levied for different network types, the same recurring charge concept is being applied.

Some businesses use a recurring subscription as their sole revenue stream. For example, membership to an ambulance organisation, magazine subscriptions, car registration fees, and sports club membership rely on a (say) yearly recurring fee in return for access to 'membership' benefits.

Other networks, especially telecommunications networks such as cable TV and ISPs levy a recurring access charge to maintain ongoing connection to their networks, and levy additional charges for use of their networks using separate usage charges.

When constructing market offerings, network billers may decide to charge only for actual use of the network (e.g. prepaid music downloads), combine recurring charges with network usage charges (e.g. fixed line phones), or bill using 'all-you-can-eat' subscriptions that do not levy additional charges based on the level of network use (e.g. ISPs).

When recurring charges are billed they are levied for defined time periods (each billing cycle) employing one of two charging approaches: 'billed in advance' or 'billed in arrears'. If billed in arrears, each new bill reflects the recurring charge applicable 'since the last bill' to the current bill's cutoff date. If billed in advance, the charge reflects the amount applicable from the last billing cutoff 'until the next (anticipated) bill'. (New service connections charged 'in advance' can bill for both an amount 'in arrears' for the (short) time period from service connection to the first bill, and the future period until the next bill.)

While either approach will collect the same financial amount, the choice made has implications for the biller's cash flow and, if the customer does not pay, on the credit management risks assumed by the biller. Charges billed in arrears are at a greater risk of non-collection since the full amount is incurred before any payment is expected, whereas charges billed (and collected) in advance are 'already paid for' up until the next bill.

Credit management is a key mechanism for managing and improving the biller's inbound cash flow by actively encouraging customers to make timely payments, and by limiting the biller's financial exposure when payments are not, and will not be, made (i.e. minimising bad debt).

Whilst recurring charges generally ask for money from the customer, nothing prevents a biller from providing a recurring credit to the customer. This approach can be employed to bill a standard rate to all customers, and apply a recurring credit rebate only to selected customers. This rebate effectively reduces the selected customers' effective billed amount in a visible and targeted manner, whilst supporting the broad use of an otherwise standard rate.

Recurring charge periodicity

Bills are issued with a range of different time periods, with frequencies of monthly up to yearly common, with shorter and longer timeframes less also possible. But, if a customer's bill is issued (say) monthly, it does not follow that all the recurring charges on the bill must occur with the same (monthly) frequency.

For example, a customer's quarterly water bill containing recurring (quarterly) charges for access to the local water and sewerage networks might also include an annual recurring charge collected (once a year) on behalf of outside groups such as the regional water authority (to pay for non-local infrastructure) and (say) the State Parks Authority (used to maintain the parks infrastructure).

In such a case the number of recurring charges listed on the bill will increase once a year to include those charges billed with a yearly frequency, but all charges will still be levied for the entire year. Some charges will be billed and collected in four parts, whilst others will be billed and collected for the full amount once a year.

Network usage / consumption

Usage / consumption charges are levied for the customer's (variable) use of a biller's network. Since the level of use varies from one customer to the next, measurements are collected of network use in the form of transactions for networks that support discrete consumption, or through meter readings for commodity (e.g. utility) networks. The biller can use these measurements to capture additional and differentiated revenue using the variation between light and heavy consumers of network resources. Different types of consumption can be charged at at different rates, reflecting their different operational costs. Based on their charging approach, a biller may seek to promote or penalise increased use of its network.

The complexity in determining the how much to charge for network use is greater than one time or recurring charges due to the detailed information that can be available, allowing one customer's calculated amount to be priced differently from another's. The pricing for recurring and non-recurring charges are relatively static compared to the transaction specific methods that can be applied to usage charges.

Examples of consumption / use charges include:

Metered consumption: quantity of gas / electricity / water consumed, megabytes downloaded
Content: music downloads, ringtones for mobile phones, premium phone services (e.g. sports scores), downloaded mobile phone games, pay-per-view on cable TV
Commerce: parking charges, cold drinks, movie passes, car washes
Customer transactions: SMS, MMS, phone calls, all-day tollway passes, individual tollway journeys

How these examples of consumption / use are treated in billing depends on how the biller has constructed their specific market offerings. That is, billing outcomes for exactly the same network events / usage can vary depending on how the market offerings are constructed, not on how they were performed in the network. For example a tollway customer completing a dozen journeys during a calendar day may be billed on a 'per-journey' basis possibly differentiated by when in the day they were performed, or alternatively they may be included, with no incremental fee, under (say) a prepaid 'all-day pass'.

Based on the creativity of the biller' product developers, and the availability of sufficient information to support different approaches, the basis for charging a customer can be crafted to any imaginable method. However, since each variation from commonly used methods must be developed and supported, the more creative, complex and different a biller's approach, the larger the cost to be offset against the variation's commercial benefit.

Tags: Billing, Recurring Charges, Usage