For every Managed Service Provider (MSP), Internet Telephony Service Provider (ITSPs), and Internet Service Provider (ISP), handpicking the right billing model is extremely important.
There are two types of billing models—prepaid and postpaid. The former involves an upfront payment of a certain amount of money before availing specific service(s). The latter enables users to avail service(s) first and then pay later.
On the surface, choosing any one payment model may seem to be a matter of convenience or preference. But it’s a strategic decision and can mean the difference between success and failure for an MSP, ITSP, and ISP!
It can have a far-reaching consequence on the service provider’s cash flow, customer satisfaction, and operational efficiency.
That’s why, as the owner of (or a top level professional in) an MSP, you need to weigh in the pros and cons of both prepaid and postpaid billing solutions.
This blog post is a deep dive into just that. In this, we will discuss the key differences between prepaid and postpaid billing, the pros and cons of both prepaid and postpaid billing, and how to handpick the right billing solution for your business.
So, if the question “Shall I go for a prepaid plan or a postpaid one?” ever comes to your mind, then this blog post is just for you. Keep reading and you’ll be glad you did!
Key Differences Between Prepaid and Postpaid Billing
When it comes to differences between prepaid and postpaid billing, the list is quite long. Here are some key differences:
1. Payment
In prepaid, users have to pay before using the product or software solution. In simple words, prepaid billing can be described as “pay first and use later” or “pay now and use within a certain date.”
In postpaid, users have to pay after using the product or software solution. Or at the end of a billing cycle. Postpaid billing is the perfect example of the “use now and pay later” model.
2. Duration of Service
In prepaid, the duration of services is subject to the payment made. It can be a monthly plan, a quarterly plan, or an annual plan
In postpaid, the duration of service is from one billing cycle to the next. It is usually monthly, however, the service can be longer as per the agreement between service provider and the user.
3. Invoice
In prepaid billing, in most cases, users don’t receive an invoice. They use the service that they pay upfront.
In postpaid, users receive an invoice at the end of the month for the services used during that period.
4. Plans
In prepaid, the plan is fixed. You can only use the amount of service you’ve paid for. Once the balance runs out, you have to recharge.
In postpaid, the plan is flexible. You can use as much service as per your requirement. However, you’ll be charged a premium if you exceed their monthly allowance.
5. Changing Plans
In prepaid, changing plans is easy. You can switch between options as per your requirement.
In postpaid, changing plans is more difficult. There are too many formalities associated and you may need the approval from your service provider.
6. Phones
In prepaid, you have to use an IP-enabled private branch exchange phone that you’ve already purchased.
In postpaid, you may be able to get an IP-based private branch exchange phone through the provider.
7. Credit
In prepaid, the credit is limited based on the prepaid balance.
In postpaid, the credit is unlimited.
8. Credit History
In prepaid, no credit history is required.
In postpaid, credit history is crucial. It directly influences postpaid plans and any associated devices.
The Benefits and Drawbacks of Prepaid and Postpaid Billing
Now that we have discussed the key differences between prepaid and postpaid billing, let’s discuss the benefits and drawbacks of each one.
Pros of Prepaid Billing
Some experts, eminent professionals, and industry leaders consider prepaid billing to be highly beneficial for organizations in the managed services and IT and telecom organizations.
For instance, Anand lyer, the co-founder and co-chief executive of Texas-based software company Volusion, said, “Mobile operators are wasting millions of dollars each year by not taking the right steps to prevent prepaid subscribers from churning. Prepaid customers are valuable assets that can provide operators with a regular stream of revenue each month as well as valuable insights on their behaviors and preferences.”
No doubt, the prepaid billing model has its own strengths and unique advantages. Let’s discuss a few of those one by one:
1. Predictable Cash Flow
Noted investor and bestselling author of ‘Rich Dad, Poor Dad’ Robert Kiyosaki calls himself a “cash flow guy.” Many MSPs, ISPs, and ITSPs would prefer a foreseeable cash flow than an unpredictable one. As prepaid billing entails upfront payments from customers, it ensures that the cash flow remains predictable for MSPs, ISPs, and ITSPs.
2. No Risk of Non-Payment
As prepaid customers pay first and use the service(s) later, it eliminates the risk of non-payment for MSPs, ISPs, ITSPs, as well as other small businesses that run their operations on tighter budgets.
3. Simplified Billing Systems
Simplifying recurring billing is extremely crucial for MSPs, ISPs, and ITSPs. Prepaid models simplify billing systems and reduce the complexity of tracking usage.
4. More Control Over Expenses
When MSPs, ISPs, ITSPs opt for a prepaid plan, they know exactly what amount they are going to spend and what services they would be getting in return. That enables them to control their expenses in an effective way.
Cons of Prepaid Billing
While prepaid billing has many benefits over its postpaid counterpart, it also has its share of disadvantages. Some of them are:
1. Chances of Increase in Customer Churn
Some prepaid customers are sensitive to price changes. When MSPs, ISPs, and ITSPs increase the price of their services, such customers are more likely to switch to a different service provider.
2. Missed Opportunity for Recurring Revenue Streams
Noted author H. Jackson Brown rightly said, “Nothing is more expensive than a missed opportunity.” Sometimes prepaid billing models result in missed opportunities for recurring revenue streams by generating upfront cash flow.
3. Limited Customer Loyalty
Some prepaid customers may be more transactional than their postpaid counterparts. As they have already paid for managed services, Internet services, and telephony services, they may no longer feel a long-term commitment and loyalty towards their service providers.
4. Limited Upselling Opportunities
Prepaid billing models offer limited upselling or cross-selling opportunities as customers have already paid for services and they are unlikely to consider bundled offerings and upgrades.
Pros of Postpaid Billing
Like prepaid billing, postpaid billing has its own strengths and advantages. Here are some of them:
1. Stable Recurring Revenue
This is quite obvious. As postpaid billing models entail payment over a regular period, they provide a steady and recurring revenue. The steady and recurring billing cycle not only makes it easier to plan for future business expansion but also enhances customer lifetime value (CLV).
2. Enhanced Customer Engagement
More often than not, postpaid billing models offer service bundling, loyalty rewards, personalization, convenience, superior support, and opportunities for upselling and cross-selling. Postpaid customers are usually more invested in the service and have longer-term relationships with their service providers.
3. Opportunities for Upselling and Cross-selling
In the last point, we discussed many ways postpaid billing models enhance customer engagement. Among them were opportunities for upselling and cross-selling. MSPs, ISPs, and ITSPs opting for postpaid billing can avail bundled services, add-ons, and tiered pricing.
4. Flexible Usage
By opting for prepaid billing, users are constrained by a predefined set of services and a maximum limit. But there are no such limitations with postpaid billing. Postpaid billing is perfect for MSPs, ISPs, and ITSPs with fluctuating usage.
Cons of Postpaid Billing
Postpaid billing has some demerits as well. Here are a few:
1. Risk of Late Payment or Non-Payment
Even if the risk of non-payment in the postpaid billing model is relatively low, the risk of late payment is extremely high. As per a study by Clockify, more than half of all the invoices (55 percent to be precise) in the US are paid late.
2. Customer Disputes
In the previous point, we discussed how prevalent late payments are in postpaid billing. A National Small Business Association study revealed that 73 percent of small enterprises have trouble with customers who do not pay on time. Another reason for customer disputes is when some customers feel that they have been overcharged.
All In All,
When it comes to choosing a billing model, MSPs, ISPs, and ITSPs can choose any one from two models available—prepaid and postpaid billing models.
Both offer unique benefits for MSPs, ITSPs, and ISPs. However, they also have their own shortcomings as well. That’s why it’s extremely important for service providers to handpick the right type of billing model from the right service provider.
