Volumetric billing methodology (2024)

Keeping things simple, where possible, is essential when it comes to working out how you are going to pay your supplier on a monthly basis for services consumed. All too often contracts have been written with overly complex pricing methodology which are difficult to track and measure for both parties.

An example would be linking Volumes with Service level achievements and mixing in ARC/RRC (Additional Resource Count/ Reduce Resource Count) . All perfectly possible but at a cost in not only $ but also in risk to accuracy,

Widget 1 Baseline volume 400 at 15$, 15 percent + or - would be dead band. So you would charge the baseline volume *price no matter where the volume sat within the deadband. Between 15% + or - and 25% + or - you would have an ARC or RRC. Anything above or below 25% would be charged at the ARC/RRC price. However the volumes breaking the ceiling (+25%) or floor(-25%) for 3 consecutive months would trigger a contractual renegotiation. That's pretty standard and a volume summarization engine can handle it. If you add into the above another layer of complexity and another on top of that you get something like the below.

Widget 1 Baseline volume 400 at 15$, 15 percent + or - would be dead band. So you would charge the baseline volume *price no matter where the volume sat within the deadband. Between 15% + or - and 25% + or - you would have an ARC or RRC. Anything above or below 25% would be charged at the ARC/RRC price. However the volumes breaking the ceiling (+25%) or floor(-25%) for 3 consecutive months would trigger a contractual renegotiation. If volumes stay within the dead band for 6 months consecutively then a 15% discount is retrospectively calculated on the baseline volume price and applied to the previous 6 months invoices in the form of a credit at month 7. Additionally the supplier shall monitor the SLA achieved for widget 1 and on a monthly basis apply a 5% discount to the baseline and ARC price but only when the volume is either at baseline or ARC but not to any volumes above ceiling which must be charged at the full ARC price. Note as well that producing the bill has a turn around time and that depending on the timings it may not be possible to apply the SLA element in the same month as the SLA results may come later. Which will mean retrospectively applying them. Inevitably resulting in more work

It's easy to fall down the trap of ever increasing complex calculations in order to fulfil a desire to either tie your supplier into delivering a great competetive contract or for the supplier to prove to their customer that they are committed to providing a competitive price.

My golden rule is that you can achieve a great contract and a better contract by keeping things simple when it comes to pricing methodology. P*Q (price times quantity) beyond that, simple ARC/RRC.