What is Usage-based Billing?
As consumers, we already encounter usage-based billing (UBB) in various aspects of our lives, such as electricity charges and Uber rides. In essence, the process works as follows:
You use a product or a service
The provider employs a metering system to monitor your usage
You pay for the usage each billing cycle.
Understanding Usage-Based Pricing in SaaS
In SaaS, usage-based billing means customers pay in proportion to the value they receive, typically measured through a value metric like API calls, workflows executed, or data processed.
This approach is especially relevant for AI-first, API-driven, or automation-heavy products where traditional seat-based pricing breaks down. In these cases, usage is driven by fewer users (or agents in some cases), making licenses a poor proxy for value.
Adoption of Usage-Based Billing
Usage-based pricing, which was originally used by companies like AWS for their infrastructure services, is now widely used across all types of software companies.
Application SaaS: These companies offer software applications with pricing based on the usage of specific features or volume of interactions, such as Zendesk's customer interactions, HubSpot's marketing contacts, and Dropbox's storage.
Middleware SaaS: These companies provide services that integrate or connect other applications. Pricing is typically based on the volume of transactions, automated tasks, or communication services, such as Stripe's transaction fees, Zapier's task automation, and Twilio's messaging and call rates.
Infrastructure SaaS: These companies offer foundational cloud services with pricing based on the resources used, such as Snowflake's data processing, AWS's computing and data transfer, and Google Cloud Storage's data storage and access.
AI companies: These companies offer AI-driven solutions with pricing based on usage; foundational AI providers like OpenAI charge for access to their language models, while application-based AI providers like DeepL and Jasper charge for specific functionalities like translation or content generation.
Benefits of Usage-Based Billing
These core reasons have mainly driven the rise in popularity of usage-based billing:
Lower barrier of entry: From a customer’s point of view, a subscription company offering a flexible, pay-as-you-go model is much more attractive and economical than a rigid subscription fee that doesn’t consider product consumption.
Aligns pricing strategy with value: Since usage-based pricing is fundamentally driven by consumption, it ensures customers pay for what they value and use. This is especially important in times of economic uncertainty and rising inflation rates, where customers exhibit prudent spending.
Better cost and margin structure: As companies automate more tasks through AI and other technologies, the need for human users (or licenses) to complete tasks is reducing. Hence, seat pricing fails to capture and monetize the true value of automation, undercharging customers, and eroding your profit margins. Usage-based pricing offers a powerful alternative in this aspect as it aligns pricing with your value metrics.
Challenges of Usage-Based Billing
While it offers greater flexibility and better margins, there are some challenges with adopting a purely usage-based pricing model:
Unpredictable revenue: With usage-based billing, your revenue is tightly linked to the real-time consumption of your product, making Monthly Recurring Revenue (MRR) predictions challenging. Fluctuations in usage or seasonal variations can lead to significant revenue swings. While peak usage boosts revenue, it can also lead to unpredictable costs for your customers, potentially causing sticker shock and complicating budget planning.
Pricing model compatibility: Usage-based pricing isn't universally suitable for all subscription models. For SaaS platforms with numerous features, identifying a single or few metrics to base pricing on can be difficult. Additionally, this model may not align with long-term revenue growth objectives. For example, a platform like Netflix charging based on the amount of content watched could be attractive to customers, but may not be a viable monetization strategy for the company.
Hybrid pricing models, a combination of usage and subscription fees, offer a better alternative. They combine the predictability of the recurring revenue model with the flexibility of consumption-based pricing.
Explore why hybrid pricing strategies find increasing relevance in SaaS.
Implementing Usage-Based Billing: Key Considerations
To successfully implement usage-based billing (UBB), consider the following steps:
Analyze feature usage: Examine feature usage patterns closely to identify your core revenue drivers. Focus on value metrics that reflect the value your platform delivers. Align these metrics with your revenue goals and ensure they support growth as usage increases.
Determine pricing structure: Decide how to price your value metrics—whether per unit, tiered, volume-based, stairstep, or in blocks of usage. Your choice will affect profit margins and customer perception of your pricing model.
Choose the right billing system: Select a usage-based billing system that accurately tracks and converts user consumption into invoices. Ensure the system can scale with your business, whether you opt for a subscription, usage-based, or hybrid model.
Automate billing: Streamline your billing process by automating the transfer of usage data to your billing platform, enhancing efficiency and accuracy.
Focus on these essential areas to develop a successful Usage-based billing (UBB) strategy. Want to get the most out of your pricing model?
Check out our in-depth guide on Hybrid and Usage-Based Billing for Subscriptions.
Chargebee's usage-based billing helps you automate the end-to-end UBB workflows in one unified system. You can:
Ingest usage data in real time via API, S3, or manual CSV upload
Aggregate and meter usage events to convert them into billable units
Configure tiered, volume-based, or hybrid pricing models
Set usage limits for each feature and track actual consumption against those limits in real time
Generate clear, usage-backed invoices automatically
These capabilities are built natively in the Chargebee platform, so you can go from raw usage to revenue without stitching together separate tools.
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