With usage-based billing, customers pay based on how much they use a product or service rather than a flat fee. If you use more, you pay more. This type of billing is common in cloud computing, application programming interface (API) services, and software tools in which costs scale with activity, such as the number of API calls, storage used, or transactions processed. Among software-as-a-service (SaaS) businesses, 18% had a largely usage-based model in 2023, while 23% had usage-based subscription tiers.

Below, we’ll explain how usage-based pricing works, the benefits and potential downsides, and how to mitigate the risks of a usage-based model.

What’s in this article?

• How does usage-based pricing work?
  
• What are the benefits of usage-based pricing for businesses?
  
• What are the potential downsides of usage-based pricing?
  
• How do businesses mitigate the risks of a usage-based model?
  
• How does Stripe support usage-based pricing?
  

How does usage-based pricing work?

Usage-based pricing works by charging customers according to their consumption of a product or service rather than a fixed subscription fee. Businesses set metrics – such as API calls, data usage, transactions, or computing time – and customers are billed based on how much they use. Here’s how it typically works:

• The business determines what aspect of the service is measurable and billable (e.g., gigabytes of storage, number of API requests, minutes of video streamed).

• Some businesses charge a flat rate per unit (e.g., $0.01 per API call), while others use tiered pricing (e.g., the first 1,000 calls are free, then $0.005 per call after that).

• The system continuously monitors and records how much of the service a customer consumes.

• Customers are usually billed monthly based on their total usage. Some services offer prepaid models in which customers buy usage credits up front.

• If a customer’s usage increases, their costs rise accordingly. They don’t pay for unused capacity.

What are the benefits of usage-based pricing for businesses?

Usage-based pricing can be a smart move for businesses, especially in SaaS, cloud services, and API-driven industries. Here are benefits of usage-based pricing:

• Clear value for costs: When customers use more, they pay more. This keeps pricing aligned with value and avoids locking people into a fixed plan that doesn’t match their needs.

• Lower barrier to entry: People are more likely to test new products when they can start small and pay for only what they need.

• Better customer retention: When customers pay for only what they need, they’re more likely to stay with the service.

• Less work upselling: Instead of pushing customers into bigger plans, you let usage drive revenue on its own. When people get value from your product, they’ll typically use it more – and that means they’ll likely pay more, too.

• Easier cost management: If your costs depend on customer usage – such as in cloud computing or data storage – this model helps keep expenses and revenue in sync. More usage means higher costs but also higher income.

What are the potential downsides of usage-based pricing?

Usage-based pricing can be a powerful model, but it has trade-offs that aren’t always obvious at first. Here’s what to watch out for:

• Less predictable revenue: When customers pay based on usage, revenue fluctuates. This can make forecasting harder, especially if usage is tied to external factors such as seasonality or market shifts. If you’re accustomed to predictable subscription revenue, this can be a major adjustment.

• Customer pushback: If customers feel as though they can’t reliably budget for your product, they might look for alternatives. And unexpected charges, especially from a sudden spike in usage, can lead to customers feeling that your pricing isn’t as transparent as they thought. If your pricing model isn’t easily understood, expect to receive plenty of support tickets.

• More subtle churn: In a typical subscription model, you know when a customer leaves because they cancel. With usage-based pricing, churn is often more gradual. A customer might not technically cancel, but their usage might drop. That means retention metrics need a different lens because you’re tracking engagement patterns rather than active accounts.

• Customer drop-off: Usage-based pricing means high usage can sometimes be a problem. If customers feel as though they’re getting charged too much as they scale, they might start limiting usage, which reduces their reliance on your product over time.

• Implementation challenges: Charging per unit sounds simple until you have to define what a “unit” is. You’ll need airtight metering and billing infrastructure to prevent disputes. Some customers might try to game the system, while others might claim they were overcharged. You’ll need to show exactly why you’re charging what you charge.

How do businesses mitigate the risks of a usage-based model?

Many customers like the flexibility of usage-based pricing, but no one likes surprise bills or unpredictable costs. And for businesses, revenue can swing up and down in ways that make planning a challenge. But these risks aren’t dealbreakers if you structure the model in the right way. Here’s how businesses can plan for the risks of a usage-based model:

• Mix in stability: Many businesses add a fixed base fee rather than going all in on usage-based pricing without a safety net. This means there’s always a predictable revenue floor, which balances flexibility with financial predictability.

• Make pricing feel fair over time: A flat per-unit rate sounds simple, but it can backfire when customers hit an unexpected bill spike. That’s why many businesses use tiered pricing that’s cheaper per unit at higher volumes, discounts for committed usage, or off-peak pricing. These tweaks can make customers feel as though they’re getting a better deal as they scale rather than that they’re being penalised for using the product more.

• Keep customers in the loop on costs: Real-time usage tracking, automated alerts, and spending caps prevent price shock. With Stripe, you can set usage thresholds and warn customers when they’re approaching one. The more visibility customers have, the better.

• Catch “soft churn” before it kills revenue: With subscriptions, the timing of churn is clear – customers cancel and leave your service. But in a usage-based model, churn happens in slow motion. A customer might still be active, technically, but if their usage is quietly dropping, so is their spend. Businesses can track these dips and reach out early through personalised nudges, proactive support, or targeted discounts to keep customers using your product before revenue starts slipping away.

• Give enterprise customers guardrails: Many businesses offer hybrid contracts – a mix of fixed and variable pricing. For example, maybe a customer commits to a baseline spend, but anything beyond that is usage-based. This gives the customer predictability while still letting them scale when they need to.

• Track the right metrics: A usage-based model changes how a business should measure success. If you’re still tracking monthly recurring revenue (MRR) and churn the same way you would in a subscription business, you could be missing the bigger picture. Instead, focus on factors such as net revenue retention, expansion revenue, and overall customer engagement trends.

How does Stripe support usage-based pricing?

Stripe lets businesses implement usage-based pricing by tracking usage, automating billing, and giving customers real-time cost visibility. Here’s how Stripe supports this model:

Metered billing that scales

Stripe lets businesses charge customers based on usage, whether that’s API calls, transactions, storage, or any other metric. You can track usage in real time, and the system will automatically bill customers at the proper intervals.

Flexible pricing structures

Not every business wants a simple “pay-per-use” model. Stripe supports different ways to charge, including:

• Flat per-unit pricing (e.g., £0.01 per API call)

• Tiered pricing (e.g., £0.02 per API call up to 1,000 calls, then £0.01 per API call)

• Credits pricing (e.g., customers buy 1,000 credits up front that are deducted based on usage)

This flexibility lets businesses design pricing that encourages growth rather than punishing heavy usage.

Automated invoicing and billing

Stripe handles all invoicing, so businesses don’t have to calculate charges manually. Stripe automatically compiles the usage data you report, applies the right pricing rules, and generates invoices at the end of each billing cycle.

Real-time usage tracking and alerts

One of the biggest risks of usage-based pricing is that customers might be surprised by their bills. Stripe helps prevent this with real-time reporting, usage dashboards, and automated notifications so customers always know their status.

Hybrid models for stability

Businesses that don’t want revenue to be fully variable can use Stripe to mix usage-based pricing with fixed fees. This could mean charging a base subscription plus overages or offering prepaid credits that customers draw down over time.

Enterprise-grade customisation

Stripe supports negotiated contracts with minimum spend commitments, discounts, and custom billing terms for businesses selling to large customers. This helps businesses secure predictable revenue while still giving customers room to scale usage.

Revenue analytics

Stripe provides reporting tools to track how usage affects revenue over time. Businesses can monitor customer spending trends, identify when usage is dropping, and fine-tune pricing based on real data.