Consumption-based pricing is a pay-as-you-go model, meaning customers are charged based on actual usage (e.g., storage space, streaming minutes, etc.) instead of a flat fee. It’s common in cloud computing, software-as-a-service (SaaS), and utilities because it keeps costs tied to value and gives customers more flexibility. This pricing model can help businesses in these industries and beyond to scale. For example, the global cloud computing market was estimated to be worth $602.31 billion USD in 2023 and is forecasted to grow 21.2% annually from 2024 to 2030.

Below, we explain how consumption-based pricing works, its advantages and disadvantages, and how Stripe can help your business implement it.

What’s in this article?

• How does consumption-based pricing work?
  
• What are the advantages of consumption-based pricing?
  
• What are the challenges of consumption-based pricing?
  
• How can Stripe help with consumption-based pricing?
  

How does consumption-based pricing work?

Consumption-based pricing involves paying for what you use, rather than paying a flat fee. The billing system tracks a customer’s usage in real time and charges them accordingly at regular intervals (e.g., weekly, monthly, etc.). They pay only for what they actually consume. This pricing model might use one of the following structures:

• Per-transaction: Every action has a price. Examples include credit card processing fees per swipe and short message service (SMS) service fees per text sent.

• Per-resource: Pricing scales with how much is used. Examples include charging per gigabyte for cloud storage and charging per function extension for serverless computing.

• Time-based: Pricing depends on active usage time. Examples include charging by the second, minute, or hour for cloud hosting.

Real-time tracking is an important part of consumption-based pricing. Companies need to see how much to charge, and customers need to be able to manage how much they spend. Many services provide usage dashboards, alerts, or spending caps so customers can stay in control. Done well, this pricing model can give users flexibility while keeping costs transparent.

What are the advantages of consumption-based pricing?

Consumption-based pricing can reshape how businesses charge and how customers pay. It can create a more balanced, transparent relationship between businesses and customers. Here’s why it works:

Provides a lower barrier to entry

This model lets customers start small and scale as needed, rather than locking them into big contracts or making them pay high up-front fees. This makes it easier for start-ups, smaller teams, or cautious buyers to try a service without worrying about spending too much.

Links cost to value

Flat fees often mean customers either overpay for capacity they don’t use or hit artificial limits too soon. Having them pay based on actual usage means their spending stays more aligned with the value they receive from the service.

Encourages smarter usage

When every action has a cost, customers might become more intentional with how they use a service. This can lead to less waste, more efficient resource allocation, and, in some cases, better overall performance.

Easily scales up or down

Companies with fluctuating demand don’t have to commit to fixed plans that might not consistently fit their needs. Whether a company is handling a seasonal rush or unexpected growth, it pays in proportion to what it uses – no wasted spending or overcommitting.

Naturally drives growth

Companies that use this model can increase revenue, as it relies on existing customer usage rather than new sign-ups alone. If a product delivers real value, customers might increase their usage over time, which creates a built-in path to expansion.

Creates a more transparent relationship

Since pricing depends on usage, customers expect clear tracking. This incentivises companies to provide better dashboards, usage alerts, and real-time billing visibility so customers feel in control.

What are the challenges of consumption-based pricing?

Consumption-based pricing can also present challenges for both companies and customers. Here are some to consider:

Inconsistent revenue

With a flat-rate model, businesses know exactly how much money they earn each month. This isn’t true with consumption-based pricing. If customer usage fluctuates – because of seasonality, economic shifts, or unpredictable demand – revenue does too. This can make forecasting and financial planning more challenging.

Unexpected costs

To customers, paying only for what they use might sound ideal. However, when usage peaks, their bills might be higher than expected. If customers don’t have clear visibility into their usage, budgeting can become more difficult. If rising costs surprise customers, they might look for alternatives.

Complicated pricing and billing

A simple monthly fee is easy to understand. However, consumption-based pricing can be harder to grasp, especially if the units are unclear or if rates change at different tiers. Companies need to structure pricing in a transparent and intuitive way, while ensuring their billing systems can track all usage – down to the smallest unit.

Real-time tracking for both sides

Providers need real-time data tracking to bill correctly, and customers need it to manage their spending. If tracking is delayed, inaccurate, or buried in a hard-to-use dashboard, customers won’t trust the bill, and companies will likely see disputes and complaints.

Awareness of spending

Flat subscription fees are predictable, so customers might not think about them often. But when every action has a cost, customers can become more aware of what they spend. If they start to feel they’re paying too much, they might decrease their usage or look elsewhere. Companies need to proactively show the value they provide.

Ease of cancellation

A monthly subscription requires a time commitment. However, with pay-as-you-go pricing, customers might find cancellation easier or more justified. If a service isn’t necessary or costs start adding up, customers can easily reduce usage or switch providers. Consequently, businesses might need to invest in retention strategies.

Customer acquisition and retention

With a subscription model, a business increases revenue by signing up new customers. With consumption-based pricing, revenue growth depends on both acquiring new customers and encouraging existing ones to increase their usage. This means companies have to think differently about pricing incentives, customer education, and engagement – without making customers feel they’re being pressured.

How can Stripe help with consumption-based pricing?

Stripe makes consumption-based pricing easier to implement by handling everything from usage tracking to customer billing. If you’re charging based on how much people use your product, here’s how Stripe can help.

Usage tracking and automated billing

Instead of building your own system to log every application programming interface (API) call, gigabyte, or transaction, you can send that data to Stripe. It calculates charges based on your pricing rules and bills customers accordingly so you don’t have to do so manually.

Support for different pricing structures

Not every company charges the same way, and Stripe’s flexibility can handle different models, including:

• Per-use pricing: Businesses charge customers per action, request, or unit used.

• Volume-based pricing: Rates decrease as usage increases.

• Tiered pricing: Different price levels reflect different usage thresholds.

• Custom models: These combine different approaches.

Stripe can also handle hybrid models that mix subscription pricing with consumption-based pricing (e.g., a flat monthly fee with additional usage-based charges).

Invoicing and payment processing

Stripe generates invoices based on actual usage so customers get a clear, accurate bill. If you want to enable autopay, Stripe processes payments in the background. This can minimise late payments and manual follow-ups.

Real-time visibility

The Stripe Dashboard makes it easier to see revenue trends, customer usage patterns, and potential churn risks. Meanwhile, customers can track their spending in real time, which helps reduce billing disputes and surprise charges.

Usage alerts

Unexpectedly high bills can easily frustrate customers. With Stripe, you can create usage alerts so customers are notified before they hit certain limits. That way, they can monitor their spending, and you can avoid complaints (or worse, cancellations).

Easier global payments and compliance

If you have customers in multiple countries, Stripe handles currency conversions, tax calculations, and payment regulations. This means you can scale internationally without spending time on the operational challenges of cross-border billing.