A pay-as-you-go (PAYG) pricing model charges customers based on actual usage instead of a flat fee or subscription. This model, also called usage-based pricing, is common for industries such as software-as-a-service (SaaS), cloud services, telecommunications, and application programming interfaces (APIs), in which costs adjust dynamically depending on consumption. In 2023, 58% of SaaS businesses reported they had implemented or tested usage-based pricing.

Below, we’ll discuss why businesses adopt PAYG pricing, how it affects revenue stability, what to consider before implementing it, and what tactics help businesses improve their pricing models.

What’s in this article?

• Why do businesses adopt pay-as-you-go pricing?
  
• How does pay-as-you-go pricing affect revenue stability?
  
• What are the big factors to consider before implementing pay-as-you-go pricing?
  
• What are the main challenges of a pay-as-you-go model?
  
• What tactics help businesses improve their pay-as-you-go pricing?
  

Why do businesses adopt pay-as-you-go pricing?

Businesses adopt pay-as-you-go pricing because it aligns costs with usage, which makes it an attractive option for customers and creates flexibility in revenue generation. Here are some benefits:

• Lower barrier to entry: Customers can start using a product or service without committing to high up-front costs.

• Clear value for cost: PAYG ensures customers pay only for what they use, which is ideal for those with variable needs.

• Scalability: Businesses can serve a wider range of customers, from small users to enterprise clients, without needing separate pricing tiers.

• Revenue improvement: Usage-based pricing can lead to higher customer lifetime value by capturing revenue as customers grow rather than locking them into static plans.

• Reduced churn: Because customers aren’t locked into fixed contracts, PAYG can reduce churn caused by those feeling overcharged for underused services.

• Competitive advantage: In industries in which customers are price-sensitive or prefer flexibility, PAYG can be a strong differentiator.

• Improved cash flow management: Businesses can more closely link revenue with infrastructure or operational costs, particularly in cloud-based or API-driven models.

How does pay-as-you-go pricing affect revenue stability?

Pay-as-you-go pricing can introduce revenue volatility, but if it’s managed well, it can create long-term revenue upsides. Here’s how it affects revenue stability:

Potential challenges

• Variable revenue streams: Unlike subscription models, which provide predictable recurring revenue, PAYG models experience fluctuating revenue based on customers’ usage.

• Seasonal or cyclical demand: Businesses in industries with seasonal fluctuations (e.g., cloud computing, energy) might see revenue peaks and dips.

• Customer churn risk: Because customers aren’t locked into contracts, they can reduce or stop usage anytime. This can make revenue more unpredictable.

• Harder financial forecasting: Businesses must build more complicated forecasting models that account for usage fluctuations.

Potential advantages

• Higher customer retention: PAYG pricing’s flexibility can lower the risk of customers canceling entirely because they can adjust usage up or down instead.

• Potential for revenue growth: As customers grow, their usage increases. This increases revenue organically without requiring upsells or plan upgrades.

• Diversified revenue base: Businesses that serve a broad range of customers with different usage patterns can minimize revenue fluctuations.

• Hybrid pricing models: Many businesses combine PAYG pricing with minimum commitments to balance flexibility with revenue predictability.

What are the big factors to consider before implementing pay-as-you-go pricing?

Before you use pay-as-you-go pricing, think through the trade-offs. The model gives customers flexibility and can drive more usage over time, but it introduces unpredictability—for your revenue and the customer experience. Here’s what to consider before you make the switch:

Consumer preferences

• If your product’s usage naturally fluctuates (e.g., API calls, cloud storage, energy consumption), PAYG pricing makes a lot of sense. But if customers prefer fixed costs, it might not be a good fit.

• If competitors use PAYG models, customers might expect it. But if they don’t, you’ll need to educate them about how this pricing benefits them.

Revenue stability and financial impact

• If usage is too sporadic, you might struggle with revenue volatility. Some businesses mitigate this by combining PAYG pricing with committed contracts or minimum spend levels.

• Revenue is steady with subscriptions, but with PAYG models, it rises and falls with customer demand. If your costs are mostly fixed, a drop in usage could squeeze profit.

• PAYG pricing lets customers start small and scale up, which can boost their lifetime value. But if they constantly fine-tune their usage to pay as little as possible, you might see lower revenue than you would with a flat subscription model.

Costs and pricing structure

• If each unit of usage costs you money, PAYG pricing can help you afford the costs. But if your costs are mostly fixed, you could end up making less than you would with a subscription.

• You’ll need a clear way to track usage (e.g., per API call, per gigabyte, per transaction). The easier it is for customers to understand, the fewer billing disputes you’ll have to resolve.

• Volume discounts or prepaid plans can help keep heavier users happy and encourage them to use more. Steadily increasing costs might make bigger clients feel as though they’re getting a worse deal.

Customer experience and retention

• The best PAYG models make pricing feel fair: customers pay for what they use, and they don’t feel as though they’re being penalized for growing. If customers are surprised by high bills, however, expect churn.

• If usage is too hard to estimate, customers might hesitate to commit or become frustrated when bills fluctuate. Usage dashboards, alerts, or budgeting tools can help prevent this.

• Customers might need guidance to control their usage, especially early. Without this support, they might reduce spending or leave.

Operational readiness

• PAYG pricing requires real-time tracking, automated invoicing, and dispute management. If your billing setup isn’t ready, your team can become overwhelmed.

• Fraud, accidental overuse, or runaway costs (e.g., an app making unexpected API calls) can create problems for customers and revenue loss for you.

• A big increase in usage is great for revenue, unless your systems can’t handle it. You’ll need to ensure performance stays strong, even when demand fluctuates.

Sales and marketing considerations

• PAYG pricing can shorten sales cycles by minimizing up-front commitment, but it also means customers might take longer to increase spending. Your sales team might need a different approach.

• If customers don’t understand how usage translates into cost, they might hesitate to commit.

• A PAYG model can make your business more attractive. But if competitors lock in customers with subscriptions, you might need other differentiators.

What are the main challenges of a pay-as-you-go model?

Pay-as-you-go pricing can be a great way to attract customers, drive usage, and scale with demand. But it also presents challenges including fluctuating revenue and unpredictable customer behavior. Stripe, which has built a suite for usage-based billing, helps solve a lot of these problems. Here’s what to watch for and how Stripe makes PAYG pricing easier to manage:

Revenue fluctuations

Unlike with subscriptions, where you can count on steady recurring revenue, the income from PAYG models rises and falls depending on customer demand. That makes it harder to predict cash flow and budget for growth.

Here’s how Stripe helps:

• Stripe Billing has forecasting features that help businesses estimate performance.

• Advanced reporting helps you predict customer usage trends.

• Stripe makes it easy to combine PAYG pricing with minimum commitments or prepaid credits for less volatility.

Surprise bills

If customers don’t know what to expect, they can get frustrated when they see a high bill or become overly cautious and limit their usage. Either outcome is bad for retention and revenue.

Here’s how Stripe helps:

• Metered billing tools let businesses transparently charge based on actual usage.

• Threshold alerts prevent bill shock by notifying customers before they hit certain usage levels.

• The Stripe Dashboard lets customers track their usage in real time so they feel in control.

Usage tracking and pricing

PAYG models require you to track every unit of usage (e.g., API calls, data storage, transactions) and convert it into a meter for fair, intuitive billing. If the process is confusing or inaccurate, you’ll likely hear about it from customers.

Here’s how Stripe helps:

• Stripe’s usage-based billing API automates metering and billing so businesses don’t have to build complex systems from scratch.

• Stripe lets businesses choose from flexible pricing models so they can charge per unit, according to a recurring time interval, or based on volume.

Customer drop-off

Subscriptions create predictable revenue because customers commit to a certain time frame up front. With a PAYG model, they can scale back or leave whenever they want, which makes retention more challenging.

Here’s how Stripe helps:

• Incentives and volume discounts encourage customers to keep spending.

• Hybrid subscription options strike a balance between flexibility and stability by letting businesses combine PAYG pricing with baseline commitments.

Payment failures

With a PAYG model, invoices fluctuate and payments aren’t always predictable. This increases the risk of failed transactions and delayed payments.

Here’s how Stripe helps:

• Smart Retries automatically reattempts failed payments at times when they’re most likely to succeed.

• Multiple payment options make it easier for customers to pay.

• Automated invoice reminders help prevent unnecessary delays and revenue loss.

Fraud and abusive usage

Without fixed pricing, some customers might try to game the system by accumulating large amounts of usage they can’t or won’t pay for.

Here’s how Stripe helps:

• Stripe Radar detects suspicious transactions in real time and blocks high-risk payments.

• Usage limits and prepayment options let businesses require preloaded balances or cap usage before unpaid bills get out of control.

What tactics help businesses improve their pay-as-you-go pricing?

Pay-as-you-go pricing is flexible, but it needs careful structuring to maximize revenue and keep customers on board. If pricing feels unpredictable, customers might hesitate to commit or might leave. If it’s too rigid, you lose the advantages of PAYG pricing. The best tactics strike a balance among flexibility, predictability, and incentives for higher usage. Here’s how businesses can refine their PAYG models for growth and stability:

Introduce volume discounts to reward growth

Customers will be encouraged to spend more if they know they’ll pay less per unit at higher usage levels. Without this incentive, they might work to minimize usage, which limits revenue. Experiment with:

• Tiered pricing: Charge less per unit as customers use more (e.g., the first 1,000 API calls cost $0.10 each, but the next 10,000 cost $0.08 each).

• Bulk discounts: Offer prepaid credits at a lower rate (e.g., $100 buys $120 worth of usage).

• Commit-to-save plans: Let customers commit to a minimum spend in exchange for lower rates. This gives them a reason to stick around.

• Usage-based loyalty perks: Try a model in which customers get better perks the more they use a service (e.g., priority support, custom integrations).

Set minimum commitments for predictability

PAYG revenue fluctuates, which can make cash flow unpredictable. A small baseline commitment helps mitigate the issue. You could try:

• Requiring a monthly minimum spend, even if usage is low

• Offering PAYG pricing on top of a base subscription

• Bundling PAYG pricing with prepaid plans so customers pay up front and draw from their balances

Provide real-time usage visibility

Letting customers track their spending in real time can make them feel more in control and less likely to cut back or leave because of unpredictable costs. Provide customers with:

• Live dashboards that show real-time usage and projected costs

• Automated alerts when usage crosses a threshold (e.g., “You’ve used 80% of your monthly limit”)

• Budgeting tools that let them set limits or automatically recharge balances

Link costs directly to value

Pure usage-based pricing can feel transactional. Layering in value-based elements makes pricing feel more fair and helps boost profit. Here are some examples:

• Feature-based tiers: Instead of charging only for usage, bundle premium features at different spend levels.

• Outcome-based pricing: Charge based on the results customers get rather than just raw usage.

Use freemium or trial-based onboarding

Customers will be more willing to experiment with PAYG pricing if they can start for free or at low risk. You can:

• Offer a free tier with limited usage, and nudge customers into paid plans once they see value

• Give usage credits up front instead of a fixed trial period (e.g., “Your first $50 of usage is free”)

Incorporate more predictable pricing options

If customers suddenly increase their usage, an unexpectedly high bill could push them to a competitor with more predictable pricing. To avoid this:

• Offer usage caps so customers can select a “hard stop” at a certain spending level

• Provide rate-limiting controls that let customers lower usage instead of accumulating high charges

• Build in autoscaling discounts so customers aren’t penalized for growth

Automate billing for a better user experience

If invoices are inconsistent or payments fail often, customers can become wary of working with you. Automated billing can avoid these issues. With automated billing, you can:

• Charge automatically rather than invoice manually to prevent late payments

• Use smart retry logic to minimize failed transactions

• Accept multiple payment methods such as credit cards, Automated Clearing House (ACH) transfers, and wire transfers

Encourage expansion with cross-selling and add-ons

PAYG users often start small, but their needs might grow over time. A well-designed pricing model nudges them toward higher spending. Encourage more engagement with:

• Add-on features that increase usage (e.g., advanced analytics, premium support)

• Multiproduct bundles that expand customers’ usage across different services