Billing models are the ways businesses charge customers. Some businesses use a flat fee, while others charge based on usage, subscriptions, or a mix. The way a business handles billing affects how predictable revenue is, whether customers will stick around, and more.

Below, we’ll examine kinds of billing models, how to choose the right model for your business, and common challenges you might face implementing it.

What’s in this article?

• What are the most common billing models?
  
• What are some overlooked billing models businesses should consider?
  
• How do businesses choose the right billing model?
  
• What challenges do businesses face when implementing billing models?
  

What are the most common billing models?

Most businesses choose one of the following pricing models, or a combination, depending on their product and customers’ expectations. Each model has benefits and drawbacks.

Flat-rate pricing

Flat rate means customers pay one price for everything, up front. This works well for premium software (e.g., Final Cut Pro), online courses, and physical goods. But without recurring revenue, businesses have to keep acquiring new customers or upselling existing ones to stay profitable.

Subscription pricing

Subscriptions are a recurring fee for ongoing access. This model is popular with many businesses, including Netflix and Slack. It’s useful for predictable revenue but only works if customers feel as though they’re continuously getting value.

Pay-as-you-go pricing (usage-based pricing)

With usage-based pricing, customers pay only for what they use. This makes sense for cloud computing (e.g., Amazon Web Services [AWS], Twilio) and utilities, where usage varies. It’s helpful for customers who don’t want to commit in advance, but it also means revenue can be unpredictable. Some businesses mix a pay-as-you-go model with a base subscription fee to gain more predictability.

Tiered pricing

This model offers levels of access at several price points and usually includes more features or capacity at the higher tiers. Zoom is a good example: the service is free for casual users, with a mid-tier plan for small teams and an enterprise plan for businesses that need more control. This model lets customers self-select according to their needs.

Per-user or per-seat pricing

In this model, pricing scales with the number of people using the product. It is common in B2B software, and businesses such as Salesforce and Notion charge based on head count. Per-user pricing is easy to understand and keeps costs steady with business growth. But if pricing isn’t structured well, businesses might limit seats to save money, which can slow adoption.

Freemium

With this model, businesses offer a free version with just enough value to hook people alongside paid upgrades for more features, storage, or support. This is popular with software-as-a-service (SaaS) companies (e.g., Dropbox, Trello) and consumer apps (e.g., Spotify). The challenge is that many free users never convert to paying customers. The free tier needs to be useful but limited enough to nudge people toward upgrading.

Demand-based pricing

Prices change based on demand, timing, or other factors. This is also known as dynamic pricing or surge pricing. Airlines and hotels use this pricing, and it’s common in rideshare apps and event ticketing. It can maximize revenue but risks frustrating customers if it feels unfair or unpredictable.

Bundled pricing

Grouping products or services at a discount is known as bundled pricing. This is how Disney+ sells its Hulu and ESPN+ bundle and how Microsoft 365 combines Word, Excel, and Teams. Bundles work because they increase perceived value, but they can also be difficult to manage because customers might want only part of the package.

Hybrid models

Most businesses don’t stick to one model. SaaS businesses often blend subscriptions with usage-based fees, and ecommerce brands layer on memberships for perks (e.g., Amazon Prime). The goal is to create a structure that feels flexible to customers while keeping revenue steady.

What are some overlooked billing models businesses should consider?

Most businesses default to the same handful of pricing models—subscriptions, flat fees, or pay-as-you-go. But there are other ways to charge that can generate revenue, even out cash flow, or make customers stay longer. Here are a few lesser-known models worth considering:

Prepaid credits

Instead of charging per use or locking customers into a subscription, sell credits they can use when needed. Examples include ad platforms selling ad credits, coworking spaces offering day passes, or law firms selling prepaid legal hours. This model gets you cash in advance while offering customers flexibility.

Outcome-based pricing

Charge based on results, not access alone. This works in consulting firms, where firms get paid when they hit specific goals, and in marketing, where agencies take a cut of sales they drive. It also works in SaaS, where recruiting platforms charge per hire instead of per seat. The upside is customers like paying for real value. The downside is you must be clear on what “success” means for your business and how you measure it.

Pay-what-you-want pricing

This can be a risky strategy, but businesses that get it right find that some customers pay more than the minimum. Pay-what-you-want is popular in digital products (e.g., Bandcamp for music, Humble Bundle for games), but it can work for services, especially if your customer base values supporting businesses they believe in.

Retainer + performance bonus

Somewhere between a subscription and outcome-based pricing, this model charges a predictable base fee and includes performance-based bonuses. Agencies and consultants often use this model—for example, marketing firms that charge a monthly retainer with a bonus if sales increase. It gives you steady income while reassuring customers that they’re paying extra only when results follow.

Memberships with perks

Amazon Prime is a good example of a membership packed with perks, including free shipping and discounts at Whole Foods. Brands that build strong communities can use this model, too. Consider a fitness business that offers exclusive workouts and discounts on gear or a retail brand with VIP pricing for members. This works best when the perks feel like a real advantage.

Hardware-as-a-Service (HaaS)

Instead of selling physical products outright, lease them with built-in service and upgrades. IT businesses use this model for leasing equipment, and Peloton is moving this way with bike subscriptions. HaaS lowers the up-front cost for customers while locking in long-term revenue.

Reverse metering

Most usage-based pricing charges customers more as they use more, but flipping that formula can build goodwill and drive behavior change. Utility companies and car insurance providers do this by charging lower rates for lower mileage, but it could work in SaaS. Imagine a storage platform charging customers less if they archive older files instead of keeping everything live.

Dynamic retainers

Instead of locking customers into a flat monthly fee, adjust pricing based on usage or interaction. For example, a marketing agency could charge based on the number of campaigns running that month, or an HR platform could bill based on active employees rather than total seats. It makes pricing feel fair while keeping customers invested.

Installment plans

Instead of pushing customers toward third-party financing, businesses can suggest their own installment payments, especially for high-ticket items. Apple does this with its iPhone Upgrade Program, and Tesla lets people pay monthly for Full Self-Driving instead of charging a huge one-time fee. This lowers the barrier to entry without involving outside lenders.

Microtransactions and add-ons

This model is popular in gaming (e.g., Fortnite skins, in-app purchases), but it also works elsewhere. A core product stays affordable, but customers can pay extra for add-ons such as priority support, customization, training, or premium features. If done right, it makes pricing more flexible while increasing revenue per customer.

How do businesses choose the right billing model?

A business’s billing model shapes cash flow, customer relationships, and more, and the smartest businesses use pricing to steer behavior, balance risk, and drive long-term growth. Here’s what’s involved in this decision:

Who’s taking the risk?

Flat fees put the risk on the customer. Whether a customer uses the product or not, they pay the same. Usage-based pricing shifts that risk to the business because the customer pays only for what they use, which can mean revenue is unpredictable. The goal is to find a balance. AWS, for example, charges per usage but gives discounts for predictable commitments. A business selling software to small teams might start with a flat subscription to keep pricing simple, then add usage-based pricing for bigger customers who want flexibility.

What behavior do you want to encourage?

Pricing should nudge customers in the right direction. If engagement is important, such as in fitness apps or streaming services, unlimited access makes sense. But if overuse drives up costs, pricing should rein it in. Think about banks charging fees for too many withdrawals or airlines structuring fares to encourage people to pay for checked bags up front. The best pricing models make customers feel as though they’re getting a deal.

How does this evolve over time?

A good billing model grows with the customer. Most businesses start with a low-barrier option (freemium, trial periods, or inexpensive entry plans) to get people in the door. Over time, they introduce ways to charge more as the customer gets more value, such as higher tiers, premium features, and usage-based add-ons. HubSpot, for example, attracts small businesses with free tools and then monetizes them when the businesses are ready to scale. The transition should feel natural.

Are you playing the short game or the long game?

Some models bring in cash fast, while others build steady, recurring revenue. One-time purchases work for high-margin products, but subscriptions create predictable income. That’s why software companies push subscription plans, while retailers experiment with memberships (Amazon Prime, Costco) to lock in repeat business. The right model depends on whether a business needs immediate sales or wants to maximize lifetime value.

How easy is it to raise prices?

Pricing will change over time. The best models make it easy to tweak pricing without losing customers. Businesses that bake in flexibility—through tiers, add-ons, or bundled services—have more room to adjust. If customers feel as though they’re paying more but getting more, they’ll be more likely to stick around.

What challenges do businesses face when implementing billing models?

Here are some of the challenges businesses face when trying to apply (or change) their pricing structure:

Customers might not see the value the way you do

Your pricing might make perfect sense to you, but your customers might feel differently. Maybe they don’t use your product as you expected, or maybe the way you charge doesn’t match their perception of its value. For example, a per-user SaaS model makes sense if every person gets direct value, but if only a few people at a business actively use the tool, it starts to feel like wasted seats.

Customers can have sticker shock

Some billing models make perfect sense mathematically but still turn people off because of how the cost feels. A $99/month subscription might be fine, but a pay-as-you-go model that racks up $99 in usage fees can feel expensive—even though it’s the same price. People tend to dislike unpredictable bills, and businesses underestimate how much customers value knowing what they’ll pay in advance.

New tech can be difficult to implement

Usage-based pricing, tiered plans, and custom enterprise quotes require tracking, metering, invoicing, and payment processing, which can quickly become complicated. Many businesses end up relying on spreadsheets, patched-together systems, or manual billing reviews that don’t scale. And if a billing system isn’t built well, it can lead to mistakes, such as overcharging or undercharging customers or making invoicing a frustrating process.

Sales teams can struggle to sell it

The more complicated your pricing is, the harder it is for reps to explain, which slows down deals. If the billing model requires too much negotiation or customers don’t immediately get it, the sales cycle drags on and conversion rates drop. That’s why businesses such as Basecamp stick with one flat price.

Users can leave when you switch models

Changing pricing is tricky. If your customers feel as though they’re getting a worse deal, expect complaints, cancellations, and bad PR. Even minor changes, such as Netflix bumping up its subscription price by a few dollars, can cause waves. The challenge is figuring out how to transition calmly, whether that means exempting current customers, providing transition discounts, or concisely explaining why the change benefits them.

People can game the system

Billing models have loopholes, and some customers will find them. Businesses that charge per seat often see businesses sharing logins. Usage-based models can lead to customers limiting their usage to keep costs down, even if it hurts their experience. Some businesses try to fix this by adding restrictions or new rules, but that can backfire if the additions make the product harder to use.

Cash flow can become unpredictable

Subscriptions provide steady, predictable revenue. Usage-based models do not. Businesses that depend on metered billing often deal with revenue spikes and dips that make forecasting harder. Even subscription models aren’t immune because seasonality, churn, and annual vs. monthly payment structures can affect the flow of money in ways that need to be managed.

Customers can churn if they don’t use enough

Flat fees are great for businesses, but customers who aren’t using the product much might start questioning whether it’s worth it. Gyms often experience this, when people pay for access but realize they’re not going enough and cancel. SaaS businesses run into this, especially if their product isn’t deeply embedded in a customer’s workflow.

Regulatory and tax roadblocks can pop up

Billing involves collecting money and complying with regulations. Different countries (and even different US states) have their own tax rules for digital goods, subscriptions, and usage-based services. A business that expands internationally might have to deal with value-added tax (VAT), the General Data Protection Regulation (GDPR), or other legal requirements they didn’t anticipate. Cryptocurrency payments or emerging financial models can complicate the situation further.

The problem of too much choice

A good billing model should make it easy for customers to make a decision. But if there are too many options—too many tiers or add-ons, too much fine print—it creates decision paralysis. People can put off buying, or they can default to the cheapest option even if a more expensive one would serve them better. Businesses that fine-tune pricing well keep the choices simple and clearly differentiate the value at each level.