When Not to Use Usage-Based Pricing: A Guide for SaaS Leaders

May 6, 2025

In today's SaaS landscape, usage-based pricing (UBP) has emerged as the darling of pricing strategies. Companies like Snowflake, Twilio, and AWS have demonstrated remarkable growth and investor appeal with this model. However, despite its rising popularity, usage-based pricing isn't the universal solution it's sometimes portrayed to be.

As a SaaS executive, understanding when to avoid this pricing model is just as crucial as knowing when to implement it. Let's explore the scenarios where usage-based pricing might undermine rather than enhance your business objectives.

When Customer Value Doesn't Align with Usage

Mismatched Value Metrics

The foundation of successful usage-based pricing is the alignment between how customers derive value and how much they use your product. According to OpenView Partners' 2022 SaaS Benchmarks report, 45% of SaaS companies that attempted usage-based pricing faced challenges because their chosen usage metrics didn't accurately reflect customer value.

Consider a project management tool like Asana. The value isn't necessarily in how many tasks users create or how many projects they manage—it's in the improved organization and productivity that remains constant regardless of usage volume. In such cases, a subscription model often better reflects the steady value customers receive.

When Usage is Unpredictable or Seasonal

For businesses where usage fluctuates dramatically, implementation becomes problematic. According to Profitwell research, B2B customers particularly dislike unpredictable costs, with 72% preferring fixed pricing when budgeting for software.

Kyle Poyar, Partner at OpenView, notes: "Customers need predictability for budgeting. When usage varies wildly month to month, a usage-based model can create more friction than value."

When Your Cost Structure Doesn't Support It

Fixed Cost Dominance

If your business operates with predominantly fixed costs rather than variable costs tied to usage, a usage model can create significant financial risk. As Patrick Campbell, founder of ProfitWell, explains, "The economics need to work—when your costs don't scale linearly with customer usage, you're essentially taking on the risk that traditionally the customer would bear."

This is particularly relevant for companies whose primary costs are in R&D, sales, and marketing rather than in service delivery or infrastructure that scales with usage.

Capital Intensive Startups

For venture-backed companies, usage-based models often mean slower revenue recognition and potentially more complex fundraising narratives. According to Bessemer Venture Partners, companies with usage-based models typically see 30-40% lower valuations in early funding rounds compared to subscription-based counterparts with similar customer bases.

Tom Tunguz of Redpoint Ventures observes: "The delayed revenue recognition of usage-based models can create a cash flow valley that many startups aren't positioned to cross, especially in today's tighter funding environment."

When Your Sales Process Requires Clarity

Complex Enterprise Sales Cycles

Enterprise sales cycles thrive on predictability and clarity. When working with procurement departments and finance teams, the ambiguity of usage-based pricing can extend sales cycles significantly. Gartner research indicates that enterprise software purchases with variable pricing take 35% longer to close than those with clear, fixed costs.

Todd Olson, CEO of Pendo, shares from experience: "We've found that in the enterprise segment, prospects often require guaranteed pricing for budgeting purposes. Usage-based models without caps or predictability can create friction in the buying process."

When Sales Compensation Gets Complicated

Usage-based pricing can complicate sales compensation structures. Without predictable contract values, determining appropriate commission structures becomes challenging. According to SaaS Capital, companies with usage-based models report 20-25% higher sales team turnover compared to those with traditional subscription pricing.

When Customer Education Costs Outweigh Benefits

High Explanation Burden

Some products have usage patterns that are difficult for customers to predict or understand. When customers struggle to forecast their own usage, they may avoid your product altogether rather than risk unexpected costs.

This is particularly relevant in industries where stakeholders may lack technical sophistication. A 2021 Forrester study found that 67% of non-technical budget decision-makers ranked pricing simplicity among their top three considerations when evaluating software.

Competitor Contrast Problems

If your competitive landscape is dominated by flat-rate pricing, introducing usage-based pricing can create unnecessary friction in the sales process. According to research by Simon-Kucher & Partners, 58% of B2B buyers will choose a less optimal solution with simpler pricing over a potentially better product with more complex pricing structures.

When Your Product Category Expects Predictability

Industry Expectations

Some software categories have established customer expectations around pricing models. HR software, accounting platforms, and certain compliance tools typically operate with predictable pricing because their users—often finance departments—demand budgeting predictability.

Jason Lemkin, founder of SaaStr, observes: "There are certain categories where flat pricing is just expected. Fighting against those expectations creates unnecessary go-to-market friction."

The Path Forward: Hybrid Approaches

While pure usage-based pricing may not be suitable in these scenarios, hybrid models can offer a middle ground. According to OpenView's State of Usage-Based Pricing report, 45% of SaaS companies now employ hybrid pricing, combining subscription components with usage-based elements.

These approaches typically feature a base subscription fee that covers core functionality or a certain usage threshold, with additional usage billed variably. This approach provides revenue predictability while still allowing for upside when customers find more value.

Conclusion: Strategic Pricing Requires Nuance

The decision to implement usage-based pricing should never be made simply because it's trending in SaaS circles. Instead, it requires careful consideration of your customer base, cost structure, sales process, and competitive landscape.

The most successful SaaS companies don't blindly follow pricing trends—they develop pricing strategies that reinforce their unique value proposition and business model. Sometimes, that means recognizing when not to use usage-based pricing, even when it seems like everyone else is heading in that direction.

As you evaluate your pricing strategy, remember that alignment with customer value, operational realities, and market expectations will always outweigh the allure of any particular pricing trend. In pricing, as in all aspects of building a successful SaaS business, strategic fit trumps fashion every time.