When to Use Usage-Based Pricing: A Strategic Guide for SaaS Executives

May 6, 2025

Introduction

In today's competitive SaaS landscape, pricing strategy is not just a financial decision but a strategic differentiator. Usage-based pricing (UBP) has emerged as a compelling alternative to traditional subscription models, with companies like Snowflake, Twilio, and AWS demonstrating its potential for driving growth and customer satisfaction. According to OpenView Partners' 2023 SaaS Benchmarks Report, companies utilizing usage-based models grew revenue 1.5 times faster than their counterparts using pure subscription models. However, the crucial question remains: When is usage-based pricing the right choice for your SaaS business?

Understanding Usage-Based Pricing

Usage-based pricing is a model where customers pay based on their actual consumption of a service rather than a fixed recurring fee. This can be measured through various metrics such as API calls, storage used, transactions processed, or time spent using the platform.

Unlike subscription models that charge a predetermined monthly or annual fee regardless of usage, UBP creates a direct correlation between the value customers receive and what they pay. It's sometimes called "pay-as-you-go," "consumption-based," or "metered billing."

When Usage-Based Pricing Makes Strategic Sense

1. When Your Product Has Variable Consumption Patterns

If your customers' usage patterns vary significantly—either between different customers or for the same customer over time—usage-based pricing can be particularly effective.

Example: Twilio's communication APIs serve both startups sending a few thousand messages and enterprises sending millions. A fixed subscription would either undercharge high-volume users or price out smaller customers. Their usage-based model allows them to serve the entire market spectrum efficiently.

2. When Your Costs Scale Directly With Usage

For products where your own costs increase proportionally with customer usage, UBP helps maintain healthy margins across customer segments.

According to a McKinsey analysis, infrastructure and data-intensive services particularly benefit from this alignment, as each additional unit of customer usage typically requires additional resources from the provider.

3. When You Need to Reduce Adoption Barriers

For new market entrants or those targeting price-sensitive segments, usage-based models can significantly lower the barrier to entry.

Stripe's payment processing model illustrates this perfectly—by charging per transaction rather than requiring monthly commitments, they've made it easier for businesses of all sizes to adopt their solution, contributing to their explosive growth from startup to $95 billion valuation.

4. When Your Value Proposition Is Directly Tied to Measurable Outcomes

If your product's value can be explicitly connected to measurable outcomes like cost savings, revenue generation, or efficiency improvements, usage-based pricing helps reinforce this value narrative.

Datadog demonstrates this principle effectively—as customers monitor more infrastructure and applications, they derive more value from the platform, making their per-host pricing model intuitively fair to customers.

When to Exercise Caution

1. When Predictability Matters More Than Flexibility

According to Profitwell research, while 74% of SaaS buyers prefer usage-based options when available, CFOs and finance leaders often prioritize predictable spending. If your target customers value budgeting certainty over usage flexibility, a pure usage-based approach might create friction.

2. When Usage Doesn't Correlate With Value

If customers derive significant value from your product regardless of how much they actively use it (like security solutions or emergency services), usage-based pricing can actually undervalue your offering.

3. When Usage Metrics Are Difficult to Track or Explain

Complex or opaque usage metrics can lead to customer confusion and billing disputes. If you can't explain your usage metrics in a simple, transparent way, you may want to reconsider or simplify your approach.

4. When Your Business Needs Revenue Predictability

Early-stage companies or those with significant fixed costs might struggle with the revenue volatility that can come with usage-based models. According to Chargebee's SaaS benchmarks, companies with pure usage-based models experience 25-40% more month-to-month revenue volatility than subscription counterparts.

Hybrid Approaches: The Best of Both Worlds

Many successful SaaS companies are implementing hybrid pricing models that combine elements of subscription and usage-based approaches:

Base subscription + usage overage: MongoDB Atlas offers tiered subscriptions with additional charges for exceeding included usage limits
Prepaid usage credits: AWS and Google Cloud provide discounted rates for committed usage
Feature-based subscriptions with usage components: HubSpot charges for their platform via subscription while certain high-value activities incur usage fees

According to OpenView's research, hybrid models now represent 45% of public SaaS companies, up from just 23% five years ago.

Implementation Considerations

If you're considering a usage-based or hybrid pricing approach, consider these implementation best practices:

Start with clear, understandable metrics that directly relate to customer value
Introduce usage-based elements gradually, perhaps alongside existing subscription options
Implement usage caps or notification thresholds to prevent surprise bills
Provide usage dashboards and forecasting tools to help customers manage their consumption
Consider grandfathering existing customers when making significant pricing changes

Conclusion

Usage-based pricing isn't universally superior—it's a strategic choice that aligns with specific business models, customer needs, and market positions. The most successful implementation decisions are based on deep understanding of customer value perception, usage patterns, and your own operational economics.

As the SaaS market continues to mature, we're seeing increasing sophistication in pricing models. The companies winning in this environment are those that view pricing not as a static decision but as an evolving strategic lever that adapts to changing market conditions and customer needs.

Whether you choose a pure usage-based approach, a traditional subscription, or a hybrid model, the key is ensuring your pricing reinforces your value proposition and facilitates both customer acquisition and expansion—the twin engines of sustainable SaaS growth.