If we go with usage-based pricing, should customers pay upfront for a block of usage (buy credits or a prepaid plan) or be billed in arrears for what they used each month? What do customers prefer?

Based on the discussions in our book Price to Scale, the answer largely depends on both the nature of your service’s usage metric and your customer’s need for predictability:

• If your usage metric is very measurable and predictable, billing in arrears (i.e., charging for actual consumption each period) works well—as evidenced by models used by AWS and Azure. This approach aligns costs directly with usage, providing a fair method when you can accurately track consumption.

• On the other hand, if the measurement of usage is less granular or if customers prefer more certainty in their budgeting, offering prepaid blocks of usage (similar to a cell-phone plan model) might be more appropriate. Prepaid plans give customers a clear ceiling on expenses and can reduce billing surprises. Some customers, especially in purchasing groups, favor this predictability.

In essence, our pricing strategy book suggests evaluating factors like predictability and measurement ease to decide: If usage is clear and reliable, post-usage billing may be favored; if not, a prepaid block approach might be safer for your customers.

Summary: There isn’t a one-size-fits-all answer—it depends on your service’s characteristics and what your customers value most. Assess your measurement precision and customer budgeting needs to choose the model that optimally aligns with both your business and customer expectations.