Introduction

Usage-based billing connects the cost of a product to its usage; the more value gained from a product, the higher the cost to use. Practically speaking, this means tracking a specific metric, API calls, Gigabytes of storage, users, etc. The key to implementing a usage-based strategy is to find a value-metric (an indicator that customer is getting value from the product) and charge based on it.

Overview

PROS
  • Directly charge a customer based on the benefit they get
  • Pricing scales with customer size
  • Low barrier of entry
CONS
  • Usage metric may not be a direct indicator of value
  • Harder to predict revenue + costs for the customer

Breakdown of the Pros

Directly charge a customer based on the benefit they get

If a company chooses their metric properly, a customer should feel that they are paying directly for value, and ideally that the value they are getting is far outweighing the price they pay.

Low barrier of entry 

When a customer pays based on usage, they are free to "try it out" with a very small rollout. This is a lot less scary than having to pay large upfront fees, and free trials don't always give a customer a great understanding of how useful a product may be long term.


Breakdown of the Cons

Usage metric may not be a direct indicator of value

One challenge businesses that adopt the usage model face is figuring out their value metric to charge customers for. Oftentimes a business defaults to "users" since its very simple and almost always scales directly with business size, however it does not usually indicate value is being extracted from the product meaning they may face challenges scaling the business later. 

Harder to predict revenue + costs for the customer

When a business charges based on a metric, that metric often fluctuates from month-to-month. This is bad for the company because they like predictable revenue, and it's bad for the customer because they want predictable expenses.


WHO SHOULD USE IT

Most B2B SaaS companies should be using some form of usage-based pricing. Being able to bill a customer based on how much value they are getting out of a product is critical to running a business - the only time where using some form of usage pricing is not always recommended is for B2C SaaS companies. This is because B2C customers are usually quite sensitive to price fluctuations and prefer a flat feature-based subscription model.

Implementation

For tracking usage of a metric, either use a metered plan or a regular plan. Metered plans are for metrics that you want to reset usage at the beginning of the month, for example tracking API calls made each billing period. Otherwise quantity of the plan can be used to track usage.

The User Interface

For tracking usage of a metric, either use a metered plan or a regular plan. Metered plans are for metrics that you want to reset usage at the beginning of the month, for example tracking API calls made each billing period. Otherwise quantity of the plan can be used to track usage.

SUBSCRIPTION MANAGEMENT
See Live Example

Examples

Own a Subscription SaaS Product?
Use the UI/UX Toolkit for Stripe Billing