With the economic impact of recessions and market swings affecting organizations around the globe, finding a billing approach that aligns with a company’s goals and maximizes revenue potential becomes even more crucial. Today, we’re taking a deep dive into consumption-based versus subscription-based billing and how to choose the right billing model by exploring their advantages and limitations. Once you understand the pros and cons, choosing the right model for your business gets easier.
Decoding consumption-based and subscription-based billing: What’s the difference?
The best place to start is by understanding the fundamental differences between consumption- and subscription-based billing.
Consumption-based billing charges customers based on product or service usage, providing cost transparency, flexibility, and scalability. Customers pay for what they use, and the pricing structure can be more flexible.
On the other hand, subscription-based billing involves customers paying a fixed recurring fee for ongoing access to a product or service. It offers predictable revenue, customer loyalty, and simplicity in budgeting but may have limitations in accommodating usage variations and revenue fluctuations.
Let’s dig a bit deeper into each to better understand their unique value propositions.
Understanding the value of consumption-based billing
Key characteristics of consumption-based billing
Consumption-based billing has some key differentiators companies need to understand. The model comes with specific benefits and include:
- Cost transparency and flexibility. This model provides customers with clear visibility into the costs associated with their actual usage. It offers flexibility in pricing structures, allowing businesses to create customized plans based on specific needs.
- Aligning costs with actual usage. It promotes fair pricing, as customers are charged based on the value they receive.
- Scalability and adaptability. Consumption-based billing can easily scale with business growth or accommodate fluctuating demands.
- Usage-based tracking and measurement. Consumption-based billing relies on accurate tracking and measurement of usage metrics, enabling businesses to generate accurate customer invoices and reports.
- Pay-as-you-go flexibility. Customers can adjust their usage and associated costs on a pay-as-you-go basis.
Benefits of consumption-based billing
Consumption-based billing is great for empowering customers by giving them control over their spending. They can adjust their usage and associated costs based on their needs, creating a more satisfactory experience. Businesses can also provide tailored pricing plans by charging based on actual usage, increasing customer satisfaction and loyalty.
Another advantage to consumption-based billing is the ease of scaling. Businesses experiencing rapid growth or seasonal fluctuations can simply scale their offerings and pricing without constraints.
Challenges of consumption-based billing
Consumption-based billing, similar to usage-based billing, can also present challenges related to the complexity of pricing structures. For example, here are some specific difficulties in consumption-based billing and its impact on pricing complexity:
The granularity of measurement. Consumption-based billing often requires tracking and measuring usage at a very granular level. This means capturing data on consumption across time, quantity, or specific features used. Determining the appropriate level of granularity and measuring it can be complex.
Pricing unit selection. Different consumption dimensions may have varying relevance and value to customers. Determining the most meaningful unit of measurement that aligns with customer expectations and reflects the cost structure is crucial but can be complex.
Variable pricing structures. Determining pricing breakpoints, and establishing reasonable pricing levels for each tier can be complex. Ensuring that pricing tiers are well-defined, transparent and appropriately incentivize higher consumption without becoming cost-prohibitive can be a delicate balance.
Managing price fluctuations. Consumption patterns can vary over time. Addressing these fluctuations and providing customers with tools or mechanisms to manage their consumption and associated costs can help mitigate this challenge.
Use cases for consumption-based billing
Consumption-based billing makes a lot of sense in various scenarios, such as:
- Cloud services and infrastructure. Paying for cloud resources based on usage ensures optimal cost management and flexibility.
- Certain SaaS products. Charging customers based on the number of active users or the volume of data processed encourages efficient resource utilization.
- Utility services. Electricity, water, and gas providers can adopt consumption-based billing to promote conservation and fair pricing.
Exploring the allure of subscription-based billing
Subscription-based billing has long been a popular model across industries, offering several advantages for businesses.
Key characteristics of subscription-based billing
- Predictable recurring revenue. Subscription-based billing provides businesses with a steady, predictable revenue stream, with customers paying a recurring fee regularly.
- Customer loyalty and retention. Subscriptions foster ongoing customer relationships and offer continuous access to a product or service.
- Simplicity and ease of budgeting. Subscription billing simplifies the customer experience. Customers pay a fixed amount regularly, making budgeting easier.
- Value bundling and pricing tiers. Subscription models often offer value bundling, combining multiple products or services into a single package at a discounted price. This allows businesses to provide added value and cater to different customer segments.
- Accessibility. Subscriptions grant customers continuous access to a product or service for their subscription period.
- Renewal and cancellation flexibility. Subscriptions allow customers to renew or cancel their subscriptions based on changing needs or preferences, allowing them complete control over their subscription commitments.
Advantages of subscription-based billing
Subscription-based billing brings a lot to the table. For example, by offering subscriptions, businesses can count on a reliable, recurring revenue stream, which provides stability and allows for better financial planning and revenue forecasting.
Customers who subscribe to a product or service are more likely to stay engaged and committed to the brand, resulting in increased loyalty and higher customer retention rates.
Subscription billing simplifies the customer experience by providing a predictable monthly cost. Customers can easily budget for the subscription fee, eliminating the need to make individual purchase decisions regularly.
Limitations of subscription-based billing
While subscription-based billing offers several advantages, it’s essential to be aware of certain limiting factors, including:
Potential revenue fluctuations. If a business heavily relies on subscriptions, revenue fluctuations may occur if there are unexpected customer cancellations or a decline in new subscriptions. It’s crucial to diversify revenue streams to mitigate this risk.
Flexibility in accommodating usage variations. Subscription models can struggle to address customers’ varying usage needs. Some customers might feel limited by fixed subscription plans that don’t align with their requirements.
Balancing pricing and value perception. Setting the right subscription price can be challenging. Finding the balance between a price that accurately reflects the value of your offering while remaining attractive to customers is essential.
Use cases for subscription-based billing
Subscription-based billing can be a suitable choice for various businesses and industries, including:
- Simple SaaS solutions: Offering subscription-based access to software tools and platforms is standard in the SaaS industry, especially when the product is less complex or only has a few core users.
- Media and entertainment: Streaming services, news outlets, and digital content providers often utilize subscription models to offer ongoing access to their content.
- E-commerce: Some businesses offer subscription boxes or services where customers receive regular shipments of curated products or exclusive perks.
Factors to consider in choosing the right billing model
Now that we’ve explored the characteristics and advantages of both consumption-based and subscription-based billing, let’s discuss the factors you should consider when choosing the right model for your business. Before choosing one or the other, evaluate whether your product or service is better suited for consumption- or subscription-based billing. Consider factors like frequency of use, demand patterns, and the ability to track usage accurately.
You must understand your target market and their preferences. Some customers may appreciate the flexibility of consumption-based billing, while others may prefer the simplicity and convenience of subscriptions.
Consider scalability carefully at the outset. If the organization anticipates significant growth or seasonal variations in demand, consumption-based billing might provide the necessary flexibility. However, subscription-based billing may be more suitable for a stable customer base and a predictable market.
Be sure to also take time to analyze the impact of each billing model on operational processes and cost structure. Ensure that the chosen model aligns with existing systems and resources.
Lastly, never ignore the competition or industry norms! If consumption-based billing is becoming the industry standard, adopting it can give you a competitive edge. Conversely, if subscription-based billing is widely accepted, it may be a safer option.
Best practices for successful billing implementation
Regardless of the billing model you choose, there are several best practices to ensure successful implementation:
- Conduct market research and customer analysis. Do you fully understand your target market’s preferences, pain points, and willingness to adopt new billing models? Gather insights through surveys, interviews, and market analysis.
- Design pricing and packaging strategies. Develop pricing plans and packaging strategies that align with customer needs and maximize the perceived value of your offering. Consider offering different tiers or add-ons to cater to various customer segments.
- Leverage technology and billing platforms. Invest in robust billing technology and platforms supporting your chosen billing model. Automation and integration capabilities can streamline your billing processes while enhancing the customer experience.
- Communicate value and manage customer expectations. Be sure to prioritize transparency and clearly communicate the benefits and value of your chosen billing model. Manage customer expectations by providing clear, accessible pricing information and directly addressing customers’ concerns.
7 important considerations for RevOps teams
If you’re in RevOps, the billing model you choose directly affects your ability to forecast revenue, align GTM teams, and scale operations without chaos. Whether you’re leaning toward consumption or subscription billing, you need to evaluate the downstream impact across every stage of the revenue engine.
Here’s what you need to think through:
1. Revenue forecasting accuracy
Your CFO expects precision. Your CRO builds plans off your pipeline. If you miss, everyone feels it.
Subscription billing gives you stability. You know what revenue is coming in next month. You can model churn, upgrades, and renewals with reasonable confidence. You can set targets, align quotas, and make hiring decisions without second-guessing the math.
Consumption-based billing? It’s a different beast. Usage fluctuates. One customer’s bill might double overnight. Another might drop to zero. That unpredictability makes ARR projections less reliable, especially in early-stage or fast-scaling companies.
To get it right, you’ll need:
- Historical usage trendlines
- Seasonality modeling
- Real-time analytics and anomaly detection
- A forecasting model that accounts for both committed and variable revenue
And you’ll need to remind execs that “committed revenue” and “expected usage-based revenue” are not the same thing.
2. Sales compensation and deal structures
Billing models directly shape how your sales team sells and how you pay them.
Subscription billing is clean. Sales reps quote a fixed price, close the deal, and get comped on ARR. Quota attainment is easy to track, and deal reviews are simple.
Consumption billing complicates that. Deals might start small, with usage growing over time. That means less upfront revenue, and fewer clear signals for when to comp reps. You’ll need to rethink incentives:
- Do you pay on projected usage?
- Do you wait and pay once usage ramps?
- How do you handle renewals or expansion?
It also affects deal structure. With subscription pricing, sales can bundle features, offer annual discounts, and sell multi-seat licenses. With consumption, sales needs to explain pricing metrics, usage tiers, and overage fees. They’re selling value and potential—not just access.
3. Tech stack readiness
Can your billing system handle granular usage tracking, real-time metering, and flexible invoicing logic?
Consumption billing requires more advanced infrastructure. Think metering tools, CPQ integration, and billing automation.
Subscription models are easier to manage. This is the case even with legacy systems because customers pay the same amount each month on a fixed cycle and can upgrade/downgrade tiers or add other fixed costs, neither of which are that complicated.
4. RevOps metrics that matter
LTV, CAC, NRR, payback period, churn; these all shift depending on your billing model.
Subscription billing simplifies reporting. You know your MRR. You can calculate CAC payback and LTV with high confidence. Forecasting churn is easier because you have clear contract terms.
The tradeoff is that it hides product underutilization. A customer might be paying every month but getting no value. That creates false positives in your health scores.
Consumption billing makes the data noisier, but richer. You see exactly who’s using the product, how often, and how much value they’re getting. That’s gold for NRR growth because high usage leads to higher bills, with no upsell motion required.
It makes traditional metrics harder to pin down, though. LTV fluctuates. CAC payback lengthens if deals start small. You need more advanced cohort analysis to understand true account health.
Churn also changes. In subscription models, churn is binary: (a) renewed or (b) didn’t. In consumption, customers can quietly fade. Usage drops before revenue does. That gives you earlier warning signs (if you’re tracking the right signals).
5. Customer experience and expectations
RevOps leaders sometimes forget that billing is part of your product experience, even if it doesn’t live in the product UI.
Subscription pricing is easy to understand. Customers know what they’ll pay every month.
Consumption pricing demands more education. You’ll need clear usage dashboards, alert systems, customer-facing tracking mechanisms, and ultra-transparent pricing docs and customer invoices to avoid surprise charges.
6. Scalability and operational load
As your company grows, so does the pressure on your ops infrastructure. Billing processes can be huge friction points for your finance team.
Subscription models are lighter operationally, especially at scale. Billing cycles are predictable, invoicing is automated, and disputes are rare. Even if your customer base doubles, you can expect it to stay that way.
Consumption models are not. They bring with them support tickets (“Why was I charged this much?”), billing disputes, and pressure on your analytics stack.
7. Flexibility to test hybrid models
You don’t need to choose one model and stick with it forever. In fact, RevOps teams need to build in flexibility from the start, because pricing evolves as your product matures.
Hybrid billing gives you room to experiment. You can start with a flat base subscription to cover fixed costs, then layer in usage-based or seat-based pricing as your product becomes more complex. Or, you could offer modular add-ons tied to consumption. This approach gives your customers options (and gives your team data).
You’ll learn:
- How much value customers get before they churn
- Where usage spikes and where it plateaus
- Which pricing mechanics actually drive expansion
A platform like DealHub Subscription Billing supports basic subscription management, as well as the complex billing logic, clearer customer communication, and tighter coordination across RevOps, Finance, and Product you need to implement consumption-based models.
Which billing model is right for your business?
Deciding how to choose the right billing model ultimately depends on your unique business needs and goals. Consider the nature of your product or service, target market preferences, scalability, operational considerations, and industry standards to weigh both options. In some cases, a hybrid model or a custom solution that combines consumption-based and subscription-based billing elements may be the ideal choice.
At the end of the day, your billing model can significantly impact your revenue and customer relationships. That’s why it’s crucial to take the time to evaluate all options, conduct thorough research, and consider seeking expert advice if needed. Once you’ve done the legwork, choose the billing model that best aligns with your business to ensure success in an ever-evolving marketplace.
