What is Usage-Based Pricing?

Usage-based pricing (UBP) is a pricing model that allows customers to pay for products or services according to the amount they consume or use. This approach is replacing traditional subscription- and seat-based pricing models, especially for software as a service (SaaS) products.

Usage-based digital pricing models allow customers to start at a low price, attracting more customers to use the service while the business monetizes its customers’ product use over time. Usage-based pricing models are becoming more common as companies move to subscription models. This pricing type can benefit both the customer and the company.

Synonyms

Pay-as-you-go
Tiered pricing
Consumption-based pricing
Consumption-based billing
Metered services

Common Usage-Based Pricing Models

Pay-as-you-Grow

The Pay-as-you-Grow (or pay-as-you-go) pricing model allows businesses to only pay for the resources they use. This type of pricing can be beneficial for companies with fluctuating or unpredictable resource needs. Pay-as-you-Grow pricing typically includes a baseline level of service that is provided at a lower cost. Then, as a company’s needs increase, it can pay for additional resources. Business sectors such as Cloud computing, storage, and SaaS often use this pricing model.

Per-Unit Pricing

Per-Unit pricing, also known as price-per-unit, is a form of pricing in which goods and services are sold based on their unit price, and customers are charged a fixed fee per unit of resource consumed.

Usage Tiers

Usage tiers involve charging different prices for different levels of usage. Usage tier pricing is becoming increasingly popular because it enables companies to tailor their pricing to different types of users. In addition, it allows customers to purchase a level of service and scale their use as needed.

Per-Active-User Pricing

In this model, customers are charged based on the number of users who actively engage with the product during a billing period. Unlike traditional seat-based pricing, where companies pay for a fixed number of licenses regardless of usage, per-active-user pricing offers more flexibility and cost efficiency. It’s especially popular in SaaS platforms that aim to align pricing with actual customer engagement.

Drawdown Model (Prepaid Usage)

The drawdown model allows customers to prepay for a set amount of usage, such as credits, transactions, or compute time, which they consume over time. As usage occurs, the balance is reduced until it’s replenished or exhausted. This model is often used in API-based services, data platforms, and marketplaces where usage may vary month to month but customers prefer upfront budgeting and cost control.

Overage Pricing

Overage pricing combines a base plan with a fixed usage limit and charges customers additional fees if they exceed that limit. It’s commonly used in telecommunications, cloud services, and software subscriptions. This model ensures predictable base revenue while giving customers flexibility to scale usage as needed.

The Trend Toward Usage-Based Pricing

There is a growing trend toward usage-based pricing. TechCrunch surveyed about 600 SaaS companies to learn how they priced their products in 2021. According to their State of Usage-Based Pricing Report, 45% of SaaS companies had a UBP model in 2021, up from 34% in 2020 and 30% in 2019.

Whether for utilities like water and electricity, or services like cloud storage and internet service, more and more companies are adopting this billing model. Usage-based pricing allows companies to offer flexible billing options without requiring long-term contracts. This flexibility makes it easier for customers to scale up and down as needed and enables them to make changes quickly based on market conditions.

Agility

Pricing agility is one of the best features of usage-based pricing. For start-ups or small and medium-sized businesses, the lowest tier of a product or service usually meets their needs. However, access to more products or services may be necessary as the business grows. This is where usage-based pricing comes into play. Instead of upgrading a product or service because it no longer meets a customer’s needs, a business can simply add usage tiers or pay for each additional unit used.

Affordability

Usage-based pricing can make your product more affordable for your customers. By charging based on usage, you can offer a lower price point for customers who use your product less frequently. This can be a great way to attract new customers or keep existing customers happy.

Minimal Commitment

Usage-based pricing requires less commitment from customers. This type of pricing is often used for services that are used infrequently or by businesses with uncertain usage patterns. As a result, customers can save money and avoid overpaying for services they may not use often.

Boost Revenue with Usage-based Pricing

A usage-based pricing strategy offers several advantages impacting revenue, including shorter buying cycles, increased customer satisfaction, reduced churn rates, and greater investor appeal.

Shorter Buying Cycles

A usage-based pricing model can create shorter buying cycles, as customers are more likely to purchase a product or service when they know they will only pay for what they use. On the other hand, UBP may discourage customers from using a product or service if they are unaware of the pricing structure, so it’s crucial to be transparent about pricing during the sales process.

Increased Customer Satisfaction

There are a few key reasons why usage-based pricing can benefit customers and increase customer satisfaction.

It’s flexible – customers only pay for what they use, so they don’t have to worry about overpaying for services they don’t need.
It encourages conservation – customers who know how much they’re using (and how much it costs) are more likely to be conscious of their consumption and cut back where possible. This can lead to long-term cost savings.
It’s transparent – customers always know how much they’re paying, and there are no hidden fees or surcharges. This can help build trust and confidence in a business.
It’s easy to understand – usage-based pricing can greatly increase customer satisfaction by offering a more flexible, transparent, and easy-to-understand pricing model. Higher customer satisfaction leads to lower churn rates.

Appealing to Investors

Usage-based pricing can be appealing to investors for several reasons. First, it can help increase customer lifetime value, as customers using a product more often will likely stick around for longer, which increases revenue over time.

Second, as mentioned above, usage-based pricing can help increase customer satisfaction and lower churn rates. Third, usage-based pricing can help to attract new customers, as it can be a more affordable option than other pricing models. Growth in the customer base can lead to increased revenue growth.

The Benefits of Usage-Based Pricing

A few benefits of usage-based pricing were discussed above. Let’s expand on some of these:

Expands Customer Base

For businesses, usage-based pricing can be a great way to attract new customers who may be hesitant to commit to a traditional subscription. By offering a usage-based option, businesses can show potential customers that they’re flexible and willing to meet their needs. In addition, usage-based pricing can help businesses expand their customer base by appealing to a wider range of customers.

Cost Scale with Users

Another core benefit of UBP is that it allows customers to test your product or service at a reduced cost. Customers can spend money when they have it or when their budget increases. The main advantage of this strategy is that the more money your customer makes with your product, the more they can invest back into it.

Higher Customer Retention

The element of flexibility is critical to this pricing model. Greater flexibility leads to higher customer retention because no customer wants to feel trapped in a long-term service or contract. In addition, providing customers the opportunity to spend according to their needs and consumption yields higher customer loyalty.

Which Products and Services are Best for Usage-Based Pricing

When deciding to offer UBP, the primary factor to look at is whether or not your products and services are scalable. Here are some examples of the types of products and services that are well-suited to UBP.

Some examples of products and services that work well with usage-based pricing are:

Software as a Service (SaaS) providers often charge for their services using usage-based pricing. This pricing type can benefit companies with high volume usage or the need to scale their usage up or down quickly. SaaS providers offering usage-based pricing include Zapier, Adobe Creative Cloud, and Slack.
Infrastructure as a Service (IaaS) providers also use a usage-based pricing model. Examples include Amazon Web Services, Google Cloud Platform, and IBM Cloud.
Telecommunications companies often use usage-based pricing. Examples are AT&T, Verizon, and Sprint.
Utility companies use this pricing model. Examples include electric, water, and gas companies.
Other products and services work well with usage-based pricing, including cloud storage, web hosting, and online backup services.

How to Implement Usage-Based Pricing in Your Organization

Operationalizing usage-based pricing requires more than a new pricing model; it demands alignment across systems, teams, and go-to-market strategy. This phased roadmap will help RevOps and SalesOps leaders implement UBP effectively:

Assessment Phase

Evaluate whether UBP is a strategic and operational fit.

Product suitability: Can the product or service usage be measured accurately and consistently?
Customer readiness: Will customers understand and accept a variable billing model?
Revenue implications: Will UBP increase customer lifetime value, retention, or account expansion?

Usage-Based Pricing Design

Define how you’ll monetize usage in a way that’s scalable and aligned with value delivery.

Choose pricing metrics: Examples include API calls, data usage (GB), transactions, minutes, or users.
Set pricing tiers: Will you use a pay-as-you-go model, tiered usage, or a hybrid subscription + usage model?
Incentivize expansion: Structure pricing to encourage higher usage and upsell opportunities.

Systems Integration

Ensure your tech stack can support real-time tracking and billing. Usage-based pricing software becomes essential here.

Data capture: Collect usage data from product telemetry or third-party systems.
Billing integration: Sync usage data with your billing platform to generate accurate, timely invoices.
CRM and CPQ sync: Feed usage data into CRM and CPQ systems to support account visibility and quoting.

Testing and Validation

Run controlled pilots or shadow billing before full rollout.

Internal testing: Validate pricing logic and system workflows using sample data.
Customer pilots: Offer the new pricing to a select group to gather feedback and uncover edge cases.
Revenue recognition checks: Confirm compliance with ASC 606 by ensuring usage data is tracked and recognized properly.

Go-to-Market Rollout

Roll out UBP across the sales organization and customer base.

Enablement: Train GTM teams on new pricing structures, customer conversations, and quoting tools.
Customer comms: Clearly communicate how usage is tracked and billed to avoid surprises.
Sales strategy alignment: Equip sales teams with insights on how UBP supports land-and-expand motions.

Ongoing Optimization

Monitor performance, gather insights, and iterate.

Track metrics: Monitor revenue, churn, product usage patterns, and expansion rates.
Refine pricing: Adjust pricing tiers or metrics based on customer behavior and market trends.
Scale automation: Continue automating usage tracking, billing, and reporting as you grow.

This roadmap helps ensure your UBP model is not only well-designed but also fully integrated into your GTM operations, enabling predictable revenue and scalable growth.

Cross-Functional Requirements for Successful Usage-Based Pricing

Successfully implementing usage-based pricing requires strong coordination across teams. Each function plays a vital role in making the model work smoothly, both operationally and for the customer.

The product team defines which customer behaviors can be measured and monetized. They’re responsible for setting clear, trackable usage metrics that reflect customer value and ensuring the product supports reliable metering from the start.

Engineering and data teams build and maintain the infrastructure that captures and shares usage data. They ensure data is accurate, real-time, and integrated across platforms like billing, CRM, and CPQ, which is essential for billing precision and customer trust.

Finance and accounting translate usage into billable revenue while ensuring compliance with standards like ASC 606. They also update forecasts and reporting to reflect the variable nature of usage-based revenue and help define billing rules that match real-time consumption.

Customer success teams help customers understand how pricing ties to their usage and guide them on how to manage their spend. They monitor usage patterns to spot potential issues early and share insights back to internal teams to improve pricing and product design.

Finally, sales and revenue operations are responsible for operationalizing UBP in the field. They equip sales teams with the right tools, templates, and messaging, while ensuring that systems and processes, such as quoting and forecasting, support variable revenue models.

When these teams are aligned, UBP becomes much easier to implement and scale, creating a more seamless experience for the business and its customers.

How Usage-Based Pricing and CPQ Drive Revenue Efficiency

Implementing usage-based pricing can be complex, but with the right tools, it becomes scalable and manageable. Configure, Price, Quote (CPQ) software plays a critical role in operationalizing UBP by bringing structure and automation to the quoting and pricing process.

With CPQ, your sales team can generate accurate quotes quickly, even when pricing is based on variable usage metrics like API calls, data volume, or time spent. CPQ platforms also ensure that pricing rules, discount approvals, and quote logic are applied consistently and in line with company policies.

DealHub CPQ is built to support modern pricing models like UBP. It integrates seamlessly with your CRM, connects to your product and service catalog, and includes a recommendation engine to guide reps toward high-value upsells and cross-sells. With DealHub, businesses can create flexible pricing tiers, align quotes with customer usage patterns, and ensure billing is accurate and transparent.

Combining usage-based pricing with CPQ and subscription management improves pricing agility, enhances the customer experience, and drives predictable revenue growth in a variable consumption environment.

People Also Ask

What is the difference between the subscription and the usage model?

A subscription-based p ri cing model is a payment structure that allows a customer or organization to purchase or subscribe to a vendor’s services for a specific time for a set price.

Usage-based pricing is a consumption-based pricing model in which customers are only charged when they use a product or service.

How do you sell usage-based pricing?

When selling a product or service that uses a usage-based pricing model, it’s important to be upfront about the pricing structure. This will help avoid any confusion or frustration later on. Explain how the pricing works and what customers can expect to pay. You should also provide examples of how the pricing would work in real-world scenarios.

What are the disadvantages of usage-based pricing?

Usage-based pricing can be a good option for some companies, but it is not without its disadvantages. Usage-based pricing can be challenging to implement and administer because you need to track usage data for each customer and determine the prices based on that usage. This can be time-consuming and difficult to do accurately.

Additionally, customers may be surprised and frustrated by their bills. Usage-based pricing can lead to lower product or service consumption if the customer is trying to keep costs to a minimum.

How does Usage-Based Pricing affect revenue recognition under ASC 606?

Under ASC 606, revenue recognition for usage-based pricing models falls under the category of variable consideration, which is recognized only when it is no longer constrained. This means a company can’t recognize revenue until it can reliably estimate the amount of usage or until the usage actually occurs.

For UBP models, revenue is typically recognized in the period when the usage happens, because the actual usage data provides the most accurate and reliable measure of what the customer owes. For example, if a customer consumes cloud storage services in March, the revenue for that usage is recognized in March—even if they are invoiced later.

Key considerations:
– Performance obligation: Fulfilled as the service is consumed.
– Constraint on variable consideration: Companies must be careful not to overestimate future usage.
– Invoicing vs. revenue recognition: These may be decoupled; invoicing can be delayed or batched, but revenue is tied to actual consumption.

To stay compliant and streamline recognition, many companies use automated billing systems integrated with CPQ and revenue recognition software, especially when usage data comes from multiple systems or fluctuates significantly.

What is usage-based pricing software?

Usage-based pricing software is a specialized type of billing and revenue management tool that enables companies to charge customers based on how much of a product or service they actually use. Instead of charging a flat fee or tiered subscription, this software tracks real-time usage data, like API calls, gigabytes of data, compute hours, or transactions, and translates that data into accurate, automated invoices.

UBP software integrates with a company’s product, data infrastructure, CRM, and billing systems to meter customer activity, apply pricing rules, generate usage reports, and handle revenue recognition. This ensures that pricing is transparent, billing is accurate, and finance teams remain compliant with accounting standards like ASC 606.

Modern UBP software often includes features like customizable pricing models (e.g., pay-as-you-go, volume-based, tiered usage), usage dashboards for internal and customer visibility, billing automation, and predictive analytics to forecast revenue. It’s especially valuable for SaaS, cloud, and API-driven businesses that want to align pricing with customer value while scaling operations efficiently.