What is usage-based billing? Tips on how to implement it

Usage-based billing, used by services like utilities, mobile data plans, and popular platforms such as AWS and Twilio, charges customers based on actual consumption. In this article, we’ll focus on how this model applies to SaaS companies, its benefits, and how to implement it effectively.

What is usage-based billing exactly?

Usage-based billing is a pricing model where customers are charged based on their actual usage of a product or service. Instead of paying a fixed fee, they pay for what they consume, which allows companies to align their revenue with customer engagement and usage.

For SaaS companies, revenue growth directly correlates with customer behavior, offering flexible pricing that aligns with the value customers receive, ensuring they only pay for the resources they use.

A key aspect of this model is value metrics — specific activities or usage patterns tied to the billing structure. 

For instance, a streaming service might charge by the number of hours watched, while a cloud storage company might bill based on the amount of data stored. By defining these metrics, companies can ensure profitability while maintaining transparency and fairness for customers.

Table of contents

With the basics covered, here's what you'll learn next:

• How five popular SaaS companies are using usage-based billing
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• Types of usage-based pricing explained
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• Benefits of usage-based billing for businesses and customers
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• Key considerations for both businesses and customers
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• Whether or not usage-based billing is right for your SaaS company
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• Tips for a successful implementation process
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• How Orb helps you implement usage-based billing with ease

SaaS companies that benefit from usage-based billing

Several SaaS companies have successfully integrated usage-based billing into their pricing models. Below is a comparison of five well-known SaaS offerings, highlighting how they incorporate this billing model and the key benefits they offer. Let’s dive in:

What are the different types of usage-based pricing?

Usage-based pricing — also called consumption-based pricing — lets customers pay according to their actual usage of a product or service. 

The usage-based billing model can take different forms, such as pay-per-use, tiered pricing, volume-based pricing, prepaid credits, and overage fees.

Let’s do a quick rundown of what each one means:

• Pay-per-use: Also called the "per-unit model," customers are charged for each unit of a service they consume. 
  
  For example, Twilio charges users for more than just texts and minutes of calls; it also includes charges for API requests and other services, such as authentication services (e.g., two-factor authentication)

• Tiered pricing: In this model, prices are divided into tiers based on usage. The price per unit can decrease with higher usage, but each tier has a set cost. 
  
  For instance, HubSpot adjusts pricing based on the number of marketing contacts, features, and users, charging according to the selected plan and additional needs.

• Volume-based pricing: Unlike tiered pricing, volume-based pricing applies the same rate to all units, but the price per unit drops as more units are used. For instance, AWS follows this model by lowering the cost per GB as data storage increases.
  
  Do keep in mind that AWS uses a combination of tiered, volume-based, and pay-per-use models across its various services.

• Prepaid credits: Prepaid credits can align with a usage-based billing model. In this case, customers purchase a set amount of credits in advance, and as they use the product or service, those credits are deducted based on their actual consumption. 
  
  The prepaid credits approach provides flexibility for customers who want to manage their spending while still benefiting from a usage-based system, as they are charged only when they use the service. 

• Overage fees: These fees are applied when customers exceed predefined usage limits. As an example, SaaS businesses may impose overage fees when a company exceeds the number of hosts monitored beyond their subscription plan.

Benefits of usage-based billing for businesses

For SaaS companies, adopting usage-based billing offers several strategic benefits. Here’s a breakdown of the main benefits it brings to companies:

• Revenue alignment with usage: Usage-based billing directly correlates a company’s revenue with customer consumption, creating a dynamic where increased customer engagement can lead to higher earnings.
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• Customer retention: By charging customers only for what they use, businesses can enhance perceived fairness and reduce churn. Customers are more likely to continue using services they view as cost-effective.
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• Product adoption and upgrades: Usage-based billing can drive product adoption and upsell opportunities. Customers are more inclined to try new features or services when they know they’ll only pay for actual use, leading to broader product engagement.
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• Customer satisfaction: A billing model that adapts to the specific needs of customers builds trust and fosters loyalty. Customers feel they’re receiving value for their money, which boosts satisfaction.

Benefits of usage-based billing for customers

Just as usage-based billing can help companies, it can also be a good model for customers. Let’s take a look at three key benefits for users:

• Cost efficiency: Customers can scale their costs according to their needs, avoiding unnecessary expenses on services they don’t use.
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• Control and flexibility: This model offers customers the ability to adjust their service usage without being locked into fixed plans, giving them more control over their expenses.
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• Transparency and fairness: Usage-based billing offers transparency, fostering trust between customers and service providers by clearly showing spending details.

Key considerations for both businesses and customers

While usage-based billing offers numerous benefits, both companies and customers should be aware of the potential challenges that come with this model. Let’s look at these considerations from both the company’s and the customer’s side: 

For businesses

• Operational difficulty: Implementing and managing an accurate usage-tracking system can be technically demanding, especially for businesses using in-house solutions.
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• Revenue variability: Fluctuations in customer usage may lead to unpredictable monthly revenues, complicating financial planning.

For customers

• Risk of bill shock: Unexpected usage spikes may lead to higher-than-anticipated costs. Clear communication, monitoring, and notification systems can help manage this risk.
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• Complex billing: Customers may need to actively track their usage to avoid surprises. Understanding the billing metrics can be time-consuming.

Is usage-based billing right for your SaaS company?

So, now you know what usage-billing is and how it impacts both companies and customers. But before making the switch, you need to assess if usage billing actually fits your specific SaaS company’s value proposition. 

Here are some factors to consider:

Value metrics

For a usage-based billing model to be effective, your SaaS company must be able to define and measure clear value metrics that accurately reflect how customers use and derive value from your product.

Consider these points:

• Suitable for: SaaS startups that offer products with easily quantifiable metrics (e.g., data usage, API calls). These companies can implement usage-based billing smoothly, as they can clearly link costs to value.

• Not suitable for: Companies whose products don't have straightforward metrics for usage or value. If quantifying product usage or customer value is ambiguous, sticking to traditional subscription models may prevent billing complexities and customer confusion.

Customer usage patterns

Understanding and having clear actionable data on how your customers use your product is more than crucial. Significant variability in usage among customers might make usage-based billing more equitable and appealing, so usage-based billing is: 

• Suitable for: Companies who have data-driven insights into a wide range of usage patterns among their customers. Variability in customer usage patterns means that a usage-based model can more fairly allocate costs, keeping customers happy and subscribed. 

• Not suitable for: SaaS businesses with customers who use the product uniformly. For these companies, the simplicity and predictability of subscription models likely outweigh the benefits of usage-based billing.

Resource allocation

Resource allocation is key to efficiently managing a SaaS company's costs. Usage-based billing ensures that costs align with the actual resource use, which is ideal when a few users consume the most resources. 

Think about these pros and cons in terms of resource allocation:

• Suitable for: Companies with uneven resource use among customers. For instance, if 20% of users are consuming 80% of your resources, usage-based billing enables accurate billing for those heavy-usage customers. 
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• Not suitable for: Businesses with consistent resource usage across customers. If operational costs aren't driven by a few heavy users or if tracking and billing by resource use isn't cost-effective, a simpler billing model may be better.

Scalability of product features 

Products that allow customers to adjust their usage dynamically align well with usage-based billing. For example, this billing model is:

• Suitable for: SaaS companies offering flexible, scalable solutions like cloud storage or API-based services. These products naturally fit with usage-based models, as customers can easily see the link between usage and costs.

• Not suitable for: Products with fixed features that don't scale easily with customer needs. For these companies, a subscription model may provide the stability and predictability that both the business and its customers prefer.

Variation in user-perceived value

Usage-based billing can be particularly equitable for products whose value varies widely among users. This means a wider range of customer types can click with your value proposition and monetization model.

Ask yourself if:

• Suitable for: SaaS companies whose products offer varying levels of value to different users. In such cases, usage-based billing can ensure fairness for both high and low-demand users. 

• Not suitable for: Companies whose SaaS products deliver uniform value to all users. Here, a subscription model might be simpler and more efficient, avoiding the need for complex billing calculations.

Customer satisfaction

Ultimately, your customer's perception of your billing model can significantly impact satisfaction and loyalty. Understanding customer preferences regarding billing models is key here. 

Consider the following:

• Suitable for: Companies whose customer base values flexibility, transparency, and the fairness of paying only for what they use. If your customer research indicates a preference for usage-based billing, adopting this model could boost satisfaction and increase chances of retention.

• Not suitable for: Businesses with customers who prefer the simplicity and predictability of subscription fees. If your market research shows that your target customers value budgeting predictability over flexibility, sticking to a subscription model may better meet their needs.

Tips for a successful implementation process

To successfully implement usage-based billing, keep these best practices in mind:

• Understand your customers: Analyze customer usage patterns to identify critical metrics and set pricing that reflects the value they get.
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• Set clear pricing: Develop a clear, flexible pricing structure based on customer-perceived value — including a base rate with incremental fees for additional usage. 
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• Invest in the right tech: Use a platform like Orb, a usage-based billing software that is specially designed for usage-based billing models.
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• Educate your customers: Clearly explain how pricing operates and how charges are determined by their specific usage. Use different use cases as examples to help customers anticipate their expenses.
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• Monitor and adapt: Regularly review your pricing strategy's effectiveness and be proactive in refining rates or introducing new offers to better align with market demands.
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• Offer flexible packages and add-ons: Cater to different customer needs. Provide a range of tiered options and additional features for extra fees. 

How Orb helps you implement usage-based billing with ease

You’re ready to start the implementation process — but doubt sets in, and some key questions start to pop up in your head:

“How do I track customer usage accurately?”

“How do I integrate data with my billing system?”

“Will my billing system handle large influxes of data?” 

We get it — finding the answers to these questions on your own can be quite hard.

Fortunately, Orb knows that — though it can be difficult to implement a usage-billing model for your business, it doesn’t need to be like that. 

Orb is a done-for-you solution specifically designed for usage-based billing. Leading companies like Perplexity and Vercel entrusted Orb with building their pricing engine and were delighted by Orb’s all-encompassing billing solution. 

Orb makes every step toward full implementation easier — here’s how:

• Integration setup: Upon signing up, Orb's robust APIs and integrations make it easy to ingest usage data tracked by your app or data warehouse. With integrations to S3 and Segment as well as Orb’s REST API, you’ll be up and running in just a few minutes. 
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• Custom metrics definition: Orb's flexible metric customization accommodates a wide range of measurable usage patterns. Anything from API calls to storage-used can be easily tracked and billed by Orb in seconds. 
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• Pricing plan creation: Whether you opt for per-unit pricing or tiered rates based on usage thresholds, Orb’s Plan Builder feature helps you define intricate pricing strategies tailored to different customer usage patterns with ease — without coding. 
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• Automated billing process: Orb automates the entire billing cycle, from usage tracking to invoice generation. This includes calculating fees, applying discounts, and handling billing adjustments.
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• Offering transparency: With usage-based billing software like Orb, customers have their own dashboards, providing them with real-time visibility into their usage data and incurred expenses. 
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• Reporting and analytics: Orb’s comprehensive reporting tools help you analyze usage trends, billing accuracy, and revenue generation. Key insights for swift decision-making are always readily available. 
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• Plan adjustments and updates: Orb enables you to adjust and update pricing plans in response to market demands, customer feedback, or strategic shifts. Its flexible platform allows for quick changes without disrupting the billing process at any point. 
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Ready to take Orb for a spin and discover how it can help you implement a usage-based billing engine? Check out our 30-day free trial and get firsthand experience with our billing platform.