Usage-based billing for SaaS companies: How it works and best practices

Today, static pricing models are rapidly becoming obsolete. Did you know that the percentage of SaaS companies using usage-based pricing has surged from 27% in 2018 to 41% by 2023? 

This shift underscores a critical trend: Customers expect pricing to align precisely with the value they receive. To stay competitive and drive growth, understanding and implementing effective usage-based billing is essential. 

Read on to learn:

• How usage-based billing works and its strategic advantages for SaaS businesses
• The key challenges of managing usage-based billing and practical solutions
• Best practices for automating your billing process and selecting the right tools
• Real-world examples of SaaS companies using usage-based models

Let’s get started by explaining what usage-based billing means.

What is usage-based billing?

Usage-based billing is a pricing model where users pay based on their actual usage of a product or service, rather than a fixed fee. Also known as a consumption-based pricing model, this approach confirms businesses charge only for what customers consume, making it a fair and scalable option.

This model is widely used across industries, including SaaS organizations, GenAI, cloud services, telecom, and API-driven businesses, where usage fluctuates based on customer needs. Companies implementing usage-based billing software can align their revenue with customer engagement, ensuring they only pay for the resources they use.

A key component of the usage-based pricing model is value metrics — specific activities or usage patterns that determine billing. 

For example, a streaming platform might charge based on hours watched, while a cloud storage provider bills for the amount of data stored. By defining these metrics, businesses can maintain transparency and profitability while offering customers flexibility.

Note: We’ll share a chart later with examples of companies using this model.

What are the different types of usage-based pricing models?

The usage-based billing model can take different forms, such as pay-per-use, tiered pricing, volume-based pricing, prepaid usage plans, and overage fees. Here’s a quick rundown of each of these. 

Now, although many people confuse usage-based billing with subscription billing, they’re actually very different.

Usage-based billing vs. subscription pricing

While both models provide structured pricing, usage-based billing and subscription pricing differ in flexibility and cost predictability. Let’s take a closer look:

• Usage-based billing adjusts costs based on actual consumption, making it ideal for businesses with fluctuating usage patterns. Customers benefit from paying only for what they use, which can reduce waste and improve cost efficiency.
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• Subscription pricing, on the other hand, charges a fixed recurring fee for access to a product or service, regardless of how much a customer uses it. This model offers predictability and stability, making budgeting easier for both businesses and customers.

Benefits of usage-based pricing for SaaS companies

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

• Revenue alignment with usage: Usage-based pricing directly correlates a company’s revenue with customer consumption, creating a dynamic where increased customer engagement leads 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 pricing models 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 pricing 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.

What’s driving the shift to usage-based pricing?

Having explained the benefits of using this pricing model, let’s look at why SaaS companies are using it more and more:

• Subscription fatigue: Most subscription models often require upfront commitments, whether or not customers fully use the service. 
  
  With software automation, AI, and API-driven products reducing human involvement, the classic per-seat subscription model is becoming less relevant. Customers now expect pricing to align with actual usage, driving the move toward usage-based models.

• Revenue diversification: SaaS businesses are seeking ways to expand their revenue streams beyond static subscriptions. The percentage of SaaS companies using usage-based pricing increased from 27% in 2018 to 41% in 2023. 
  
  While pure usage-based pricing has slightly declined, hybrid pricing models — blending subscription and usage-based elements — are becoming the dominant approach.

• Greater fairness and flexibility: Customers want to pay based on the value they receive. Usage-based pricing eliminates unnecessary costs, providing a more transparent and fair pricing structure that adapts to different customer needs.
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• Scalability with customer growth: As customers scale, their usage increases naturally. This usage increase allows SaaS companies to grow revenue organically as customer demand expands, without forcing premature upgrades or contract renegotiations.

Note: Read our dedicated post for more on how to do usage-based pricing right.

How consumption-based pricing increases revenue

Beyond improving fairness and flexibility, consumption-based pricing can directly enhance revenue generation. Here’s how:

• Lower barriers to entry: Usage-based models allow customers to start using a product at a lower cost, since they can try out the product on a few use cases and see the results. This helps to increase adoption rates and drive more conversions.
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• Built-in expansion revenue: Unlike fixed-fee models, usage-based pricing scales with customer success. As customers derive more value, their usage increases, leading to organic revenue growth.
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• Increased total addressable market (TAM): By eliminating rigid seat-based pricing, SaaS companies can reach a wider audience, including those who were previously priced out of high-cost subscription tiers.
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• Upselling and cross-selling opportunities: Usage-based models naturally encourage product exploration. As customers use more features, they become more likely to upgrade or purchase additional services.

SaaS companies that benefit from using 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 businesses, highlighting how they incorporate this billing model and the key benefits they offer.

Benefits of usage-based billing for customers

Just as usage-based billing can help companies, it can also be a good model for customers too. 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 or seats 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 and aligning cost with the value that customers get.

How usage-based billing works, step by step

Usage-based billing adapts to customer consumption in real time. This dynamic approach requires a structured process that accurately tracks usage, applies the right pricing logic, and generates invoices without friction. Here’s how it works.

Step 1: Tracking customer usage

The foundation of any usage-based billing system is precise tracking. Businesses need a way to monitor how much of a service each customer is consuming, whether it’s API calls, cloud storage, marketing contacts, or AI processing time. 

This tracking happens through backend integrations, event monitoring, or third-party ingestion tools. Accuracy is critical — errors at this stage can lead to inaccurate charges and disputes down the line. The most accurate usage-based billing solutions use a raw event architecture that ingests all usage data and doesn’t drop events. 

Step 2: Assigning pricing based on usage

Once customer usage data is collected, the system applies the appropriate pricing model. Some companies charge a fixed rate per unit, while others offer tiered or volume-based pricing, where the cost per unit decreases as usage increases. 

Prepaid credit systems and overage charges also come into play for businesses that want to give customers flexibility while keeping predictable revenue streams.

Hybrid models, like Zapier’s mix of subscription and usage-based pricing, add an extra layer of complexity. Here, the system must correctly apply both base subscription fees and variable charges based on additional consumption.

Step 3: Calculating and validating charges

After usage data is processed through the pricing structure, the system calculates the total amount owed. Automated checks flag anomalies, such as unusually high charges that might indicate an error or unexpected customer behavior.

For companies offering hybrid pricing, this step also involves reconciling usage-based charges with fixed subscription fees. Any discounts, free tiers, or promotional offers must also be factored in before the invoice is finalized.

Step 4: Generating and sending invoices

Once charges are validated, the system compiles an invoice summarizing the customer’s usage, itemized costs, and any applicable taxes or adjustments. Invoices must be clear and transparent to avoid customer confusion.

At this stage, businesses may also send notifications about upcoming charges, giving customers a chance to review their usage before payment is processed. Many usage-based billing software solutions automate this entire process, reducing manual errors and ensuring invoices go out on time.

Step 5: Processing payments and handling adjustments

With invoices sent, payment collection begins. Most companies integrate with processors like Stripe, PayPal, or ACH transfers to automate transactions. Some customers opt for auto-pay, while others prefer to review invoices before making a payment.

If a customer disputes a charge, support teams need access to detailed usage logs to resolve issues quickly. Transparent billing practices — like showing real-time usage data — help reduce disputes and build trust.

Step 6: Providing real-time usage insights

Many businesses offer customers live dashboards where they can track their spending, forecast future costs, and set usage alerts. These tools give users greater control over their consumption, preventing billing surprises and helping them adjust their usage as needed.

Step 7: Adjusting pricing over time

Usage-based pricing isn’t static. Over time, businesses analyze customer behavior, market trends, and revenue data to refine their pricing structures. Some companies introduce new tiers to accommodate changing customer needs, while others tweak their overage policies to prevent frustration.

Cloud platforms like AWS and data companies like Snowflake regularly update their pricing models to stay competitive while optimizing revenue. By keeping pricing flexible, businesses can balance customer satisfaction with long-term growth.

How to measure usage-based billing revenue

Start by collecting real-time usage data from customers. Make sure it’s recorded through backend systems or billing software. This data is then multiplied by the applicable pricing structure (whether per-unit, tiered, or volume-based) to calculate revenue for each billing cycle.

Key metrics like average revenue per user (ARPU) and net revenue retention (NRR) help assess financial performance. ARPU reflects the revenue generated per customer, while NRR accounts for expansion revenue from existing users. Businesses should also monitor usage trends to forecast revenue fluctuations and identify potential growth opportunities.

For accuracy and efficiency, most companies use usage-based billing software to automate revenue tracking, generate real-time reports, and reduce manual errors.

Key challenges of managing usage-based billing

While usage-based billing offers adaptability and scalability, it comes with operational complexities that businesses need to address. Below are some challenges, along with solutions inspired by real SaaS companies.

Challenge 1: Tracking and processing large volumes of usage data

SaaS companies that bill based on consumption need robust systems to track customer usage in real-time. Without automated tracking, errors can creep in, leading to incorrect charges and customer disputes.

Solution: Snowflake, a cloud data platform, processes massive amounts of usage data by integrating real-time monitoring with its billing engine. It uses event-driven data pipelines to track consumption and apply pricing instantly. 

SaaS businesses can adopt similar strategies using event-based tracking and usage-based billing software to automate calculations and prevent revenue leakage.

Challenge 2: Revenue unpredictability and forecasting difficulties

Usage-based pricing can result in fluctuating earnings, making it harder to predict cash flow. This pricing model is unlike subscription models with steady recurring revenue. 

Solution: AWS mitigates revenue unpredictability by offering hybrid pricing — a mix of subscription and usage-based charges. 

Customers commit to baseline spending while retaining flexibility for additional usage. SaaS companies can implement minimum spend commitments or tiered pricing models to stabilize revenue while maintaining customer flexibility.

Challenge 3: Preventing customer "bill shock"

Customers may experience unexpected high charges if their usage spikes, leading to frustration and potential churn.

Solution: Twilio addresses this by providing real-time usage dashboards and automated alerts that notify customers when they approach certain thresholds. 

SaaS businesses should implement similar usage notifications and allow customers to set budget caps or auto-upgrade options to prevent negative surprises.

Challenge 4: Complex billing and invoicing

Generating clear and accurate invoices can become complicated, especially with different pricing tiers, volume discounts, and prepaid credits. 

Solution: Orb’s unique raw event architecture ensures usage data is accurate and doesn’t drop events, no matter the scale or complexity of event data. Complex calculations are then applied to this raw event data. As a result, the automated invoices that Orb generates reflect the right price. SaaS companies can simplify their billing operations by integrating automated invoicing tools that calculate charges dynamically and provide customers with detailed billing breakdowns.

Challenge 5: Educating customers on pricing models

New customers unfamiliar with usage-based pricing might struggle to understand how they are billed, leading to confusion and support requests.

Solution: Zapier, which combines subscriptions with pay-as-you-go pricing, provides clear documentation and interactive pricing calculators to help customers estimate costs before committing.

SaaS companies should invest in transparent pricing pages, onboarding tutorials, and customer support resources to reduce friction and improve user adoption.

Remember: For businesses wondering how to manage usage-based billing, tackling these challenges with the right tools and strategies is vital. 

How to automate usage-based billing with best practices

Automating usage-based billing reduces manual work, lowers the risk of errors, and keeps revenue operations running smoothly. Below are key practices to help businesses build a reliable and efficient system.

Use billing APIs to connect data sources

Billing APIs allow companies to sync real-time usage data with their billing system, providing accurate pricing and invoice generation. 

Platforms like Orb provide dedicated usage-based billing software that integrates directly with SaaS products, allowing businesses to calculate charges based on actual consumption without manual input. Orb’s integrations with other tools, such as CRMs, data warehouses, and payment processors, enable automated workflows. Usage can also be tied to customer and other types of data for deeper insights.

Achieve accurate usage tracking with a raw event architecture

Usage-based billing requires precise tracking of how customers interact with a product. Billing solutions with a scalable API and a raw event architecture are able to process large volumes of usage data and do not drop events. This reduces billing discrepancies, since ingesting raw event data ensures accuracy and complex pricing calculations can be easily performed using the raw data.

Enable real-time reporting and automated alerts

Teams across a company need access to live data to monitor customer activity, detect unexpected usage spikes, and manage revenue projections. 

Automated reports and alerts keep both businesses and customers informed, reducing disputes and improving billing accuracy. Setting up notifications for approaching usage limits or billing thresholds helps prevent unexpected charges.

Automate invoice generation and payment collection

Invoices should be generated dynamically, accounting for tiered pricing, discounts, and applicable taxes without requiring manual adjustments. 

Automated payment processing guarantees transactions are handled efficiently, reducing delays and missed payments. Businesses can also offer auto-renewal and flexible payment options to improve customer retention.

Provide security and compliance in billing automation

Billing for usage means handling sensitive financial information. Strong encryption, access controls, and audit logs help businesses stay compliant with regulations while protecting customer data. 

For companies operating in multiple regions, integrating tax compliance tools into the billing workflow prevents miscalculations and regulatory issues.

The most popular usage-based billing solutions

Different platforms offer varying levels of support for usage-based billing. Some focus on basic subscriptions, while others handle complex, dynamic pricing. Below is a quick comparison of Orb, Stripe, Chargebee, and Zuora.

How Orb helps you implement usage-based billing with ease

Implementing usage-based billing shouldn't be a hurdle. Are you struggling with rigid systems that stifle pricing experimentation, inaccurate billing that leads to revenue leakage, or the complexity of scaling your billing infrastructure?

Orb helps SaaS and GenAI companies move beyond these constraints. Trusted by industry leaders like Vercel and Dune, Orb transforms your usage data into a dynamic billing engine. We provide the agility, accuracy, and extensibility you need to drive growth.

Here’s how Orb simplifies usage-based billing:

• Adapt pricing with unparalleled agility: Rapidly change pricing models using Orb RevGraph and the Orb SQL Editor, which empower product teams to launch new pricing strategies without engineering bottlenecks. Use Orb Simulations to test pricing changes with historical data. Then, automate price adjustments for rapid iteration.
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• Bill with absolute precision: Provide error-free billing by ingesting all raw event data into Orb RevGraph, which also keeps a complete audit trail for every calculation. Gain real-time usage tracking for perfect data accuracy and financial reliability.
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• Confidently scale your operations: Orb creates a single source of truth by integrating with your financial stack to combine usage, pricing, and product data. The Orb API supports high-scale data ingestion, and built-in functions like Orb Billing, Invoicing, and Reporting provide a complete solution for seamless operations across the full billing cycle. Comprehensive revenue analytics and customer usage dashboards also empower companies to make informed, data-driven decisions.
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• Benefit from a true partnership: Get dedicated implementation support and industry expertise, with regular business reviews and best practices to realize value quickly. As a trusted leader, Orb guides you in your usage-based pricing journey.

Ready to experience the future of billing? Explore Orb’s flexible pricing options to find one that fits your needs.