What is usage based billing? Tips on how to implement it in 2025

Usage based billing offers a dynamic approach to pricing, aligning costs with actual customer consumption. This model, particularly beneficial for SaaS and GenAI businesses, replaces fixed fees with charges based on usage, fostering transparency and scalability. 

Implementing this billing model requires careful planning and the right tools, like subscription management software that integrates seamlessly with your billing platform. This post will cover what usage based billing is and how to use it effectively.

Read on to learn:

• The various types of usage based pricing and their applications
• How to implement a robust usage based billing system
• The benefits and challenges of this model for both businesses and customers
• About real-world case studies of usage based billing implementation and the results

Let’s get started by addressing the elephant in the room.

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.

Unlike fixed seats-based pricing, where customers pay a set amount regardless of usage, with consumption billing customers are only charged for what they actually use. This approach can be particularly effective for SaaS and GenAI companies, where revenue growth is tied directly to how actively customers interact with the product.

The importance of value metrics and other considerations

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

For example, a cloud storage provider may charge based on the amount of data stored, while an API platform may bill per request. Clear value metrics help maintain transparency, prevent overpayment, and ensure profitability.

Usage charge plays a central role in this model, as it directly links the cost of a service to customer activity. Companies must establish fair and measurable billing structures to avoid confusion and maintain trust. 

Another consideration in this model is accounts receivable — the revenue a company expects to collect from customers based on their usage. By tracking and managing these receivables effectively, businesses can maintain steady cash flow while offering customers a flexible and scalable pricing model.

What are the different types of pricing models?

Usage based pricing — also called consumption-based pricing — can be structured in multiple ways. Below is a summary of the most common models, plus some non-usage based models:

Main takeaways

Each pricing model serves different business needs and customer preferences. Companies that prioritize predictability may opt for flat-rate or per-user pricing, while those looking for flexibility often choose usage based models.

Hybrid approaches, such as combining tiered pricing with usage based charges, allow businesses to offer scalable plans. For instance, a SaaS platform might set a base subscription fee with extra costs for exceeding usage thresholds, so users pay according to value received.

Note: For a more detailed exploration of these pricing models viewed through the lens of subscription pricing, read our article about it. 

How does usage based billing work?

Setting up usage based billing requires several key components, including data tracking, pricing logic, and invoicing systems. Companies must have an efficient infrastructure that can track usage in real time, apply the correct pricing model, and generate accurate invoices. 

Step-by-step process of usage based billing:

1. Usage tracking: The system collects and logs customer activity, such as API calls, storage used, or data processed.
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2. Data aggregation: Usage data is consolidated in a structured format for pricing calculations.
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3. Pricing calculation: The billing engine applies the correct pricing model (pay-per-use, tiered, etc.) based on recorded usage.
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4. Consumption billing receivable management: The system calculates expected revenue based on tracked usage and prepares financial records.
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5. Invoice generation: The platform automatically creates invoices reflecting the customer’s actual usage.
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6. Payment processing: The customer is charged accordingly, and payments are reconciled in the system.
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7. Customer reporting and transparency: A dashboard or reporting tool provides real-time visibility into usage and costs.

How do the steps flow from consumption tracking to invoicing?

The usage based billing process begins with real-time consumption tracking, where data is collected and categorized. 

The system then applies predefined pricing rules to calculate charges based on usage metrics. As consumption increases, these charges accumulate, forming the consumption billing receivable—expected revenue that will be invoiced.

Once the billing cycle ends, the system generates an invoice reflecting actual usage. Customers receive clear breakdowns of their charges, and payments are processed accordingly. Companies that rely on robust tracking and automation tools can manage this process efficiently, guaranteeing accurate billing and improved cash flow.

Note: For a deeper look at the technical limitations businesses like Stripe face with some billing solutions, check out this article.

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: Because revenue directly correlates with actual consumption, companies benefit from increased earnings as customers use more of the service. This approach creates a sustainable growth cycle where business success is tied to delivering real value.
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• Scalability and flexible pricing: Companies can offer dynamic pricing that scales with business activity, ensuring customers pay for only what they use. This flexibility makes the model appealing to startups, enterprises, and everything in between.
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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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• Better cash flow management: When combined with robust usage based billing software, businesses can track real-time consumption billing receivable and forecast revenue more accurately. Automated billing ensures companies capture revenue efficiently while reducing manual errors.
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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.

Challenges of usage based billing and how to overcome them

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 challenges and look at some tips to overcome them

Complex implementation and integration

Setting up a usage based billing system requires integrating multiple components, including real-time usage tracking, pricing calculations, and automated invoicing. Many companies struggle with syncing these systems, leading to inefficiencies and revenue loss.

Tips for overcoming this challenge:

• Use a dedicated usage based billing platform to automate data collection, pricing adjustments, and invoice generation.
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• Make sure your tracking system integrates with your CRM, ERP, and financial tools.
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• Test the end-to-end billing flow before rolling it out to customers to identify potential weak points.

Data accuracy and reconciliation issues

Since revenue is directly tied to tracked consumption, any inaccuracies in data collection can lead to incorrect charges. This issue can quickly snowball into customer disputes, lost revenue, and compliance risks. Guaranteeing precise tracking across different services and usage metrics is a notable hurdle.

Tips for overcoming this challenge:|

• Implement automated data validation to cross-check usage logs with billing records
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• Use redundant tracking systems to minimize data loss or discrepancies
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• Provide customers with real-time usage dashboards to verify their own data

Consumption billing receivable management

Unlike fixed subscription billing models, usage based billing leads to revenue fluctuations. Businesses must manage consumption billing receivables, which represent expected revenue based on customer usage. Without proper tracking, cash flow can become unpredictable.

Tips for overcoming this challenge:

• Use predictive analytics to forecast revenue based on historical usage trends.
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• Set up automated reminders for customers with outstanding balances to ensure timely payments.
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• Offer prepaid credit options to stabilize revenue streams and reduce billing disputes.

Customer concerns about unpredictable costs

Some customers may experience bill shock when their usage unexpectedly spikes, leading to higher-than-anticipated charges. If not properly communicated, this can lead to dissatisfaction and churn.

Tips for overcoming this challenge:

• Provide real-time alerts when customers approach their usage thresholds.
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• Offer budget caps or customizable limits to prevent unexpected overages.
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• Clearly explain pricing structures and usage charges in onboarding materials to set expectations.

Note: To learn more about SaaS customer success check out our post about strategies for driving growth. 

Best practices 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. 

Usage based billing and revenue management

Implementing usage based billing plays a crucial role in revenue recognition, financial forecasting, and cash flow management. Businesses need a structured approach to provide billing accuracy, align revenue with consumption, and maintain financial stability.

Revenue recognition in usage based billing

With traditional subscription models, revenue recognition is concise — customers pay a fixed fee, and revenue is recognized evenly over the subscription period. 

In contrast, usage based billing requires revenue to be recognized based on actual consumption rather than a pre-set schedule. This can create variability in monthly recurring revenue (MRR) and requires firms to follow clear accounting principles to avoid mismatches.

Best practices for revenue recognition:

• Use real-time usage tracking to align revenue reporting with actual consumption.
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• Follow GAAP and IFRS revenue recognition standards to ensure compliance.
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• Separate earned revenue from deferred revenue when customers prepay for usage credits.

Forecasting revenue with a usage based model

Since revenue fluctuates based on customer consumption, accurate forecasting can be more challenging than with fixed pricing models. However, strong analytics and historical data patterns can help businesses predict revenue more effectively.

Strategies for better forecasting:

• Use historical usage trends to identify seasonal fluctuations and customer behavior patterns.
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• Implement predictive analytics to estimate future usage and expected revenue.
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• Offer hybrid pricing models (e.g., base subscription + usage based charges) to balance revenue predictability with flexibility.

Managing consumption billing receivable

Usage based billing generates invoices based on actual consumption, so businesses must carefully manage consumption billing receivable, which represents revenue that has been earned but not yet collected.

If not properly tracked, delayed payments or discrepancies in usage data can lead to cash flow instability.

Effective consumption billing receivable management:

• Automate invoice generation and payment reminders to reduce delays.
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• Provide customers with clear, itemized usage reports to minimize disputes.
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• Offer prepaid or credit-based billing options to stabilize revenue streams.

Reconciling usage charges with financial performance

To maintain financial health, businesses must align usage based revenue with overall financial performance metrics such as gross margin, cost of goods sold (COGS), and profitability.

Key considerations for reconciliation:

• Track cost per unit of consumption to ensure usage charges cover operational expenses.
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• Use real-time financial dashboards to compare revenue against costs and profitability.
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• Regularly audit billing data and customer invoices to identify discrepancies before they affect financial statements.

Best practices for accurate invoicing

Inaccurate invoices can lead to customer disputes, delayed payments, and compliance risks. Since usage based billing involves tracking and charging for variable consumption, businesses must ensure invoices reflect actual usage without errors.

Best practices for invoicing:

• Use automated billing systems to minimize human errors in invoice calculations.
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• Provide transparent breakdowns of usage charges so customers can easily verify their bills.
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• Implement real-time customer notifications to alert users when invoices are generated or payments are due. 

Key metrics and analytics of usage based billing software

Tracking the right metrics is vital for improving usage based billing. Businesses must monitor total usage charges, customer activity trends, and consumption billing receivable to ensure accurate invoicing and cash flow stability. Billing accuracy rate is another key metric, reflecting the percentage of error-free invoices.

Measuring usage, customer activity, and revenue growth

Measuring usage charges involves aggregating real-time consumption data and applying pricing rules, while customer activity can be assessed through engagement levels, such as API calls or data usage. 

Revenue growth is best tracked through monthly recurring revenue (MRR), expansion revenue, and retention rates.

Optimizing billing with analytics

Analytics play a crucial role in refining billing strategies. Companies can use data insights to adjust pricing models, detect anomalies, and predict churn. Real-time usage analysis helps spot underutilized features, automate tier adjustments, and refine pricing to match user needs.

Key performance indicators (KPIs) for usage based billing

Some of the most important KPIs include net revenue retention (NRR), which measures customer expansion revenue against churn, and average revenue per user (ARPU), which helps optimize pricing. 

The billing collection rate reflects how efficiently invoices are paid, while the usage-to-revenue ratio shows how effectively consumption translates into revenue.

Real-world examples and case studies of usage based billing

The impact of usage based billing is easier to understand with some examples. Next, we’ll share some case studies of companies that implemented this model usefully: 

Note: The information on Orb's involvement with these companies is sourced from their respective case studies.​

FAQs

How does consumption billing work in practice?

Consumption billing tracks customer usage in real-time, applies predefined pricing rules, and generates invoices based on actual consumption, confirming customers pay only for what they use.

Can usage based billing software improve billing accuracy?

Yes, usage based billing software automates data collection, pricing calculations, and invoicing, reducing manual errors and ensuring accurate, transparent billing.

What is consumption billing receivable and why is it important?

Consumption billing receivable refers to the revenue a company expects to collect based on tracked usage before invoices are paid. Managing it effectively helps maintain cash flow stability and ensures accurate revenue forecasting.

Can usage based billing drive revenue growth?

Yes, it aligns revenue with customer engagement, encourages product adoption, and enables scalable pricing that adjusts as customers use more services, leading to increased earnings over time.

How Orb helps you implement usage based billing with ease

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. 

Ready to take Orb for a spin and discover how it can help you implement a usage based billing engine? Explore our flexible pricing tiers and find one that fits your needs.