Whenever I speak with SaaS founders, the topic of usage based pricing inevitably comes up. The implicit assumption is usually that everyone is doing pricing wrong because they have not yet figured out that a usage based pricing model will solve all their growth problems.
I implement usage based pricing for many of my clients. I also actively avoid it for just as many. Pricing is a mechanism for capturing value. If you implement a model simply because it is trendy, you risk alienating your buyers and destroying your cash flow. The idea that a usage model is a universal fix is a belief rather than a strategic option.
If you are considering a switch to saas usage based pricing, you need to understand the structural realities that can block good implementation. Here is a breakdown of the pitfalls you must navigate before tying your revenue directly to customer consumption.
At its core, usage based pricing is a straightforward transaction. You give the customer access to a solution, they use it, you measure that usage, and then you send them an invoice. A specific behavior occurs over time, gets summed up, and then gets billed.
While the mechanics sound simple, the commercial implications are complex. Moving away from predictable recurring revenue requires your business to absorb the natural volatility of your customers’ operational habits.
The primary appeal of usage based pricing saas is the alignment between customer success and your revenue. As they grow, you grow. However, that alignment can work against you under specific conditions.
Revenue volatility is the most immediate consequence of tying pricing to usage. I once worked with a customer selling a usage based pricing model to marketing agencies. The software functioned on a cost-per-click basis. Usage would explode during Black Friday and Christmas, but it would completely die down during the summer holidays.
I have seen similar patterns in maritime shipping and other highly seasonal industries. This model is acceptable if you have the balance sheet to survive half the year without earning meaningful money. If you cannot weather the full cycle of usage, you should avoid a pure usage model.
Usage implies that a user is actively engaging with your product, but selling into large corporations reveals a wide gap between the person using the software and the person paying for it.
For instance, a procurement team might buy a tool and hand it over to their developers. The developers then start hammering away at API calls, and the bill suddenly spikes. Sometimes the usage is entirely removed from the buyer, such as when third-party software triggers API calls.
When usage falls outside the customer’s direct control, it creates extreme unpredictability and anxiety. Buyers implicitly know that their staff might not use the tool responsibly. Figma ran into this exact problem. Their active user model charged accounts whenever someone was tagged as an editor. Employees realized it was easier to grant edit access to everyone rather than manage permissions carefully. Statement bills blew up to ten times their normal size, causing massive blowback and forcing Figma to change to a more controllable model.
Some buyers physically cannot participate in a usage based pricing model due to rigid budget constraints.
I once advised a company building marketing software for shopping malls. They wanted to charge based on footfall. The mall’s marketing department rejected the model immediately. Their operating budget was a fixed percentage of the rent paid by the stores. Even if the software doubled the footfall and increased store revenue, it would take three to five years to negotiate higher rent and increase the marketing budget. The software’s success would bankrupt the department paying for it.
You will encounter similar rejections with government tenders or oil and gas projects. These entities require a predictable total cost of ownership for a specific project duration and will flatly decline usage based models.
Usage based pricing often struggles to monetize effectively across different customer segments. Imagine you measure an event that is worth one dollar to one customer and a million dollars to another. If you set your price at half a million dollars, you will only sell to the high-value customer, and you will leave vast amounts of money on the table because they received an incredible deal.
The value density of a single unit of usage varies wildly. For example, supply chain software tracking automotive parts on Craigslist deals with high-margin items worth hundreds of dollars. The same software tracking fast-moving consumer goods deals with items worth ten bucks.
Most broad usage models operate on a basic cost-plus basis, acting early in the value chain. Cloud providers like Azure just sell API calls and processing power without caring if your business is wildly profitable or failing. They provide the gas, regardless of whether you are driving a Volkswagen Beetle or a Ferrari. If you want to capture the value generated by the Ferrari, you must reposition your product and charge based on a metric specific to their business outcomes.
If you are operating in a venture context, a usage based pricing model can complicate your fundraising efforts. Investors require historical track records to model predictability.
License-based models are simple. You sell ten seats, and the customer pays for ten seats whether they create eight accounts or none. With usage based pricing, you have to convince an investor to fund your business based on the promise that early customers will eventually scale their usage. Pitching an unpredictable cash flow is incredibly difficult.
Selling the promise of future usage typically only works for Pre-Seed and Series A rounds. By Series B and beyond, investors strictly want to see top-line revenue, growth rates, and net retention. They do not care about your pricing model (they only care about the math). If you have not generated positive cash flow and a reliable history by the time you reach five or ten million in annual recurring revenue, raising late-stage capital will be very difficult.
Usage based pricing is a powerful lever when applied to the right product and the right market. It aligns your revenue with customer growth and lowers the barrier to entry. However, ignoring the realities of seasonality, budget constraints, and user control will turn your pricing strategy into a liability. Evaluate your customers’ buying habits and cash flow tolerance before you rewrite your billing infrastructure. If the usage based model fits your unit economics, implement it. If it does not, stick to a model that guarantees predictability.
Common examples include cloud infrastructure providers billing by compute hours, payment gateways charging a percentage per transaction, and email marketing platforms billing based on the volume of emails sent per month.
Usage based pricing bills the customer precisely for the units they consume during a billing cycle. Tiered pricing charges a fixed recurring fee for an allowance of features or usage up to a specific limit.
Yes. Many SaaS companies use a hybrid model where customers pay a flat base fee for platform access and core features, supplemented by usage fees for variable costs like API calls or data storage.
Revenue forecasting requires analyzing historical usage data, understanding customer seasonality, and tracking leading indicators like active user engagement. It is inherently more volatile than forecasting fixed recurring subscriptions.