What is Usage-Based Billing? The Complete Guide for 2024

Think about how you pay for your electricity or water usage at home. You only pay for what you use, right?

Usage-based billing for enterprise software works the same way. Businesses pay based on usage instead of a flat fee, offering fairness and flexibility. This model allows businesses to scale pricing with increased usage while letting customers start at little to no cost, paying more as they grow.

This guide explores the benefits of usage-based billing, real-world examples, challenges in implementation, and a comparison of top solutions.

What is usage-based billing? 

Usage-based billing, also known as consumption billing or metered billing, is a pricing strategy where customers are billed based on the usage of a product or service. Businesses that use UBP measure the exact units of measurement to determine how much to charge a customer.

How is consumption-based billing value-driven?

Today, most companies are moving away from fixed cost-based models to value-based ones.

Usage-based billing is a great way for companies to generate revenue based on the actual value delivered. Unlike traditional pricing models, which often impose fixed costs regardless of actual usage, usage-based billing ensures that customers pay in proportion to the value they receive.

According to a report by OpenView, three out of five SaaS companies have started to use usage-based pricing.

For SaaS companies, usage-based billing is not just an ideal approach to provide more value to customers but also to create a more stable revenue stream that is reflective of the value derived by customers.

Moreover, adjusting pricing as the value delivered increases allows companies to capture more revenue without overcharging customers.

Pay-as-you-go business model examples

Zoom, Zapier, and 100ms champion usage-based billing in varying ways.

1. Application SaaS

Zoom offers video conferencing and collaboration software with various pricing plans to suit different usage needs. While some plans have fixed monthly fees, others operate on a consumption model, with charges based on the pay per use model (number of participants or meeting minutes).

2. Middleware SaaS

Zapier employs a usage-based pricing approach by offering a pay-per-task consumption based pricing model. It tracks the number of tasks executed during automated workflows (Zaps), measured against the user's plan allowance. When a user exceeds the task limit of their subscription plan, additional tasks are charged on a per-task basis. 

3. Infrastructure SaaS 

100ms is a communication infrastructure company specializing in building audio and video applications. It offers volume and custom pricing based on consumption metrics. Initially, the company needed help with underbilling and manually tracking startup credits. With Zenskar's help, 100ms automated its billing process, eliminating invoicing errors and increasing revenue by 4%. Zenskar also improved customer retention through real-time usage reports and customer-facing portals.

Challenges of usage-based billing

There are a few concerns that you may encounter in implementing usage-based billing. Let’s look at how to overcome these usage-based billing challenges:‍

1. Complexity in pricing

The usage-based pricing model introduces a new layer of complexity, especially concerning the difficulty in determining the suitable value metric and its associated price for some products and services. The best way to address this is to rely on customer feedback to understand their usage patterns. This will help you ascertain the perceived value of different features and allot the most relevant value metrics to them.‍

2. Unpredictability of revenue 

Usage-based billing brings with it revenue volatility, making it difficult for businesses to forecast and plan for future income. While diversifying your revenue streams can help stabilize overall revenue, you can also encourage customers to sign long-term contracts or commit to a certain usage level in exchange for discounted pricing or other incentives. These long-term commitments can provide more predictability in revenue.‍

3. Cost control

Under a usage-based pricing model, customers may struggle with bill shocks. This challenge highlights why popular billing tools fail to handle metered billing effectively. Thus, it is important to provide them access to real-time usage metrics. This will help them know what to expect and save them from exceeding budgeted usage levels.‍

4. Regulatory compliance

Compliance with regulatory requirements related to usage-based billing, such as data privacy and consumer protection laws, can add another layer of complexity. Some of the ways to address this include conducting regular audits and establishing a comprehensive legal and compliance framework that outlines the regulatory requirements applicable to usage-based billing.

How do you implement usage-based billing?

Here are some best practices to implement usage-based billing for helping you maximize your revenue and achieve sustainable growth.

• Set up a system to track usage data accurately: Make sure that you establish a system to monitor and map the usage data correctly. This can be done by integrating usage data with third-party systems using APIs.
• Define your value metric: After determining how customers perceive the value of your product or service and the price they are willing to pay for it, you then need to establish an appropriate usage metric.
• Create a pricing plan: Following usage measurement, you will need to convert it into monetary terms by applying pre-set rates corresponding to the extent of usage. You also need to review your pricing regularly to ensure you are offering customers the value expected for the price paid. 
• Communicate the pricing structure: Customers do not like bill shocks. It’s important to communicate with customers about how usage impacts billing. Furthermore, any pricing revisions or adjustments must be clearly communicated to customers.
• Analyze usage trends: By closely tracking usage patterns, you can analyze how customers are using your products or services.
• Iterate your pricing model: Based on your customer trends and feedback and other factors like market demand, you need to further fine-tune your pricing models. 

Benefits of usage-based billing

Usage-based billing provides various benefits over traditional subscription models.

1. Flexibility in pricing

Usage-based billing offers customers and businesses a great deal of flexibility. While customers can scale their usage up or down based on their needs and budget constraints, businesses have the choice to tie pricing to different value metrics.

2. Transparency in billing

Customers appreciate being able to track their usage and costs under usage-based billing. When businesses offer clear and transparent pricing, it helps them build trust and credibility with their customers, allowing them to strengthen customer relationships and differentiate themselves in the market.

3. Value alignment

Usage-based billing aligns with the value customers derive from the product or service, ensuring they pay for the features and functionalities they find most valuable. From a business perspective, aligning pricing with the value delivered ensures that these businesses capture the full value of their offerings, better monetize their products or services, and, in turn, increase profitability.

4. Scalability 

For customers, usage-based billing allows them to scale with their usage growth without experiencing any limitations or interruptions. Similarly, businesses can accommodate increasing demand without making any upfront investments in infrastructure or capacity.

5. Customer retention

Customers are most likely to remain loyal and committed to a business that offers transparent and flexible pricing that is closely aligned with their needs and usage patterns. Usage-based pricing helps businesses reduce churn and increase customer lifetime value by providing options that cater to varying customer needs and preferences.

What makes the best consumption-based billing system?

A billing system should follow these best practices of SaaS usage-based pricing. 

1. Automates billing

Without automation, inconsistencies like underbilling or overbilling are more common, especially with consumption pricing models. This is crucial for businesses like 100ms, which, prior to automation, faced issues with invoicing errors. Automating metered billing saves finance teams and engineers time, allowing them to focus on strategic tasks instead of spending hours calculating usage and creating invoices.

Automated billing systems also scale effortlessly as your business grows. Whether your customers increase in number or their usage patterns become more complex, the system can handle increased data processing without additional manual intervention. 

2. Real-time usage tracking

Billing systems typically approach usage tracking and data aggregation in two different ways:

• Linear — where metering is tightly integrated with pricing, you'll have to aggregate usage data at the source before sending it to your billing tool.
• Decoupled — where metering and billing are considered separate entities, you can send raw usage data to your billing system in real-time. 

We suggest the second approach because it gives you real-time access to usage data. This, in turn, can help you provide your customers with a usage-tracking dashboard so they can monitor their usage and avoid 'bill shock' on invoice day.  

3. No-code/low-code tools

This one’s especially important for early-stage startups. Choose a billing system that provides out-of-the-box data syncing capabilities, automation, and API support.

Some key features of a billing platform include drag-and-drop pricing and contract designers, direct (or API-supported) integrations with data sources, payment processors, CRM systems, and automated subscription management. These can free up bandwidth for your finance and engineering teams.

4. Provides customers with detailed billing breakdowns

Clear, itemized consumption billing statements allow your customers to understand how their charges are calculated, reducing confusion and fostering trust. When your customers can easily trace their usage data and how it translates into costs, they are more likely to feel confident in the consumption based model, which is crucial for long-term customer relationships and retention. 

5. Conducts regular audits

A billing system with built-in auditing capabilities helps ensure that billing remains accurate and compliant with contractual agreements. It will identify missed charges or incorrect invoicing, which could be a source of revenue leakage, and ensure that all usage data is processed correctly. 

According to a study by Deloitte, companies that routinely audit their billing systems report higher profitability and lower fraud risk.

6. Flexibility in pricing models

While usage-based pricing is here to stay, there are many ways to implement it. AI technology companies often use a credit burndown model where users pre-purchase task credits.

Then there are the other subsets of consumption based pricing, like fixed tiers with monthly overages, volume-based (or quantity-discount) pricing, and so on. This means there are endless ways to add usage-based components to your pricing strategy. 

Here's an example: Replit (an AI-powered DevOps tool) has fixed tiers that include a certain amount of credits. If you burn your credits, you'll be charged extra at the end of your billing cycle. That's tiered, credits, and overages—all in one pricing strategy.

So, ensure that the tool you pick supports all pricing models. That way, you can go all in on your pricing strategy without worrying about your billing system holding you back. 

Best usage-based billing systems in 2024

If you’re starting your usage-based pricing journey, you’re probably asking yourself — which of the many billing software solutions in the market would be the right fit for my SaaS business?

Read our guide where we compare 11 best usage-based billing tools across key criteria — flexibility, developer effort required, and pricing.

Unlock growth for your SaaS business with Zenskar, the top choice for those seeking efficiency and scalability for their used-based billing model.

Try Zenskar’s no-code usage-based billing infrastructure

Managing complex usage-based contracts can be a never-ending uphill battle, especially when handling inconsistent data and manual billing errors.

Zenskar makes it easy with a billing system designed for seamless data integration. Our system seamlessly integrates data from spreadsheets, APIs, or manual inputs, pulling everything from where it already exists, ensuring no more manual entries or mismatched information.

Zenskar gives you and your customers real-time visibility into usage, automating every step—from tracking data to generating invoices and ensuring revenue recognition compliance. Need to handle intricate contracts? Our drag-and-drop builder makes it a breeze to configure even the most complex agreements, while event-based tracking lets you experiment with pricing models effortlessly.

And you're never alone. When you sign up, we support you with 24/7 assistance, dedicated customer success teams, and custom integration options. Book a free demo with our team today to automate your billing process end-to-end.

Frequently Asked Questions (FAQs)

1. What is usage-based pricing in SaaS?

Usage-based pricing in SaaS charges customers based on their actual software usage, such as data storage or features accessed, similar to a pay-per-use model.

2. What are common usage-based pricing models?

Here are some of the most commonly used types of usage-based pricing:

1. Tiered usage-based pricing: Customers pay based on usage limits within tiers in a tiered pricing model. Exceeding a tier moves them to the next, typically at a higher price per unit.
2. Per-unit pricing: Customers are charged a fixed price for each unit consumed, with no changes, regardless of usage volume.
3. Volume-based pricing: Pricing scales with the volume consumed; the more a customer uses, the lower the price per unit.
4. Hybrid model: A mix of subscription and usage-based pricing, where users are charged a fixed amount plus variable fees based on consumption.

3. How is usage-based billing tracked for cloud solutions?

Usage-based billing for cloud solutions charges are based on resources consumed, like computing power or storage. The pricing structure scales with usage.

4. What is the difference between usage-based billing and metered billing?

The usage-based billing model charges customers based on actual consumption, while metered billing tracks and charges for specific metrics like data usage or transactions.

5. What is the difference between metered and measured usage?

Metered usage charges customers based on specific, quantifiable metrics like data consumption, while measured usage tracks broader usage patterns over time.

‍