Common models of usage-based pricing for your GTM strategies
Pay-as-you-go
This is the simplest model: a direct, fixed price for every unit you consume. (e.g., $0.001 per API call, $0.10 per GB of storage).
Best for
Infrastructure, APIs, services where value is easily measured per unit.
Tiered usage
With tiered pricing, the more you use, the less you pay per unit. (e.g., First 10K API calls are $0.002 each, the next 90K are $0.001 each).
Best for
Businesses looking to encourage higher volume usage.
Volume-based
Your total volume sets one low price for everything. (e.g., If you use 50K API calls, all 50K are billed at the lower $0.001 rate).
Best for
Simpler billing calculations than tiered models.
Overage model
This model combines a predictable monthly subscription with the flexibility of pay-as-you-go for any extra usage.
Best for
Subscription stability with pay-as-you-go flexibility.
Prepaid credits
Customers purchase credits upfront to spend on future usage. (e.g., Buy $100 in credits; 1 credit per API call).
Best for
Upfront cash, volume discounts, and predictable budgets.
Outcome-based
Price is based on the business value delivered, not resources consumed. (e.g., a percentage of revenue generated).
Best for
Services with a clear, measurable impact on a core business metric.
Hybrid model
This model lets you charge for a mix of things at once—like per user, per GB, per-seat fees, and per feature used.
Best for
Complex platforms with multiple value metrics.
Is usage-based billing right for you?
Advantages
Challenges
Getting started with usage-based billing
Identify your value metric
Your first and most critical step: find the single metric that best represents customer value (e.g., API calls, GBs processed).
Choose the right model
Select one of the usage-based models that best fits your product and customers.
Communicate clearly
Avoid surprising customers by providing a dashboard to monitor their real-time usage.
Invest in billing infrastructure
You'll need a system to accurately meter and invoice usage, which is a major engineering challenge.
How industry leaders use it
Amazon Web Services (AWS)
The pioneer of PAYG for cloud infrastructure. You pay for compute hours, data storage, and network traffic. It's the model that built the cloud.
Twilio
An API company that charges per API call, per text message sent, or per minute of voice call. Their success is directly tied to their customers' usage.
Snowflake
A data platform that bills based on "compute credits" (processing power) and data storage, perfectly aligning cost with data operations.
Zapier
Uses a hybrid model. Their subscription plans come with a set number of "Tasks" (automations). If you need more, you pay for overages or upgrade.
Your questions, answered
Usage-based billing is a pricing model where you charge customers based on exactly how much they use your product. It is basically the opposite of a flat monthly subscription.
Think of it like a utility bill. You do not pay a fixed fee for electricity; you pay for the specific amount you consumed. In the software world, this usually means charging for:
- Volume: Things like gigabytes of storage or data transfer.
- Events: Actions like the number of emails sent or API calls made.
- Time: How many minutes a server ran or a video took to process.
This is a great model because it feels fair. Your customers only pay more when they are getting more value out of your tool.
To measure usage, you have to define what counts as a "unit" of value. There are four common ways companies measure this data:
- Sum: This is the simplest method. You just add up every event. For example, the total number of SMS messages a user sent in a month.
- High Water Mark: Here, you charge based on the highest usage point during the period. This is common for things like concurrent database connections.
- Unique Count: This tracks distinct items. A common example is charging for the number of unique active users (MAU) in a billing period.
- Duration: This measures time. You track when a resource started and when it stopped, like measuring how many seconds a virtual machine was running.
Managing this model requires more than just good math. It requires good communication. Since bills change every month, customers can get anxious about costs.
To manage this well, you should focus on transparency:
- Real-time Dashboards: Give your customers a live view of their usage. They should be able to log in and see exactly what they have spent so far.
- Usage Alerts: Set up automated emails that notify customers when they hit 80% or 90% of their budget. This prevents "bill shock" at the end of the month.
- Graceful Limits: Decide what happens when a user hits a limit. Do you block them immediately, or do you let them go over and charge a premium rate?
- Logs for Disputes: If a customer asks why their bill is high, you need detailed logs to show them exactly when and how the usage happened.
You cannot really manage usage-based billing with spreadsheets. Once you have more than a handful of customers, you need an automated data pipeline.
A standard automation setup involves three main steps:
- Event Tracking: Your application needs to send a signal every time a user does something billable. For example, if they upload a file, your code triggers a "file_uploaded" event.
- Metering: You need a system to catch all those events and do the math. It might add them all up, find the highest usage point, or just count unique users.
- Invoicing: Finally, the system takes that total number, multiplies it by your unit price, and automatically charges the customer's card at the end of the billing cycle.
Ready to launch usage-based billing?
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