What Is Usage-Based Billing for SaaS? Benefits, Risks, and Best Practices.
Joshua D'Costa
Growth & Marketing
Oct 14, 2025
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5
min
Static, one-size-fits-all pricing is losing ground. From 2018 to 2023, the share of SaaS companies using usage-based pricing climbed from 27% to 41%.
That shift makes the point clear: customers want prices that match the value they get. To stay competitive and unlock growth, learning how to design and deploy usage-based billing is essential now.
What is Usage-Based Billing
Usage-based billing aka metered billing is a pricing model where customers pay for exactly what they use, for example, per API call, per gigabyte of storage, or per minute of compute time instead of a flat subscription fee. In other words, businesses charge only for what customers consume.
It’s especially common in API-driven, cloud, and AI-enabled SaaS where usage fluctuates widely. Aligning costs with actual usage, promises fairness and scalability for both customers and vendors in this model.
Benefits of Usage-Based Billing
Usage-based billing offers several strategic advantages for SaaS and digital product companies:
Aligns pricing with value
Customers pay in proportion to how much they use the service. This transparency builds trust and reduces waste, users aren’t stuck with paying for features or seats they don’t use.
Lower barrier to entry
New users can start small and grow organically. Because there’s little or no upfront commitment, it’s easier to attract trial users or startups that fear high fixed costs. This flexibility removes friction in the sales process: customers can begin with minimal usage and expand over time, which helps increase adoption.
Built-in expansion revenue
As customers use more of the product, revenue grows automatically, no aggressive upselling required. Usage-based billing creates built-in expansion revenue, since customer growth directly translates to higher spend. This also means sales teams can focus on customer success rather than pushing bigger plans.
Improved customer satisfaction and retention
When users feel they’re only paying for what they use, they’re less likely to feel overcharged. In fact, usage pricing often boosts loyalty: customers who see the cost-benefit of usage-based tiers tend to stay longer. This is partly because they can easily adjust usage up or down as needs change, which enhances flexibility and trust.
Reaches new market segments
It attracts price-sensitive users or teams who wouldn’t buy an expensive flat plan. By breaking pricing into increments (APIs, bandwidth, etc.), companies open their addressable market.
This is especially relevant for AI and SaaS startups expanding internationally: offering metered plans can win over smaller businesses or regions with lower budgets, ultimately expanding total market reach.
How does usage-based billing work?
Usage-based billing charges customers based on what they actually consume. It’s flexible by design: everyone pays in proportion to their usage rather than a fixed fee. Here’s a straightforward breakdown of how it typically operates.
Monitoring and metering
First, the product tracks consumption precisely, this could be API calls, gigabytes stored, minutes used, or any other measurable unit. Accurate metering is the foundation: if you can’t measure it reliably, you can’t bill for it fairly.
Rate setting
Next, the business defines the price per unit. That might be a flat per-unit fee, tiered rates that decline with volume, or a hybrid mix. The pricing rule determines how consumption converts into cost.
Billing cycles
Usage is aggregated over a defined period: daily, weekly, monthly, or another interval you choose. At the end of each cycle the system totals the measured usage for each customer.
Invoicing
After calculating consumption, the platform generates an invoice: total units × unit price. Because consumption varies, invoices will differ from customer to customer and month to month.
Alerts and controls
To avoid bill shock, good usage-based systems send alerts when customers near pre-set thresholds. These notifications help users monitor spend and change behavior before costs spike.
Payment methods
Customers can pay invoices with the usual options; cards, bank transfers, or digital wallets and many platforms support automatic charging to keep collections smooth.
Disputes and adjustments
Because charges are posted after the fact, disputes can happen. A transparent audit trail, clear usage reports, and a straightforward dispute-resolution process make it easier to investigate and correct errors when needed.
Risks and Challenges of Usage-Based Billing
Despite the benefits, metered billing also introduces challenges that SaaS teams must manage carefully:
Revenue unpredictability
Unlike flat subscriptions that guarantee a fixed monthly fee, usage-based revenue can fluctuate significantly. This makes forecasting and cash-flow planning harder, especially if usage has seasonal or market-driven swings.
Bill shock and customer dissatisfaction
If a customer’s usage unexpectedly spikes, they may receive a much higher bill than anticipated. Surprise charges can leave users feeling misled or frustrated. Even in the best scenarios, some customers may start throttling their own usage to avoid high costs, which can inadvertently limit engagement.
Complex implementation and billing errors
On the operations side, usage-based pricing is trickier to set up. You need solid metering infrastructure that never misses an event; even a few lost usage records can create billing disputes.
Customer confusion and support load
Especially for customers new to metered billing, the pricing structure can feel opaque. Questions like “Why is this month’s invoice so high?” can become common support requests. Industry experts stress that clear communication is essential to mitigate this pain point.
Operational complexity and data silos
Without tight integrations, data fragmentation can occur: your sales, finance, and engineering teams may all need different views of usage and billing data. Manual processes or disconnected systems lead to revenue leakage and missed insights. Also, forecasting requires new metrics instead of just monitoring active accounts.
Best Practices for Implementing Usage-Based Billing
To capture the upside of usage-based billing while reducing risk, follow these practical steps.
Automate usage tracking with robust integrations:
Use a billing system or APIs to capture every usage event in real time.
Instrument your product to emit usage records that feed directly into the billing platform (webhooks or event streams).
The more seamless the integration, the lower the chance of errors. In short, don’t rely on manual spreadsheets.
Choose billing platforms or APIs that support metered pricing:
Pick a provider with built-in metering, proration, and invoice generation so you don’t have to build complex rating logic from scratch.
Configure rules and let the platform calculate charges automatically.
Link billing APIs with your CRM and payment gateway to automate workflows and simplify onboarding.
Provide real-time visibility and alerts:
Give customers and internal teams live dashboards and threshold notifications to prevent bill shock.
Send staged alerts (e.g., 50%, 75%, 90%) via email or in-app messages, and offer webhook or Slack options for power users.
Early warnings build trust and let customers upgrade or top up before invoices arrive.
Use hybrid or tiered pricing to balance predictability and upside:
A common pattern is a small base subscription plus usage fees, or per-unit pricing that drops at higher volumes.
This preserves a revenue floor while keeping high usage affordable for customers.
Examples: a monthly minimum plus overages, or volume tiers that reduce the per-unit rate as usage increases.
Ensure compliance and security are baked into the flow:
Encrypt usage and billing data, maintain audit logs, and restrict access to billing records.
Integrate automated tax and currency handling for multi-region invoicing so you don’t hit regulatory traps as you scale.
Use a tax service or built-in tax features in your billing platform to handle VAT/GST/sales tax automatically.
Iterate pricing based on data:
Treat pricing as a product: track ARPU, NRR, usage growth, churn, and dispute rates, then adjust accordingly.
If many customers max out a tier, add a higher tier; if overages are frequent, rethink thresholds or include prepaid credits.
Run small experiments, collect feedback, and enable the team to change pricing without heavy engineering work.
Conclusion
Usage-based billing is becoming a key pricing strategy for SaaS. It aligns revenue with actual customer value, lowers barriers for new users, and creates natural expansion opportunities as customers grow. However, it also introduces complexity: unpredictable cash flow, the risk of bill shock, and heavier operational demands.
The winners will be those who adopt usage billing thoughtfully. That means setting up accurate usage tracking, choosing a billing platform that integrates easily with your tech stack, and keeping customers informed with dashboards and alerts.
For a SaaS or AI startup looking to expand internationally, usage-based billing can unlock growth.
Reach out to Dodo Payments or consult our documentation to learn more about our AI-powered billing tools, and how to get started.
