Usage-based pricing (UBP) is a pricing model that charges customers based on their actual usage of a product or service.

It’s a standard approach for many software-as-a-service (SaaS) brands and cloud-based services because it creates a flexible pricing structure that adapts to changing usage patterns. Lower pricing (and usage) attracts new customers, and revenue increases with use.

While a usage-based model can support strong retention and steady revenue growth, it also requires the right set of tools to operate effectively. Brands need systems that track data usage, calculate pricing in real time, and offer quotes with clear pricing rules that customers can understand.

In this article, we’ll take a closer look at usage-based pricing, where it’s commonly seen, and whether or not it’s a good fit for your business.

What is usage-based pricing

Usage-based pricing is a consumption-based pricing model that charges customers for the amount of a product or service they actually use, rather than charging a fixed cost.

This pricing structure is most deployed when individual units are very small but are needed in larger quantities. In these scenarios, companies can set an attractive rate for each unit (with a small profit built in) and grow revenue as customer usage increases.

Here are a few examples of how UBP is used in specific industries and what services are commonly charged by usage:

• SaaS brands often use UBP to power API and integration infrastructure. API calls (priced per-call) are flexible and allow customers to pay based on the number of calls used. Zapier charges for Zaps (calls) to connect apps and pass data between them, while Twilio charges per message, email, or call for its services. Costs climb naturally as API usage increases.
  
• Cloud computing and infrastructure services, such as Amazon Web Services (AWS), can charge for data storage (per byte), translation services (per word), and web security (per credential validation).
  
• Telecommunications platforms and cellular providers usually charge for data usage (per gigabyte) if users exceed their data plan limits.
  
• Logistics companies may charge for packages (per package) by distance (per mile) or by weight (per lb or kg) in order to calculate shipping costs.
  
• Fintech and payment services often charge small fees for payment processing (per transaction), which is applied as a flat-rate surcharge to each transaction.
  
• AI and LLM services, such as OpenAI and Snowflake, use pricing models that charge for compute consumed to perform a task, typically measured in tokens or credits.

In most scenarios, UBP is tied to a baseline plan. In telecommunications services, most cellular plans include calls, text, and a monthly data allotment, which significantly influences pricing. Usage-based pricing applies only after a user exceeds their plan limits.

However, that isn’t always the case. At the enterprise level, many brands charge at a highly incremental level to keep costs as precise as possible. Businesses can calculate costs based on estimated usage, and the value of a given service is immediately transparent.

While UBP is generally a positive experience, it doesn’t always make it the best option. Some services charge based on usage, while others include usage in a set price. Companies with high usage who want to keep overhead low may benefit from services that charge a flat rate or a monthly subscription.

For example, e-signing services like Docusign, Adobe Acrobat Sign, and Foxit charge based on usage. Once a set number of documents have been sent, the plan expires, or users must pay more for each additional document. By contrast, PandaDoc users can send unlimited documents without issue, so high-volume senders will benefit more from PandaDoc—where usage isn’t charged—than similar services where UBP is in effect.

Ultimately, companies have to decide which model makes the most sense, both when buying services and when pricing out their own products.

Types of usage-based pricing models

UBP can take many forms, which adds versatility when configuring prices. At the same time, that level of flexibility can also lead to confusion.

Below, you’ll find a closer look at how usage-based pricing can be set up. Note that while each UBP model relies on usage data, the pricing structure varies slightly across scenarios.

Pay as you go

In this model, customers pay for each unit they use, with no fixed commitment or usage cap.

This approach is most commonly seen in cloud services, where storage and compute resources are widely available. In those situations, customers pay for each storage unit or each compute cycle.

Tiered usage pricing

UBP configurations with tiered usage enable customers to pay less per unit as they spend more money.

Pricing changes when usage reaches a new tier, and each tier has its own rates.

Higher usage unlocks newer (cheaper) pricing, but customers have to use the service to reach those tiers.

Volume pricing

Although similar to tiered pricing, volume pricing allows customers to pay one price for all units based on the total volume they hit (not based on a given tier).

This encourages heavy usage and is generally more advantageous for brands when compared to tiered usage.

Overage or metered pricing add-ons

Here, customers purchase a base plan and pay an additional fee when they exceed the usage limit. Telecoms use this approach for data usage, and SaaS brands use it for automation events, credits, or compute time.

When considering these models, keep in mind that UBP configurations don’t exist in a bubble. Many providers combine subscription pricing with usage-based billing as a means to set a minimum usage cost. In that scenario, customers pay the fixed monthly fee plus a variable charge based on usage.

Depending on the setup, use case, and intention, usage-based pricing can be a powerful tool in addition to an existing price structure or an entirely new way to approach customer pricing.

Types of usage-based pricing

Usage-based pricing model	How pricing works
Pay as you go	Customers pay for each unit they use, with no fixed commitment or usage cap.
Tiered usage pricing	Pricing changes when usage reaches a new tier, with each tier having its own rate. Per-unit cost decreases as usage increases.
Volume pricing	A single price applies to all units based on the total volume used, rather than separate pricing by tier.
Overage or metered pricing add-ons	Customers purchase a base plan and pay additional fees when usage exceeds the included limit.
Subscription plus usage-based billing	Customers pay a fixed monthly fee plus a variable charge based on actual usage.

Key benefits of usage-based pricing

In the right setup, usage-based pricing offers clear advantages for many brands.

The setup creates a pricing structure that adapts to customer usage, offers transparent pricing, and helps companies reach a wider customer base—a good value metric for many SaaS businesses.

Here are the main reasons why brands might deploy usage-based pricing over subscription models and similar pricing options.

Lower barrier to entry.

Customers can start with a small commitment and only pay for actual usage. This reduces upfront costs and makes adoption easier for newer customers.

Better alignment with customer value

While some pricing models can make users feel nickel-and-dimed by adding extra surcharges, UBP often sidesteps that perception by offering direct, line-item breakdowns that feel accessible and transparent.

This reduces churn and can boost customer satisfaction when pricing is fair and balanced.

Potential for higher revenue expansion

With UBP, revenue grows as usage increases, allowing SaaS companies and cloud services to scale without redesigning the pricing model or switching over to subscription-based pricing options.

More flexible and competitive pricing strategy

Providers can adjust pricing options to match customer needs. UBP can be introduced as a pay-as-you-go plan, a metered plan, or as a hybrid model that combines fees with usage-based billing.

Scalability and predictability with the right tooling

Usage-based pricing depends on automation and real-time data. Billing systems must track usage and apply rules accurately. With the right workflow in place, teams can forecast usage and maintain predictable revenue.

Overall, usage-based pricing has many strengths, but the business model needs to be supported by clear rules and reliable systems in order to function.

Without accurate tracking, proper positioning, and clarity around how pricing works, UBP can confuse customers and lead to more questions than it answers. In those scenarios, something like a traditional subscription might be a better fit.

Usage-based pricing vs other models

As we’ve touched on already, usage-based pricing works well in many environments, but it’s not the only pricing option.

Other models offer varying levels of predictability, structure, and cost control. Some customers prefer a simple monthly subscription, while others prefer a flat-rate plan or tiered pricing to match their usage range.

Each model has strengths and trade-offs that companies need to consider, both for customer retention and for stable revenue growth (a challenge particularly for SaaS startups).

UBP vs subscription

Subscription pricing is an approach that customers and brands are most familiar with. Users are charged a fixed, recurring fee every month. They pay the same amount, no matter how much they use the product.

Usage-based pricing works very differently. Costs change with usage, so user costs vary month over month as usage rises and falls. Customers have more control over cost, and the link between price and value are clear. If customers need more of the product, they pay more. It’s that simple.

However, most SaaS brands use subscription models over UBP because subscriptions are easy to maintain and easy to understand. Especially when offered with discount incentives for annual purchases, subscription pricing allows SaaS companies to stabilize their monthly revenue and create a more predictable pattern of growth.

In many cases, companies utilize UBP as part of a hybrid pricing solution that can balance both needs. The subscription covers access and provides baseline or core features. Usage-based billing applies to variable activity like API calls, credits, or transactions.

While quotes for these services can be tricky, CPQ tools can help sales teams clarify both subscription and UBP-based services to curious customers.

UBP vs flat-rate

Flat-rate pricing charges a single price for the entire product. Every customer pays the same amount, no matter how much they use the service. It’s easy for customers to understand and makes billing a trivial affair. The flat-rate approach also creates predictable revenue because usage doesn’t impact cost.

With usage-based pricing, cost is assigned to actual usage. Pricing is more flexible and adaptive as customer needs evolve, allowing variability for both high- and low-usage accounts. Brands can support a wider selection of customers without pricing out low-end users while still supporting the business needs for established brands.

The tradeoff comes down to complexity. Flat-rate pricing is simple, but usage-based models need accurate metrics and tracking, as well as stable billing systems. With these tools in place, UBP offers providers a more dynamic way to monetize heavy usage.

UBP vs tiered pricing

Tiered pricing sets fixed prices for feature bundles or usage ranges. This approach is a cornerstone for most SaaS pricing in that customers choose the tier with the features that match their needs and usually pay a monthly subscription.

From a revenue perspective, tiered pricing is a “best of all worlds” approach. Companies can serve both large and small customers by allowing each pricing tier acts as its own usage threshold. Smaller companies won’t climb into higher-level plans until they can justify the cost while larger companies can pay to access all features on demand.

Usage-based pricing replaces those fixed tiers with variable costs by charging for actual usage. The model is flexible, which is useful for teams with evolving workloads. Teams can potentially get more from the product without worrying about a set number of user seats or purchasing a plan with specialized features.

However, UBP also forces brands trading on bundled value — the hidden value of all product features in a given tier working together — to instead price based solely on a usage metric. That approach can diminish brand value and force customers to remain cognizant about what features they use and don’t use for fear of unexpected charges.

UBP vs ramp pricing

Ramp pricing offers a fixed schedule of price increases. The customer pays one amount during the initial onboarding period, then moves to a higher amount as the contract ages. Usually, this model is deployed to give companies time to onboard with the system before more aggressive pricing kicks in.

With usage-based pricing, there isn’t a schedule to follow. Charges are made for actual use, so companies with slow onboarding processes, unpredictable workloads, or long sales cycles can ease into the platform on their own schedule. Similarly, teams with spikes around seasonal activity can dial usage up or down during peak periods without penalty.

As with most other models, ramp pricing offers greater predictability and monetization opportunities for most brands. UBP offers greater flexibility and real-time changes in demand, but that can leave providers with unstable revenue streams if major customers suddenly begin to use the service less or migrate away from the platform.

Pricing model	How it compares to usage-based pricing
Subscription pricing	Charges a fixed monthly fee regardless of usage. Usage-based pricing varies month to month based on actual usage, giving customers more control over cost and a clearer link between price and value.
Flat-rate pricing	Charges a single price for the entire product, with usage having no impact on cost. Usage-based pricing assigns cost to actual usage and adjusts as customer needs change.
Tiered pricing	Sets fixed prices for feature bundles or usage ranges. Usage-based pricing replaces tiers with variable charges based on actual usage.
Ramp pricing	Follows a scheduled increase in price over time. Usage-based pricing charges for actual use with no preset schedule.

Pros and cons of usage-based pricing

Usage-based pricing can support strong growth, but it introduces new requirements around tracking, billing, and forecasting.

Sales teams also lose some conversational touchpoints, as well as core techniques like upselling and cross-selling, specialized discounts, or long-term incentivization, because usage is the only metric that matters.

Collectively, these tradeoffs mean that UBP works well for many brands, but it comes with plenty of advantages and disadvantages to consider before deployment.

Advantages

• Revenue increases with usage as customers adopt the product and integrate it into daily workflows. Higher activity produces higher revenue without changing the core pricing model.
  
• Upfront costs stay low because customers only pay for actual usage. Adoption is easier and supports growth among smaller teams and startups, and newly onboarded brands can integrate at their own pace.
  
• Value is clear to the customer because usage metrics explain each charge. Customers understand why a bill changes, which improves satisfaction and long-term retention.
  
• Flexible pricing structures fit more use cases since UBP works with metered, tiered, volume, and hybrid pricing models. Teams can adjust the format to meet customer needs without rebuilding pricing strategies.
  
• Scaling becomes easier with automation and usage-tracking tools. Providers don’t need to offer new plans or negotiate new terms and contracts as usage increases, and deeply integrated companies can increase usage without worry about caps or restrictions.

Drawbacks

• Forecasting becomes more difficult as usage shifts from month to month. Overall, this reduces predictability for finance teams and makes revenue planning much harder for SaaS businesses.
  
• Billing becomes more complex when compared to other pricing models. Teams need reliable usage data, accurate thresholds, and automated billing systems that can process events at scale. Manual tracking and calculation methods break down quickly.
  
• Costs can surprise customers when usage spikes or exceeds normal patterns. Even when everything is above board and pricing is accurate, an unexpectedly high bill can lead to concerns and increase churn risk.
  
• Sales teams have limited ways to offset cost concerns when bills grow faster than expected. Even small increases in usage can create noticeable jumps in cost, but reps may not be able to offer discounts or better incentivization because costs are based on usage, rather than perceived value.
  
• Support teams face heavier workloads when customers ask for usage history, billing details, or cost projections. Brands that aren’t prepared to address these concerns will face operational strains if dashboards and reporting tools are weak.

Is usage-based pricing right for your business?

A usage-based model works well when customer value comes from repeated activity within a product, or when the core component of a product is essential to long-term growth.

Data storage is a great example. As brands grow, they’ll need more storage for the data they produce. While many brands, like PandaDoc, offer specialized data storage for contracts and other documents, generic data storage can handle backups, paperwork, specialized media files, and more.

A platform like Azure or AWS can sell storage via usage-based pricing with the knowledge that revenue will climb over time as customer needs increase. The same is true for platforms built around integrations, automation, data processing, messaging, and other trackable metrics.

But that doesn’t mean UBP is always a good fit. Some solutions are hard to optimize for usage-based pricing, and some services are best quantified by the value they offer, rather than the number of times a service is used. For example, web security services like Wordfence for WordPress or backup services like Backblaze offer value that would be difficult to quantify based on usage, but they can be critical to a corporate ecosystem.

Depending on the nature of your business, the product/services you sell, and how your brand integrates with the rest of the market, usage-based pricing may or may not work for you.

If you’re considering UBP for your business, consider the following questions:

• Can usage be measured in a clear and consistent way?
  
• Does usage reflect customer value?
  
• Do customers understand usage metrics?
  
• Is the product/service used in unpredictable patterns?
  
• Will customers accept variable invoices?
  
• Does the brand have the runway to support variable usage?
  
• Does the brand serve (or want to serve) a wide range of usage levels?
  
• Will UBP improve product retention?
  

It’s also worth noting that usage-based pricing may not be the right fit for the entire business.

Many brands, including PandaDoc, use tiered, subscription-based pricing for most plans, while charging for usage of more trackable items, such as API calls or form creation.

A company taking a similar approach may be able to deploy UBP where it makes the most sense, while positioning the brand through more attractive pricing strategies.

How to implement a usage-based pricing model

Ultimately, it’s up to the brand to decide if pricing based on usage is a good fit and, if so, how to implement.

Typically, this starts by defining clear usage metrics, determining how to track data usage, and offering a pricing structure that aligns with the value of the product or service. The goal is to connect usage to cost without adding friction for the customer.

Here’s a short roadmap to implementing usage-based pricing:

1. Identify a usage metric that reflects value

This could be something like API calls, automation runs, transactions, or something else. The benchmark needs to be easy to measure and simple for users to understand.

2. Analyze customer behavior and cost structure

Look at how often customers use the product and how usage evolves over time. This data can help you determine whether the chosen metric is steadily growing, mostly stable, or shrinking. You can also use this data to set fair pricing and identify thresholds that make sense to users.

3. Choose a pricing model

Metered pricing offers the greatest amount of flexibility, but tiered- or volume-based pricing creates structured ranges. Keep in mind that you can also bundle some credits into subscription plans if you’re trying to encourage engagement with usage-based products.

4. Track and bill for usage

Once you’ve set a pricing model and attracted customers, all you’ll need to do is track usage and bill accordingly. Depending on your tech stack, this may be easier said than done. However, it’s a critical aspect of UBP, so take the time to deploy a scalable tracking solution that ensures invoices are accurate and easy to interpret.

Naturally, there are additional steps along the way that teams will need to refine as UBP solutions roll out. Sales, finance, and support teams need information and training so that they can guide customers and resolve outstanding questions.

Systems need to be updated to give accurate quotes and invoices when it’s time to bill for usage. Quoting solutions like PandaDoc CPQ can help with some of those obligations by providing preliminary quotes and pricing rules that offer accurate estimates during the pre-sale process. Post-sale, customers will need meter-accurate invoices that reflect usage and provide a clear understanding of how pricing is applied.

Clarify complex pricing with PandaDoc

Managing usage-based pricing alongside other tiered pricing or subscription models can slow teams down.

Multiple pricing structures in a quote can cause confusion because each model uses different rules, rates, and workflows. When these need to be calculated manually, the risk of errors increases and deals stall.

PandaDoc CPQ keeps all pricing models organized and accessible. The platform can track pricing logic, apply formulas, and update quotes with real-time calculations. When the system is fully deployed, reps can use it to create quotes with accurate usage estimates, baseline subscription rates, or a hybrid of both. Plus, PandaDoc supports approval workflows and CRM syncing, so information stays accurate and consistent across all teams and workspaces.

With PandaDoc, teams can work faster and reduce mistakes across even the most complex pricing scenarios.

Want to see PandaDoc in action? Sign up for a free 14-day trial or book a demo to see how PandaDoc CPQ can support your pricing strategy.

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