Usage-based billing charges customers in proportion to how much they consume — per API call, seat, or transaction — not a flat fee.
Usage-based charge = units consumed × price per unit (plus any base platform fee in a hybrid model)
A customer is on a £200/mo base plan plus £0.002 per API call, and makes 400,000 calls in a month.
£200 + (400,000 × £0.002) = £200 + £800 = £1,000 billed for the month
Usage-based billing (also called consumption or pay-as-you-go pricing) ties what a customer pays to how much they actually use — API calls, compute, data processed, messages sent, or transactions run. It contrasts with flat-rate subscriptions, where the price is fixed regardless of usage, and it has surged with infrastructure and AI products, where cost scales directly with consumption and customers expect to pay only for what they use.
Its great strength is alignment: a customer who uses little pays little, which lowers the barrier to starting and lets revenue expand automatically as usage grows. That makes expansion revenue almost frictionless — accounts grow their spend without a sales conversation — and is a big reason usage-based companies often post strong net revenue retention. Pure usage models, and hybrids that pair a base subscription with usage on top, are now common.
The trade-off is predictability. Variable revenue is harder to forecast, and it complicates the cleanest SaaS metrics: usage revenue is not contractually recurring, so folding it into MRR or ARR can overstate the durable, predictable base. The disciplined approach is to separate committed recurring revenue from variable usage revenue, recognise usage as it is consumed, and avoid annualising a volatile usage month into a headline run-rate figure.
Usage-based billing aligns price with value, lowers the entry barrier, and turns growing consumption into near-frictionless expansion revenue — which is why so many infrastructure and AI products adopt it and why it often drives strong net revenue retention. The cost is forecasting difficulty and metric hygiene: because usage revenue is not contractually recurring, conflating it with MRR or annualising a volatile month is exactly how some businesses overstate their true recurring base.
Usage-based pricing has grown rapidly: OpenView found roughly 60% of SaaS companies used some form of usage-based pricing by 2023, up from 34% in 2020 (with 46% running a hybrid model and ~15% a largely pure consumption model), and the share is higher still among infrastructure and AI products; pure consumption models tend to post higher net revenue retention than flat-rate peers (sources: OpenView Usage-Based Pricing reports; ChartMogul).
Usage revenue is variable and not contractually recurring, so folding it directly into MRR can overstate your durable base. The cleaner approach is to track committed recurring revenue separately from variable usage and avoid annualising a volatile usage month.
Subscription pricing charges a fixed fee regardless of consumption; usage-based pricing charges in proportion to what is consumed. Many companies run a hybrid — a base subscription plus usage on top — to combine predictable revenue with consumption-driven expansion.
Because spend grows automatically as customers use more, expansion happens without a sales conversation. That frictionless growth lifts net revenue retention, though it also makes revenue less predictable than a flat subscription.
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