Is usage-based pricing right for my SaaS business?

I first tackled the question, "Is usage-based pricing right for my SaaS business?" three years ago in an article for m3ter. Since then, a lot has changed, so let's dive into new insights and revisit the trends that are still shaping the landscape.

Consumption pricing trends in SaaS in 2025

The adoption of usage/consumption pricing has not slowed. In fact, 61% of SaaS companies have deployed at least some usage-based pricing at the end of 2023, up from 45% three years ago. (OpenView) Four factors have driven the continued momentum:  

1. Usage-based pricing is more common and accepted by customers  
2. Per-seat pricing is no longer the default for new companies or products
3. UBP has specific advantages in the current constrained buying environment as it lowers price friction and improves logo retention
4. AI functionality is most commonly priced on a usage basis due to its high COGS and unpredictable usage intensity

These recent trends overlay a decades-long trend of lower barriers to entry and a flood of VC dollars, creating a more competitive industry. Software may be eating the world, but software companies are eating each other AI will lower barriers to entry further. This megatrend has shifted pricing power to buyers, resulting in pricing structures with more accountability and flexibility. 

To use an analogy from another industry, software customers used to buy a house (perpetual license), then they started renting a house (subscription), and now they are in an Airbnb (usage-based.) Accountability and risk for the software vendor have increased with each new iteration. Usage-based pricing is the natural outgrowth of all these trends, yet not all software will adopt the approach.  

The more I have studied pricing, the more I appreciate how specific each case is. SaaS products deliver distinct and sometimes nuanced benefits. There are best practices in pricing, but when it comes to the actual execution, value-maximizing pricing is different for each product and company. The journey to optimal pricing focuses on your specific product and the value it delivers. 

Company and product characteristics that lend themselves to usage pricing

Usage-based pricing can be found at all levels of the software "stack," from infrastructure through applications. However, there are common characteristics of products with a high concentration of usage pricing. Below is a list of the most common types of products priced on a usage basis.

1. High COGS

If you look at public companies utilizing UBP, you notice an over-representation of offering lower-in-the-stack cloud functions, which incur actual direct costs to the provider. This doesn't imply that these solutions lack value; rather, they consume physical resources such as storage, compute and bandwidth. These businesses adopted UBP because traditional per-seat pricing, combined with usage, could put them out of business. Most cloud providers, like AWS, charge based on usage, similar SaaS companies such as Snowflake, Elastic, Data Dog, MongoDB, Fastly and Sumo Logic.

AI applications have similar unit economics. In theory, customers should not care what the service provider’s costs are, and costs should not necessarily dictate pricing structure, but in reality, it does. Customers understand that the service costs money to provide, and they see usage-based pricing as "fair." It is a natural extension of the utility model. 

2. Products linked to revenue 

At the top of the application stack, successful SaaS businesses deploying UBP have identified linkages between their product and an increase in their customer's revenue. Once the link is established, the application will "pay for itself" in the customer's eyes.

Based on a quick scan, revenue generation is tied to approximately 75% of the public SaaS application layer businesses. Examples include Shopify, HubSpot, Eventbrite, Chargebee, Toast, and Klaviyo. Other less obvious types of functionality also tied to revenue include appointment setting, pricing optimization, and out-of-stock reduction. 

Of course, not all SaaS applications can be linked to revenue, but understanding the potential connections and possibly building modules that can connect to revenue is worth exploring. One good example of this trend is the convergence of SaaS and payments. Payment companies are buying SaaS companies and vice versa tighten the linkage between their product and revenue. Shopify is now more of a payments company than a software business, and because of that, it is driving incredible organic growth and NRR at scale.

3. Self-provisioning 

One of the advantages of usage-based pricing is that it eliminates any cost barriers to customer trials. Customers can try a small amount of your product to see if they like it before committing significant financial resources. Most product-led growth (PLG) companies deploy some form of consumption pricing. If, however, your product still requires a heavy lift in implementation or training, the lower financial barrier afforded by UBP will have no real impact on the ease of adoption.

4. Unbound upside

Some products and their related usage metric will hit a natural limit that might be relatively low: lawyers are only going to have so many cases, and dentists will only see so many patients. UBP may still provide a compelling entry pricing methodology, but it will not have the revenue upside of a product that increases in usage intensity. On the other hand, UBP provides considerable upside for products like AI applications, marketing automation, code testing, text messaging, and many others attached to activities that can grow asymmetrically. Said differently, if an application supports business activity that can grow faster and larger than the customer itself, UBP is worth exploring. 

5. Obvious proxy for value

Many companies don’t deploy consumption pricing because there are no obvious activities that drive value or are a proxy for value. However, some older SaaS businesses adopted per-user pricing by default and should explore opportunities to tie pricing to usage. 

A few companies I have spoken to shifted from a per-seat license to a usage-based one simply after brainstorming metrics.  A SaaS vendor focused on frontline worker safety shifted its pricing from a per-user approach to one focused on the number of times workers used the app for a safety-related workflow. This alleviated the customers’ concerns about paying for thousands of users who never actually used the application. 

6. API-Centric apps

A growing number of software applications do not interface with humans, so something different than per-user pricing must be found. If a usage metric can be identified, particularly if usage may grow faster than the underlying customer company, UBP is the best pricing structure. Other alternatives are tying pricing to the size of the customer, typically measured in revenue, employees, or locations. 

The intent of the list above is to provide reference points for where usage-based pricing has historically been successful and why. As mentioned, it's not an exhaustive list, and as UBP evolves and expands, creative SaaS companies will find new pricing vectors that link to customer value. This list lets you know if you are following an established pattern or breaking new ground, which is always more challenging and carries higher risk. That leads us to our next topic, per-seat pricing. 

Per-seat pricing: not always a bad choice

Per-seat pricing has been the default pricing model in SaaS because it was the model for perpetual software products. To some degree, per seat was the only way to price on-premise and early SaaS software because companies had limited ability to track usage data. Because it was the default pricing approach, it is now over-represented in SaaS companies where other metrics would be better.

That said, per-seat pricing is not a bad fit for all SaaS businesses and makes sense when the software delivers discrete value to an individual person. For example, the software may train the user, make them more efficient, or allow them to collaborate better. According to James Wood, per-seat pricing suits applications like learning systems, collaboration products, and even Salesforce management products. For example, HubSpot is known to have pricing based on the number of contacts in the application, but that is only for their marketing suite. For their Salesforce automation product, they price per seat because the value is delivered to individual salespeople.

What about tiered pricing?

Whether pricing by seats or usage-based metrics, tiered pricing has some hidden costs to the vendor. Wide tiers are simple to administer; but have drawbacks

1. Customers may feel like they are paying for seats they are not using.
2. Tiered pricing constrains adoption for fear of tipping over into a higher price band. Atlassian addressed this a few years ago by switching to a granular per-seat pricing structure based on the actual number of users. That switch unlocked organic growth while allowing customers to only pay for what they used. Abandoning tiers altogether is unnecessary to have the desired effect. Still, it is essential to make them more granular, so that usage progression is more natural and customers aren't afraid of the price to jump to the next tier.
3. Combining granular usage pricing with billing for overages and then layering-on customer protection rules like rollover credits and overage grace periods better align value with pricing than the use of fixed tiers. James Wood, thinks that “eliminating wide or fixed tiers and moving to more granular tiers or ‘per X’ pricing can improve net dollar retention by five percentage points on average.” 

Expectations when considering usage-based pricing

Half of the SaaS companies running UBP as their primary pricing model have done so from their founding (OpenView). “There is very seldom a ‘silver bullet’ metric that is the obvious choice." According to James Wood, "most companies considering UBP need to carefully think about trade-offs between potential metrics to pick the best one ." Be prepared to talk to many different customers and track several metrics to see how usage behaves over time. Also, be ready to use more than one metric and combine usage with other pricing approaches. Approximately half the SaaS businesses that use UBP do it in combination with other pricing approaches.

Usage-based pricing: A great idea for some, and a bad idea for others

The excitement around usage-based pricing is real. It can have transformative ramifications for your business, and its deployment is clearly on the rise. That said, UBP is not a good fit for all SaaS businesses. Understanding which applications have historically succeeded with UBP should help management teams and boards better assess the risks and rewards of deploying it in their business.