Why Usage-Based Billing is Taking Over SaaS

SaaS pricing has evolved, and traditional subscription models no longer fit every business. Many companies, particularly those in AI, cloud services, and API-driven products, are shifting toward usage-based billing. This pricing model allows customers to pay for exactly what they use, aligning costs with value.

Businesses adopting this approach benefit from improved scalability, better revenue predictability, and reduced customer churn. However, implementing a usage-based system comes with technical challenges, including tracking usage, preventing overbilling, and ensuring seamless integration with payment processors.

In this guide, we’ll break down the fundamentals of usage-based billing, how to implement it, and the best practices for optimizing customer experience and revenue.

What is Usage-Based Billing?

Usage-based billing charges customers based on their actual consumption rather than a fixed fee. This model is commonly used in industries where consumption varies, such as:

• Cloud computing (AWS, Google Cloud, Azure) – Charged per computing instance or bandwidth usage.
• AI APIs (OpenAI, Hugging Face, Stability AI) – Billed per token, inference, or API call.
• Data platforms (Snowflake, Databricks) – Charged per query execution or storage used.
• Software tools (Zapier, Twilio, Stripe) – Charged per API request or workflow execution.

The primary benefit of this model is flexibility, but it also requires accurate tracking, reporting, and billing mechanisms.

Prepaid vs. Postpaid Usage-Based Billing

Choosing between prepaid and postpaid billing models is a critical decision when implementing a usage-based system.

Prepaid (Credit System)

• Customers deposit funds upfront and consume credits as they use the service.
• Reduces the risk of chargebacks and delinquent payments.
• Helps maintain a predictable cash flow.
• Requires careful management of refunds and credit expiration.

Postpaid (Billed in Arrears)

• Customers use the service and are invoiced at the end of the billing cycle.
• Simplifies customer onboarding and encourages more usage.
• Increases the risk of non-payment and disputed charges.
• Requires strong fraud detection and invoicing mechanisms.

A hybrid approach can combine both models, where a base subscription is required, and additional usage is billed separately.

Implementing Usage-Based Billing with Stripe

For companies using Stripe, integrating metered billing requires a structured approach. Stripe allows businesses to create usage-based billing plans using their metered billing API.

Step 1: Creating a Metered Billing Plan

import stripe
 
stripe.Product.create(
    name="API Usage",
    type="service",
)
 
stripe.Plan.create(
    product="prod_ABC",
    nickname="Pay-as-you-go API Calls",
    currency="usd",
    interval="month",
    usage_type="metered",
    billing_scheme="per_unit",
    unit_amount=5  # Charge per 1000 API calls
)
 

Step 2: Tracking and Reporting Usage

stripe.SubscriptionItem.create_usage_record(
    subscription_item="sub_item_123",
    quantity=1000,  # Number of API calls used
    timestamp=int(time.time()),
    action="increment",
)

This ensures usage is tracked and customers are accurately billed at the end of each billing cycle.

Preventing Overbilling and Customer Churn

One of the biggest concerns in usage-based billing is avoiding billing surprises that lead to customer dissatisfaction and churn.

Best Practices for Preventing Overbilling:

• Real-time usage dashboards – Provide visibility into consumption.
• Automated alerts – Notify users when they approach 75% or 90% of their quota.
• Soft limits – Allow customers to set usage caps.
• Auto top-ups – Enable automatic credit refills to prevent disruptions.

Companies like OpenAI and AWS use these strategies to ensure customers remain engaged while keeping billing transparent.

Buy vs. Build: Should You Use a Third-Party Billing Provider?

A key decision for businesses is whether to build an in-house metering and billing system or integrate a third-party solution.

Building Your Own System:

• Full control over data and customization.
• No external dependencies.
• High engineering and compliance burden.

Using a Third-Party Provider (Metronome, Orb, Lago, OpenMeter):

• Faster implementation with built-in metering and billing.
• Prebuilt compliance and fraud protection.
• Potential vendor lock-in and additional fees.

For most startups and growth-stage businesses, leveraging a third-party provider accelerates go-to-market and reduces engineering overhead.

Final Takeaways

Usage-based billing is becoming the standard for SaaS companies looking to align pricing with customer value. To implement it successfully:

• Choose between prepaid vs. postpaid models based on customer behavior.
• Set up metered billing in Stripe to track and bill accurately.
• Prevent overbilling with alerts, soft limits, and real-time tracking.
• Decide whether to build or buy a usage tracking system based on scale and complexity.