The guide to usage-based subscriptions

This guide offers a crash course in usage-based subscriptions, one of the most common hybrid pricing models in SaaS. We cover the different types, advantages and disadvantages, and how to manage the model within the m3ter system.

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Contributors

James WoodHead of Product, m3ter

Shafkat AhnafPresales Lead, North America

What are usage-based subscriptions?

Usage-based subscriptions are a form of hybrid pricing that combine a recurring subscription model with usage elements. According to data from OpenView Partners, 41% of SaaS companies had adopted usage-based or hybrid pricing at the end of 2023, with an additional 17% actively testing it. The majority of those companies were found to have implemented hybrid models like usage-based subscriptions versus pure usage-based or pay-as-you-go (PAYG).

Within the SaaS pricing spectrum, usage-based subscriptions fall in the “Subscription 2.0” bucket, as they involve adding usage-based pricing to a fixed (e.g. per-seat) structure.

The SaaS market is trending toward hybrid models like usage-based subscriptions, moving inward from both poles:

Businesses starting on the right end of the spectrum (pure pay-as-you-go models) often graduate toward usage-based subscriptions over time. This is because hybrid models are easier to operationalize through sales-led or product-led sales motions. They also offer high value customers more predictability without sacrificing flexibility of usage.
Businesses who are moving from the left end of the spectrum – adding usage components to their traditional subscription model – are seeking better price discrimination, low-friction revenue expansion opportunities, and improved margin control.

Types of usage-based subscriptions

There are three main types of usage-based subscriptions:

Prepayment Models

In prepayment models, customers commit to spending a certain dollar amount within a given period, often receiving discounts in return for their commitment. This model, popular with cloud providers like AWS and Azure, allows customers to lock in predictable costs while gaining flexibility in how they allocate their spend (e.g., across different services or products). For vendors, this ensures upfront revenue and incentivizes customer loyalty through discounts or preferential terms.

Usage Commitment Models

Usage commitment models require customers to commit to a minimum level of usage over a billing period. If usage exceeds the commitment, customers pay for the additional amount. This model balances predictability with flexibility and is often used by companies offering infrastructure, APIs, or platform-based services.

Capped Usage models

In capped usage models, customers pay a fixed subscription fee that includes a capped amount of usage. Beyond the cap, additional usage is either unavailable or must be purchased separately. This model works well for companies aiming to provide a clear budget boundary while enabling revenue expansion from power users. This model is less frequently used in SaaS as it can lead to poor customer experience, especially with usage elements customers can’t directly control (e.g. automation, API or AI usage).

Advantages and disadvantages of usage-based subscriptions

Advantages of usage-based subscriptions

Usage-based subscriptions offer several advantages due to their “best of both worlds” pricing approach:

Revenue predictability: The fixed subscription element provides stable and predictable revenue for vendors while offering customers predictable budgeting.
Flexibility for growth: The usage component allows customers to scale their consumption over time, paying fairly for what they use.
High Net Revenue Retention (NRR/NDR): This growth flexibility leads to higher rates of expansion than traditional fixed subscriptions, boosting organic revenue growth.
Customer alignment: These models can more easily align customer costs with value delivered, improving customer satisfaction and retention. Similarly, it also provides an effective north-star metric for customer success and activation teams.
Risk mitigation: Vendors are protected from revenue loss due to low usage, while customers avoid unpredictable or runaway costs.

Disadvantages of usage-based subscriptions

Despite their benefits, usage-based subscriptions come with potential downsides to consider:

Complexity: Implementing and managing usage tracking, billing, and reporting can be challenging. In addition, the additional rating requirements (i.e. matching usage to price) and overage billing can make systemization difficult. Naturally tools like m3ter are built to make this easy!
Sales cycle impact: Some customers (typically SMBs and Mid-Market) may be unwilling to commit to high amounts of usage without trying the product first. In these cases, it is often good to also have a low-commit or pay-as-you-go-option.
Risk of churn: If customers don’t use over 50% of their usage limits or feel they’re being overcharged for the committed volume, it can lead to dissatisfaction and churn. It is often best to provide volume discounts for higher commits to improve customer perception of the price at higher commitment levels.