Usage-Based Pricing (UBP) in SaaS

1. Introduction

In the evolving landscape of Software-as-a-Service (SaaS), pricing models are not merely financial levers – they are strategic weapons. Among the most transformative shifts in recent years is the rise of Usage-Based Pricing (UBP), a model in which customers pay based on the value they consume. Unlike traditional seat-based or tiered subscriptions, UBP ties revenue directly to product usage, making it highly scalable and aligned with customer success. This alignment has turned UBP into a favorite among infrastructure-heavy SaaS platforms like Twilio, Snowflake, and AWS – companies that have grown multi-billion-dollar empires without locking users into fixed fees. The appeal of UBP is clear: it removes friction in adoption, incentivizes efficient usage, and creates built-in revenue expansion as customers grow. But this model is not without trade-offs. It introduces financial forecasting complexity, potential customer churn due to “bill shock,” and increased demand on engineering infrastructure to track, meter, and invoice usage in real-time. This case study explores the origin, evolution, and business impact of Usage-Based Pricing through both a strategic and operational lens.

2. Company Background: Twilio – A UBP Pioneer

To understand the potential and pitfalls of UBP, we examine Twilio Inc., a cloud communications platform founded in 2008 by Jeff Lawson. Twilio provides APIs that developers use to build messaging, voice, video, and email capabilities into applications. From the outset, Twilio’s mission was to simplify communication infrastructure for developers. But what truly differentiated Twilio was its pricing strategy: it adopted a pay-as-you-go usage-based model, charging customers per text message, voice minute, or API call. This radically lowered the barrier to entry for startups and small teams, allowing developers to experiment with low financial risk.

As Twilio scaled, this pricing model enabled automatic revenue expansion – without traditional sales processes. For instance, a developer could start with $10/month in SMS spend, which could organically grow to hundreds of thousands of dollars as their app scaled – with no need for re-negotiated contracts. By 2020, Twilio’s usage-based model had helped it cross $1.7 billion in annual revenue, while serving over 200,000 active customer accounts. Importantly, over 90% of Twilio’s revenue was derived from usage-based fees. The company’s net revenue retention (NRR) often exceeded 130%, a key indicator that existing customers were spending more over time. Even amid macroeconomic uncertainty, this model gave Twilio resilience, as customer spend was variable and more closely aligned with actual value received.

Twilio’s success inspired a wave of imitators and gave birth to the “API-first, usage-priced” SaaS category. Companies like Stripe, SendGrid (acquired by Twilio), Algolia, and even AI infrastructure platforms like OpenAI now rely heavily on usage-based pricing. However, Twilio’s challenges also became case-in-point for UBP’s limitations – especially in financial forecasting, customer success complexity, and support burden.

3. Market Overview: The Rise of UBP in SaaS

The SaaS industry has seen rapid adoption of UBP over the past decade, driven by both technological feasibility and customer preference for flexible pricing. A 2022 OpenView report estimated that over 45% of SaaS companies had adopted UBP, either fully or in a hybrid model. Of the fastest-growing cloud companies (those with >100% YoY revenue growth), over 60% used some form of usage-based pricing. This trend is particularly prevalent among infrastructure, developer tools, API platforms, and data-as-a-service (DaaS) products.

Why this shift? Several converging trends explain it. First, customers increasingly demand value alignment – they want to pay only for what they use. Second, SaaS companies are under pressure to drive efficient growth and reduce Customer Acquisition Cost (CAC). UBP enables land-and-expand strategies, where a free or low-cost entry point can evolve into significant revenue as usage scales. Third, with the rise of cloud-native infrastructure and real-time analytics, it’s now technically feasible to meter usage with precision. Finally, the PLG (Product-Led Growth) movement has popularized frictionless user acquisition, and UBP fits naturally into that mindset.

Market leaders in this domain – including Snowflake (data warehousing), Datadog (observability), and AWS (cloud infrastructure) – have each used UBP to achieve remarkable financial outcomes. Snowflake, for example, generates all its revenue via UBP and reached a market cap of $70 billion within a few years of IPO. The company’s pricing is tied directly to data processed and storage used, creating an elegant alignment between cost and customer value. These companies have demonstrated that when well-executed, UBP is not just a pricing model – it’s a growth engine.

But the adoption is not universal. For horizontal tools (like collaboration or CRM), UBP can introduce confusion, unpredictable costs, and friction. As such, many SaaS companies use hybrid pricing models – combining flat subscriptions with usage-based components to balance predictability with flexibility.

4. Timeline of Adoption

The modern roots of usage-based pricing can be traced to Amazon Web Services (AWS), launched in 2006. AWS revolutionized cloud computing by offering pay-as-you-go infrastructure, charging customers based on compute hours, storage size, or API calls. This model was revolutionary compared to fixed-cost hosting plans, and it quickly became the standard in cloud architecture. Following AWS, several startups in the developer and API tool space adopted similar models. Twilio (founded 2008) was among the earliest to bring UBP to the communications layer. Stripe (founded 2010) did the same for payments, charging per transaction. Over the next decade, this model spread across observability (Datadog), search (Algolia), security (Snyk), and AI/ML (OpenAI).

From 2015–2020, the Product-Led Growth (PLG) movement added fresh momentum. Companies wanted to eliminate the friction of pricing conversations altogether – allowing developers or SMBs to try products without commitment. UBP enabled this. Platforms like Firebase, Segment, and Postman grew their user base using free or low-commitment plans with usage-based upgrade paths.

By 2020–2022, investor interest peaked. Public SaaS companies using UBP outperformed their peers. According to OpenView’s 2022 Expansion SaaS Benchmarking Report, UBP companies had median Net Revenue Retention (NRR) of 135% vs. 115% for non-UBP peers. This created a flywheel: more companies adopted UBP, more capital flowed to them, and pricing infrastructure startups like Metronome, M3ter, and Orb.io began offering UBP metering-as-a-service.

But the trend hit its first real stress test in 2022–2023, as macroeconomic tightening caused usage to decline. Suddenly, UBP revenues dipped across many SaaS firms, revealing a core risk: when customer activity drops, so does revenue – even if churn hasn’t occurred. This highlighted the need for robust forecasting models and diversified monetization strategies.

5. Financial Impact

The financial implications of usage-based pricing are profound, cutting across top-line growth, customer expansion, churn, and cost structure. At a high level, UBP allows companies to grow revenue in proportion to customer value received, enabling high net dollar retention (NDR). Unlike traditional flat-rate models, which require upselling or contract renegotiation, UBP builds organic revenue expansion into the business model.

For example, Snowflake’s Q2 2023 earnings showed a net revenue retention rate of 135%, driven almost entirely by increased data usage from existing clients. Similarly, Twilio has consistently reported NRR above 125%, with over 90% of its revenue coming from usage-based charges. These metrics are critical because they allow a company to grow without acquiring new customers – thus keeping Customer Acquisition Cost (CAC) low and LTV:CAC ratios favorable.

UBP also positively impacts Gross Margin, especially in API or infrastructure-heavy businesses. Since cost of goods sold (COGS) often scales linearly with usage, companies can maintain predictable margins. For instance, if it costs $0.002 per API call and customers are charged $0.01, the margin scales automatically. However, this also means gross margins can be compressed if infrastructure costs increase – something AWS-dependent businesses face.

But UBP’s flexibility comes at a cost: forecasting volatility. Companies often struggle with revenue predictability, especially if customer usage is seasonal or discretionary. CFOs at usage-based SaaS companies report that traditional SaaS metrics like Monthly Recurring Revenue (MRR) become less useful, and new models are required (e.g., “Annualized Usage Revenue” or “Trailing 90-Day Revenue”). Additionally, customer success and support teams need to work harder to prevent “bill shock”, where customers receive unexpectedly high invoices and churn as a result.

To mitigate these risks, many companies implement usage caps, alerts, prepaid credits, or hybrid pricing tiers. Stripe, for example, uses usage-based pricing with volume discounts and negotiated enterprise caps. OpenAI prices its GPT API by token volume, but offers free usage tiers and cost simulators to prevent churn.

6. SWOT Analysis of Usage-Based Pricing in SaaS

Strengths:

  • Revenue Alignment with Usage: UBP aligns revenue generation with customer success. The more value a user extracts, the more they pay – creating a win-win.
  • Lower Entry Barrier: Low upfront costs attract smaller customers, allowing companies to widen their funnel.
  • Inherent Upsell Engine: Unlike flat-rate models, UBP monetizes increased usage automatically without requiring separate upsell cycles.
  • Customer Trust: Perceived as fair since customers only pay for what they use.

Weaknesses:

  • Revenue Predictability Issues: Fluctuating usage complicates financial forecasting, impacting investor confidence.
  • Customer Budgeting Concerns: Enterprise customers may hesitate due to unpredictability in monthly charges.
  • Churn Risk in Downtimes: Seasonal businesses may reduce usage drastically, leading to involuntary churn and unstable MRR.

Opportunities:

  • Entry into Emerging Markets: Freemium + UBP appeals to startups and SMBs in cost-sensitive geographies.
  • API-Economy Boom: Companies offering usage-based APIs (e.g., Twilio, Stripe) benefit from developer-driven adoption.
  • Product-Led Growth Synergy: PLG motions thrive under UBP as users start small and scale naturally.

Threats:

  • Price Shocks and Perceived Overbilling: Without proper usage alerts and caps, customers may feel exploited.
  • Competitive Flat-Rate Models: Rivals offering predictable pricing can lure enterprise clients away.
  • Complexity in Sales Enablement: Sales teams struggle to pitch flexible pricing effectively, requiring re-skilling and deeper technical fluency.

7. Porter’s Five Forces in UBP Context

1. Competitive Rivalry (High):
SaaS is saturated with competitors using flat-rate, tiered, or hybrid models. UBP often becomes a differentiator, but also invites comparison. Companies like Snowflake, which only charge for compute time, must fight hard on performance and customer success.

2. Threat of New Entrants (Medium):
While UBP can make products sticky, it also empowers new startups to undercut incumbents using freemium + UBP. The real moat lies in UX, integrations, and developer trust.

3. Supplier Power (Low to Medium):
For infrastructure-based SaaS companies (e.g., APIs), cloud providers like AWS can raise costs. However, many UBP SaaS firms pass on these costs to customers with a markup.

4. Buyer Power (High):
Buyers demand clarity and fairness in pricing. UBP makes them sensitive to spikes and necessitates transparent billing, usage dashboards, and even “savings plans” (like AWS).

5. Threat of Substitutes (Medium):
Flat-rate competitors or open-source alternatives can lure customers who seek price predictability. Unless UBP is paired with performance advantage or flexibility, churn risk rises.

8. PESTEL Analysis

Political:

  • Data sovereignty laws (e.g., GDPR, CCPA) impact cloud-based UBP services handling sensitive data.
  • Government procurement processes may prefer fixed pricing for budget clarity.

Economic:

  • Recessions or downturns lead to reduced usage, shrinking revenue under UBP.
  • SMBs prefer UBP during volatile periods for financial flexibility.

Social:

  • Increasing digital literacy and demand for transparency enhances UBP acceptance.
  • However, enterprises may still cling to predictability for long-term planning.

Technological:

  • Granular tracking and AI-powered metering tools make UBP implementation feasible.
  • Real-time dashboards and billing APIs improve customer control.

Environmental:

  • Green SaaS movements reward pricing models based on efficient compute/storage usage.
  • Companies promoting “green credits” for low usage consumption can link UBP to ESG goals.

Legal:

  • Overcharging due to faulty metering can trigger lawsuits or compliance issues.
  • Transparent SLA terms are crucial to avoid contractual disputes under UBP.

9. Impact on Customer Behavior

Usage-based pricing fundamentally changes how customers interact with a product. Instead of focusing on plans or seats, customers obsess over value per unit – be it per API call, gigabyte, message, or minute.

Key Behavioral Changes:

  • Optimizing Usage: Customers build usage thresholds into workflows and automate budget limits.
  • Trial Scaling: Customers begin with free/low usage and scale operations gradually, leading to longer but more reliable expansion paths.
  • Self-Education: Users explore dashboards and knowledge bases to reduce over-usage – boosting engagement but increasing support workload.
  • Churn vs. Shrinkage: Instead of complete churn, customers may scale down temporarily – a nuance SaaS teams must account for in retention metrics.

UBP also transforms how sales teams sell and CS teams support. Sales must quantify “units of value,” and CS must guide customers on maximizing ROI per usage metric – not just feature adoption.

10. Strategic Recommendations for SaaS Companies

  1. Educate Users from Day One: Make your usage metric transparent during onboarding. Use dashboards, in-product nudges, and monthly summaries to build trust.
  2. Blend UBP with Guardrails: Consider setting usage caps, soft limits, or savings plans (like AWS’s Reserved Instances) to prevent customer anxiety during spikes.
  3. Create Predictive Forecasting Tools: Help customers estimate bills in advance. Integrate this into pre-sales calculators and customer success playbooks.
  4. Tailor UBP for Segments: Enterprise buyers might prefer hybrid pricing (base fee + UBP), while SMBs and developers prefer pure UBP with minimal friction.
  5. Instrument Deep Analytics: Use behavioral telemetry to correlate feature usage, drop-offs, and billing issues – and refine UBP triggers based on real-world engagement.
  6. Monitor LTV vs. CAC per Segment: UBP can distort traditional CAC payback calculations. Break down LTV by usage quartiles for better modeling.
  7. Train Sales and Support Differently: Sales needs new scripts to justify “pay-as-you-grow,” and CS needs to proactively coach on efficient usage.

Summary

Usage-Based Pricing (UBP), often referred to as consumption-based pricing, is a model where customers pay according to how much of the service or product they use. Unlike traditional fixed subscription models, UBP aligns pricing directly with customer value, making it especially effective for products where usage varies widely (e.g., cloud infrastructure, API calls, or data volume). It supports a frictionless entry (low upfront cost) and enables scalable expansion without forcing a contract upgrade. This model fits particularly well in modern SaaS environments, where user behavior can be tracked in real-time, allowing for granular billing. However, implementing UBP successfully requires robust usage tracking systems, billing automation, transparent customer communication, and a pricing structure that balances predictability and flexibility.

From a business strategy standpoint, UBP enables better monetization of power users, improves net revenue retention (NRR), and supports PLG (Product-Led Growth) motion. Financial planning in UBP models becomes more complex due to variability in MRR, forecasting challenges, and the need for real-time analytics. Operationally, aligning engineering, product, and finance teams is critical. Companies like Snowflake, Twilio, and Stripe have successfully adopted this model, showing remarkable revenue growth and high expansion rates. However, customer trust and perceived fairness are crucial, making transparent dashboards and real-time usage visibility essential to minimize billing surprises. Ultimately, UBP is not one-size-fits-all – it thrives when aligned with clear value metrics, strong product engagement, and well-designed onboarding.