I understand why companies love it. The math looks incredible on paper. But for most consumer companies, it's probably a bad idea. For those who implement it, or a version of it, it’s harder than you think. Flat Fee Pricing vs Usage Based Pricing For those unfamiliar, usage-based pricing is the concept that you charge per usage of the product as opposed to a flat fee per month. Blockbuster video charging you for every movie you rent = usage based pricing Netflix allowing you to stream as much as you want = flat fee pricing. While the vast majority of software products are flat fee and for good reason, more companies are exploring usage based pricing. Why is that? Why Companies & Investors Love It This is driven by unlocking what’s called “net negative churn” which is only possible with some form of usage based pricing. Net negative churn means if you sign up a cohort of users this year that pays you $100, next year they're worth more than $100. Not less. More. This means instead of churning revenue from every group of users that sign up each month, you are gaining revenue. This has a massive impact on your ARR and valuation. Usage based pricing is common in web hosting and storage industries. You can see this in Snowflake’s public filings that they hit 178% net revenue retention at its peak. That means for every $100 they signed up, they were making $178 from that same cohort a year on. 178% net revenue retention They trade at a 16-17x price to earnings multiple whereas the “average” SaaS company is close to 7x ARR. Understandably, if you run a company that could potentially unlock net negative churn, you’re probably feeling some pressure to do so. Why Product Teams Love It On the product side, usage based pricing also elegantly solves multiple difficult problems at once. 1. It makes pricing tiers much easier to understand. One of the hardest problems when you design a paywall or multiple tiers of a product is making the difference easy to understand. As the saying goes, "a confused mind never buys." Centering your product around usage makes (most) of this problem go away. In the Twilio example below it's really easy to see the difference between the tiers when they're based on usage. The user can mentally calculate where they are and understand what's right for them 2. Users who get the most value from your product are more likely to convert and have high LTV. A really good mental test if your monetization system works is "Do the users who get the most value from your product end up paying you the most?” If the answer is no, then something in your monetization system is off. Usage based pricing both helps fix this problem and inherently self selects for good personas. personas 3. It aligns customer & company incentives beautifully Company and customer incentives should be aligned but they are frequently not. It's really easy for product teams to get lost down meaningless rabbit holes and ignore the core value of the product. With usage based pricing: The better your onboarding, the more money you make.  The better the habit loop, the more money you make  The better you layer in more use cases, the more money you make The better your onboarding, the more money you make. The better the habit loop, the more money you make The better you layer in more use cases, the more money you make Now when your teams get lost in things that don't drive usage, you feel that pain financially So what's the problem? The Downsides Even if usage-based pricing makes sense for your market, there are real costs. It makes user activation much harder. Every click feels like it costs money. Users hesitate instead of exploring freely. Hesitation kills habit formation. And habit formation is how you fight churn. It makes user activation much harder. The hardest part of growing a product is activating users early. If you add friction to that journey with usage anxiety, you hurt retention downstream. It adds massive complexity in your product and company It adds massive complexity in your product and company You now have to figure out: How do upgrades and downgrades work?  What happens to unused credits?  How do you handle overages? What happens during cancellation?  What about reactivation - do old credits come back? How do upgrades and downgrades work? What happens to unused credits? How do you handle overages? What happens during cancellation? What about reactivation - do old credits come back? Additionally it triggers a lot of organizational complexity How does your finance team recognize this revenue?  How do you forecast upgrades and downgrades  How will the customer service team know which plan someone’s in when they email you  Product has to build metering infrastructure, dashboards, and alerts. How does your finance team recognize this revenue? How do you forecast upgrades and downgrades How will the customer service team know which plan someone’s in when they email you Product has to build metering infrastructure, dashboards, and alerts. Every one of these needs to be designed, built, documented, and supported. It's a tax you pay forever. When Usage-Based Pricing Actually Works I think that pure usage-based pricing only works when three things are true: There's a real marginal cost to providing the service.  The customer understands and believes that cost really exists.  No competitor can offer unlimited and survive There's a real marginal cost to providing the service. The customer understands and believes that cost really exists. No competitor can offer unlimited and survive To me, point #3 is the key one. If everyone is already offering a flat fee, it's tough for you to go usage-based unless you have a massive differentiator. Because of these factors, its more common in some industries vs others: Usage Based Pricing Dominates Usage Based Pricing Dominates Cloud infrastructure (AWS, GCP, Azure)  AI/LLMs (OpenAI, Anthropic API)  Payment processing (Stripe, Square)  Utilities (electricity, water, gas)  Telecommunications (data overages, international)  Shipping & logistics (FedEx, UPS)  Data & API providers (Twilio, SendGrid) Cloud infrastructure (AWS, GCP, Azure) AI/LLMs (OpenAI, Anthropic API) Payment processing (Stripe, Square) Utilities (electricity, water, gas) Telecommunications (data overages, international) Shipping & logistics (FedEx, UPS) Data & API providers (Twilio, SendGrid) Flat/Subscription Pricing Dominates Flat/Subscription Pricing Dominates Streaming media (Netflix, Spotify, Disney+)  News & content (NYT, The Atlantic)  Consumer productivity (Notion, Evernote)  Dating apps (Hinge, Bumble)  Fitness & wellness (Calm, Headspace, Strava)  Password managers (1Password, Dashlane)  Design tools (Canva, Figma) Streaming media (Netflix, Spotify, Disney+) News & content (NYT, The Atlantic) Consumer productivity (Notion, Evernote) Dating apps (Hinge, Bumble) Fitness & wellness (Calm, Headspace, Strava) Password managers (1Password, Dashlane) Design tools (Canva, Figma) In all of these cases, customers intuitively understand there's a real cost. Nobody expects unlimited electricity for $50 a month. So What Do You Do With This Information? Here's how I'd think about your choices: Pure usage-based pricing (Stripe, AWS, OpenAI API): Pay for what you use. No tiers, no flat fee. Only do this if you meet all three criteria above. Usage within tiers (Beehiiv, Twilio, Zoom, Mailchimp): Fixed monthly price per tier, but usage limits define which tier you're in. This is the default for most B2B companies. You get expansion revenue without the activation friction. Flat fee (Basecamp, Netflix, Spotify): Everyone pays the same. This is the default for most consumer companies. Pure usage-based pricing (Stripe, AWS, OpenAI API): Pay for what you use. No tiers, no flat fee. Only do this if you meet all three criteria above. Pure usage-based pricing Usage within tiers (Beehiiv, Twilio, Zoom, Mailchimp): Fixed monthly price per tier, but usage limits define which tier you're in. This is the default for most B2B companies. You get expansion revenue without the activation friction. Usage within tiers Flat fee (Basecamp, Netflix, Spotify): Everyone pays the same. This is the default for most consumer companies. Flat fee For the vast majority of consumer companies, you should do number three. In certain high usage scenarios, you can use #2 if you can execute on it well. My favorite version of #2 is using it as the line between a free and paid product. DocuSign (used to) gives you 5 free signatures per month  NYT gives you a limited amount of free articles per week  Shazam gave limited the number of skips you could have per day DocuSign (used to) gives you 5 free signatures per month NYT gives you a limited amount of free articles per week Shazam gave limited the number of skips you could have per day If you are an up-and-coming company that is still working on core product development, I would start with a clear line between free/trial and paid. Once you start to understand your personas, you can add additional tiers on top of paid based on usage numbers. Good luck out there

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