Unlike traditional subscription pricing, which charges a flat fee regardless of use, consumption-based pricing ensures customers pay only for what they consume. This approach meets the expectations of decision-makers, who increasingly prefer pricing models that allow them to experience the value of a product before making a financial commitment.

Snowflake is a standout example of how the consumption-based pricing model is reshaping SaaS and IaaS businesses. By tying costs directly to customer usage, Snowflake has driven higher consumption rates, boosted revenue, and deepened customer relationships. Its success demonstrates the potential of this flexible approach to pricing, which benefits both providers and users by aligning cost with delivered value.

Consumption-based pricing and billing remove barriers, enabling customers to experiment without risk and scale their usage as their needs grow. This pricing model enhances trust and fosters long-term partnerships. As SaaS and IaaS companies seek sustainable growth, the consumption-based pricing model has emerged as a powerful strategy to deliver value and stand out in a competitive marketplace.

Understanding Consumption-Based Pricing Models

As businesses increasingly adopt a consumption-based model, different pricing structures have emerged to suit varied needs. These approaches allow companies to align costs with usage, offering transparency and flexibility that appeal to both providers and customers.

Pay-As-You-Go (PAYG) Model

Under this model, customers only pay for the resources they consume, giving them complete control over their expenses. PAYG is particularly common in cloud computing and utility computing, where resources such as storage, bandwidth, and processing power are metered and billed according to consumption. 
This approach allows customers to scale their usage up or down as needed, without being tied to a fixed subscription fee. The flexibility and cost-effectiveness of the PAYG model make it an attractive choice for businesses with varying resource requirements.

Tiered Consumption Model

In a tiered consumption model, pricing is based on predefined usage thresholds. Customers are automatically moved to the next tier when they exceed the limits of their current tier, ensuring a seamless transition as their needs grow. This model provides a clear path for scalability, allowing customers to start with a lower tier and gradually increase their usage over time.

tiered consumption model

OpenAI exemplifies the effectiveness of consumption-based pricing in the SaaS domain with its flexible and usage-driven approach to its ChatGPT and DALL·E models. Non-subscription customers are charged based on metrics directly tied to their use, such as the number of tokens processed for text models (e.g., $2.50 per 1M input tokens for GPT-4o) or images generated by DALL·E ($0.020–$0.120 per image, depending on resolution and model). 

This "only pay for what you use" policy ensures transparent billing, reduces entry barriers, and encourages businesses to experiment and scale usage according to their needs.

Volume-Based Consumption Model

The volume-based consumption model incentivizes customers to consume more by offering lower unit prices as the volume of units consumed increases. This model rewards customers for their increased usage, making it more cost-effective for them to scale their consumption. 

Twilio, a cloud communications platform, employs this model by providing volume-based discounts to customers who use more of their services. As customers' usage grows, they benefit from lower per-unit costs, encouraging them to continue using the platform and expand their usage. The volume-based consumption model fosters long-term relationships with customers and promotes a mutually beneficial growth strategy.

For instance, inbound local minutes cost $0.0085 per minute up to 500,000 minutes. Once this threshold is reached, the rate drops to $0.0080 per minute. Imagine a customer uses 500,000 minutes in a month, incurring a cost of $6,700. Any additional minutes are charged at the discounted rate. For example, 1,000 more inbound minutes would cost just $8.00. This tiered pricing structure makes scaling usage more cost-effective, fostering long-term customer loyalty and aligning pricing with business growth.

Hybrid Consumption Model

The hybrid consumption model blends elements of usage-based and subscription revenue models to provide a flexible consumption model tailored to customer needs. In this structure, customers may pay a base subscription fee while accessing premium features or scaling additional usage through variable pricing. On the other side, this model enables SaaS companies to cater to diverse customer needs, offering a predictable revenue stream through subscriptions while accommodating variable usage patterns.

Many SaaS companies are adopting this blended approach to attract a wider range of customers and adapt to their unique requirements. In fact, 46%1 of SaaS companies now offer or actively test usage-based pricing alongside traditional subscription plans, highlighting its versatility and growing adoption. 

Mailchimp, a leading email marketing platform, employs a hybrid pricing model by offering monthly subscription plans that include a set number of emails and contacts. Customers who exceed their plan’s limits can purchase additional emails or contacts, ensuring they only pay for what they use while maintaining access to core features. This flexible approach allows businesses to scale their usage cost-effectively as their needs grow.

Benefits of Consumption-Based Pricing for SaaS and IaaS Companies

Consumption-based pricing offers a transformative approach for SaaS and IaaS companies. It aligns costs with actual usage, enabling businesses to enhance value delivery while addressing customer preferences for flexibility and fairness.

Aligning Cost with Value

According to a Bain & Company report, 80% of customers feel that consumption-based pricing better aligns costs with the value they perceive, which is one of the key advantages of this approach. Under this model, customers are charged based on their actual usage of the product or service, rather than a fixed fee.
This approach also redefines sales dynamics. Sales representatives, incentivized by usage growth, shift their focus from traditional transactional selling to acting as customer advocates. 


Their goal is to help clients derive maximum value from the solution. For SaaS businesses, this customer-centric approach is pivotal to long-term success. Ultimately, the consumption revenue model transforms pricing from a cost concern into a tool for building stronger partnerships.

Increased Customer Satisfaction and Retention

The inherent flexibility in consumption-based pricing is a significant factor in driving customer satisfaction. Customers gain the freedom to scale their usage up or down, tailoring services to match their evolving needs without the financial strain of fixed contracts. This adaptability often translates into improved user experiences and reduced churn rates.

SaaS consumption models, with their focus on usage-driven billing, empower customers to experiment with products risk-free and adopt additional features as they realize greater benefits. This flexibility deepens trust and loyalty, ensuring customers stay engaged with the provider over the long term. According to OpenView Advisors2, this approach results in an impressive Net Dollar Retention (NDR) of 125%, outperforming the broader SaaS index of 114%.

Scalability and Revenue Growth

Scalability is a defining strength of consumption-based pricing models. As customer usage grows, so does the provider’s revenue, creating a sustainable growth loop that benefits both parties. Usage-based SaaS companies achieve 31% more annual revenue growth compared to the broader SaaS market, highlighting the model's financial advantages3. This is particularly impactful for cloud consumption solutions, where resource needs can expand rapidly. 

Beyond scalability, this model provides measurable financial benefits. Enhanced customer retention strengthens the overall lifetime value of users, while a well-structured referral program, driven by satisfied customers, can indirectly reduce customer acquisition costs (CAC). Additionally, the potential for upselling within the framework of a consumption revenue model boosts net retention rates. Providers gain deeper insights into customer behavior, enabling them to identify opportunities for further engagement and growth.

Challenges of Implementing a Consumption-Based Pricing Model

Implementing a consumption-based pricing model presents unique challenges that businesses must address to ensure success. While the model offers significant advantages, it also requires careful planning, precise execution, and ongoing adaptation.

Forecasting and Budgeting Difficulties

One of the primary challenges of implementing a consumption-based pricing model is the difficulty in predicting revenue and budgeting accurately. Unlike traditional subscription-based models, where revenue is relatively stable and predictable, consumption-based pricing introduces variability based on customer usage patterns. This variability makes it challenging to forecast revenue accurately, as customer consumption can fluctuate significantly from month to month.

Additionally, separating organic growth from sales-influenced growth becomes more complex, as it requires a deep understanding of customer behavior and the impact of sales activities on usage. These forecasting and budgeting difficulties can make it harder for companies to plan for the future and make informed financial decisions.

Billing and Payment Complexities

Consumption-based pricing also introduces complexities in billing and payment processes. Accurately tracking customer usage and ensuring that billing is aligned with actual consumption can be a significant challenge. Companies need to have precise systems in place to monitor and record usage data, as well as generate accurate invoices based on that data. 

Moreover, managing customer expectations around billing can be difficult, particularly when it comes to structuring contracts and addressing billing spikes or overages. Customers may be surprised by unexpected costs if their usage suddenly increases, leading to potential dissatisfaction and disputes. 

Addressing these billing and payment complexities requires clear communication, transparent pricing structures, and flexible contract terms that accommodate variable usage patterns.

Educating and Onboarding Customers

Effectively introducing customers to a consumption-based pricing model requires clear communication and robust support. Many customers may be unfamiliar with how such models work, necessitating thorough onboarding and ongoing education to prevent confusion and frustration.

This challenge extends to internal teams as well. Sales representatives and account managers must fully understand the intricacies of the model to articulate its value and address customer concerns. Providing sales teams with the resources to explain usage metrics, pricing tiers, and billing structures is essential for building confidence and ensuring alignment with customer expectations.

Customer education involves more than just explaining the pricing structure. It requires equipping users with tools to track and manage their consumption effectively. This includes dashboards, usage alerts, and detailed reports to help customers monitor their activity and plan their expenditures.

Bridging the knowledge gap between traditional and consumption-based models is an ongoing effort that demands collaboration across teams. Companies that invest in this area can reduce friction, enhance customer satisfaction, and establish a strong foundation for long-term partnerships.

Best Practices for Implementing a Consumption-Based Pricing Model

This section will explore three best practices for implementing this pricing model: choosing the right consumption metrics, leveraging revenue operations and intelligence software, and continuously monitoring and optimizing the model based on customer usage data and feedback.

Choosing the Right Consumption Metrics

Metrics should be transparent, easy to understand, and directly tied to the customer’s goals. Misaligned metrics can lead to confusion and dissatisfaction, undermining the pricing model's effectiveness.

In the SaaS domain, metrics are often tied to the specific features and functionalities that users engage with. Examples include inbound and outbound minutes used in cloud communication platforms like Twilio, the number of automations executed in project management tools such as Asana and ClickUp, messages sent and received in AI-driven chat services like WhatsApp, tokens processed for language models like ChatGPT, or images generated using tools like DALL·E.

For IaaS solutions, metrics focus more on resource usage and scalability. Common consumption billing items include resource consumption, such as CPU or memory usage; data transfer, measured in gigabytes of ingress or egress; and usage metrics like API calls or active user sessions. For example, companies offering cloud infrastructure services often charge based on processing time or storage usage, ensuring costs scale predictably with customer needs.

The chosen metrics should reflect the product’s core value while being feasible to track and report. Clear, data-backed metrics not only build trust but also make it easier to demonstrate value to customers.

Leveraging Revenue Operations and Intelligence Software

Revenue Operations and Intelligence (RO&I) software can play an important role in the successful implementation of a consumption-based pricing model. 

BoostUp provides a comprehensive solution that delivers advanced features to help businesses forecast revenue, track usage, and optimize their operations.

Key Features that support B2B operation in the consumption-based pricing model:

  • Seamless data integration: BoostUp enables businesses to unify fragmented data by consolidating information from multiple sources, including CRMs and data warehouses. This seamless integration provides a comprehensive view of customer usage, ensuring that no critical data is overlooked. By interfacing directly with external systems, BoostUp eliminates the need for complex modifications and effortlessly incorporates custom fields and objects from CRMs, making it adaptable to any business setup.
  • Custom rollup hierarchies: BoostUp’s forecasting capabilities are tailored to the unique needs of each business, allowing data to be organized and analyzed based on users, accounts, products, or workloads. With the ability to inherit predefined hierarchies from CRM systems, businesses can maintain consistency while gaining new insights. Whether forecasting revenue from API calls, usage credits, or time-based metrics, BoostUp ensures flexibility and precision for even the most complex pricing structures.
  • AI-driven forecasting: BoostUp utilizes advanced AI to deliver highly accurate forecasts by analyzing consumption patterns and generating projections tailored to usage-based revenue models. It doesn’t stop at existing customers—BoostUp uses cohort benchmarks to project revenue for new customers as well. By combining machine learning predictions with human judgment, businesses achieve a triangulated view of their anticipated revenue, empowering more informed decision-making.
  • Real-time usage visibility: Gain up-to-the-minute insights into customer behavior with BoostUp’s real-time tracking capabilities. This feature enables businesses to monitor usage trends across products and services, helping them identify underutilized features, detect usage spikes, and adjust pricing or resource allocation accordingly. BoostUp allows teams to align pricing more closely with customer needs and optimize revenue growth in real-time by analyzing consumption patterns.

 

Continuously Monitoring and Optimizing

A consumption-based pricing model requires constant monitoring and iterative optimization to remain effective. Customer usage behavior can change due to changes in operations, market dynamics, or product updates, so regular reviews are essential.

Cross-team collaboration is key to this process. Data scientists can analyze usage trends and predict future patterns, while sales reps can provide insights into customer behavior. Product development teams also play a critical role, as updates and new features can have a significant impact on usage metrics.

Feedback loops are equally important. Gathering customer feedback helps to identify pain points and opportunities to improve the pricing structure. Using tools such as usage dashboards and predictive analytics ensures that both customers and providers can effectively track performance.

Regular evolution of the pricing model based on real data ensures that it remains relevant and continues to align with customer needs and business objectives.

Real-World Examples of Successful Consumption-Based Pricing

Several SaaS and IaaS companies have demonstrated the effectiveness of consumption-based pricing, showcasing its potential for revenue growth and customer engagement.

Confluent, a streaming platform built on Apache Kafka, utilizes a usage-based pricing model that directly reflects its customers’ consumption of data streams and throughput. This approach lowers entry barriers for businesses by letting them pay only for the data they process, making it easier to experiment with the platform and scale usage as their needs expand.

JFrog stands out in the DevOps space with a consumption-based pricing model that adapts to the changing needs of its customers. By billing based on data transfer and storage usage, the company enables organizations to align their costs directly with their operational needs.

MongoDB transitioned to a flexible consumption model to support its database-as-a-service offering, MongoDB Atlas. Customers pay for data storage and processing resources as they use them, promoting scalability. 

Redis Labs, known for its real-time data platform, adopted a consumption revenue model to provide customers with flexibility. Pricing is based on memory usage and throughput, enabling businesses to scale services cost-effectively. 

Snowflake has become a prominent example of leveraging a consumption-based model to drive success. Its pricing is tied to actual usage, allowing customers to pay for the computing and storage they use. This approach reduces entry barriers, encourages experimentation, and aligns costs with the value delivered.

Key Takeaways

As you consider implementing a consumption-based pricing model for your SaaS or IaaS company, keep these key takeaways in mind:

  • Consumption-based pricing aligns cost with value, increases customer satisfaction and retention, and enables scalability and revenue growth.
  • Implementing this model comes with challenges, such as forecasting and budgeting difficulties, billing and payment complexities, and the need for effective customer education and onboarding.
  • To succeed with consumption-based pricing, follow best practices like choosing the right consumption metrics, leveraging revenue operations and intelligence software, and continuously monitoring and optimizing your pricing strategy.
  • Learn from real-world examples of successful consumption-based pricing implementations, such as Snowflake, MongoDB, and Redis Labs, and consider how to manage the role overlap between CSMs and Sales Reps.
  • Before transitioning to consumption-based pricing, ensure you have the right systems and processes in place, including robust usage tracking and billing systems, clear communication and onboarding strategies, and cross-functional collaboration between sales, customer success, and product teams.

BoostUp’s real-time forecasting, AI-driven alerts, and deal insights empower businesses to track usage accurately, predict revenue fluctuations, and enhance collaboration between CSMs and Sales Reps. To learn more about how RO&I solutions can help manage consumption-based pricing scenarios, book a demo with our team today.

References

1Source: OpenView — 2022 Financial & Operating SaaS Benchmarks Survey, Page 10

2Source: OpenView — 2022 Financial & Operating SaaS Benchmarks Survey, Page 15

3Source: OpenView — 2022 Financial & Operating SaaS Benchmarks Survey, Page 15