Easy guide to consumption billing (usage-based pricing)

Consumption-based billing is a pricing model where customers pay based on how much of a service or product they actually use. Instead of charging a flat rate per month, companies track user activity and invoice accordingly. This dynamic model is also known as usage-based billing or activity-based billing.

How does consumption-based billing work?

You can bill each customer based on what they consume if your product runs on event data, API calls, compute time, number of emails sent, or GB of data stored. This model is ideal for businesses where usage varies wildly between users. 

It’s especially useful for cloud software, AI tools, developer platforms, and SaaS companies that provide infrastructure, analytics, or APIs. Consumption billing aligns your revenue with how customers experience value, making it a strategic win for growth-minded teams.

A billing model comparative chart

Consumption billing isn’t the only billing model out there, so here’s a comparative chart of the most common ones:

*There are many other differences between metered billing vs. true usage billing to consider.

What is consumption-based pricing?

“Billing” refers to the invoicing process, and consumption-based pricing is the pricing logic behind it. It defines the rates, tiers, thresholds, and metrics tied to customer usage.

Let’s say you charge $0.01 per API call. That’s consumption-based pricing. If a customer makes 15,000 calls in a month, they’ll be billed $150. That’s an example of consumption billing.

You can design your consumption-based pricing to follow different models:

• Flat rate per unit (unit-based)
• Discounts at higher usage volumes (volume-based)
• Minimum usage with overage (threshold or minimum + overage)
• Mixed models with subscriptions (hybrid billing)

Main takeaway: The pricing model you choose depends on how customers use your product, how predictable your costs are, and how competitive your market is.

Many companies looking for the best consumption-based pricing for usage billing also need a platform that allows them to evolve pricing without touching code. That’s where Orb comes in, but we’ll discuss Orb in a later section.

Consumption-based billing vs. usage-based billing

There’s confusion around these two terms. So, let’s break it down:

What is consumption-based billing?

It refers to charging customers based on raw resources consumed, like GB of data processed, CPU hours, or events triggered. It’s about granular, measurable units of service.

What is usage-based billing?

This broader term includes all models that charge customers based on use, including the number of seats, page views, tasks completed, or product interactions. It might not always tie directly to infrastructure costs.

While every consumption-based billing model is a form of usage-based billing, not every usage-based model is consumption-focused. Think of it this way:

• Consumption billing = pricing for what someone has used
• Usage billing = pricing for how a product is accessed or interacted with

Both offer the benefits of usage-based pricing, but consumption is best when your costs are tightly linked to user activity.

Why SaaS companies are switching to consumption-based billing

Consumption-based billing is gaining popularity for a reason. Flat-rate pricing might work for early-stage startups or tools with steady usage. However, when you scale, charging based on consumption is often the better choice. Here’s why companies are making the switch:

1. You unlock fairer monetization

If one user sends 10,000 API calls and another sends 100, charging them the same fee doesn’t make sense. With consumption billing, you price based on actual use, capturing more value from high-usage customers while keeping smaller users engaged.

This is one of the primary benefits of consumption-based pricing: Your pricing grows with customer usage.

2. You offset infrastructure costs

AI platforms, cloud services, and API-first businesses incur costs with every customer action. With billing based on consumption, you ensure customers contribute their fair share to infrastructure costs.

This is especially important if you run a usage-based billing SaaS business where events like GPT queries, GPU processing, or streaming sessions cost you money.

3. You improve retention by aligning value

Users are more likely to stay loyal if they feel they’re only paying for what they use. Overcharging light users leads to churn. Consumption-based billing makes costs feel fair and reduces billing friction.

As pricing becomes a key product differentiator, more companies are looking for the best services for usage-based billing with consumption pricing strategies that give customers transparency and control.

Types of consumption billing models

There are several ways to structure a consumption billing software implementation. Here are the most common:

• Unit-based pricing: Each unit of activity is billed at a flat rate (e.g., $0.01 per API call). It’s simple and easy to explain.

• Volume-based pricing: Price per unit drops as usage increases (e.g., $0.10 per GB for the first 1 TB, $0.08 per GB after).

• Threshold-based pricing: Customers are automatically upgraded when they cross specific usage limits.

• Minimum + overage: Users pay a base rate for a minimum included amount, then pay extra per unit beyond that threshold.

• Hybrid billing: Combines subscription (fixed fee) with consumption (variable charges) to offer revenue stability with usage flexibility.

• Rollover pricing: Unused usage credits roll over to the next period. This feature is great for tools with seasonal usage.

Benefits of consumption-based billing

Let’s dive deeper into the top benefits of consumption-based pricing and why it works so well for scaling SaaS companies. Here are some key benefits:

• Predictable growth: When usage scales, so does revenue. With the right tracking and pricing in place, consumption billing receivable metrics become easier to forecast over time.

• Value alignment: Customers pay for the exact value they receive, nothing more, nothing less. This can help to reduce churn and increase perceived fairness.

• Flexibility across segments: From startups to enterprises, consumption-based billing lets you serve diverse customer types with varied usage levels.

• Optimized resource allocation: By billing users who consume more, you recover costs and reduce subsidization from low-usage customers.

These are also key benefits of usage-based pricing more broadly, but consumption billing offers more granularity and precision, especially when paired with a powerful billing platform for a usage-based pricing model like Orb.

Case studies: Consumption-based billing in action

AWS

AWS, launched in 2006, popularized cloud computing and introduced the pay-as-you-go model. By doing this, it changed the way businesses access and pay for computing resources. 

The consumption-based model eliminated the need for upfront hardware investments, allowing customers to pay only for the services they used. However, as AWS expanded its array of services, the billing structure became more complex, leading to some customer confusion.

AWS has invested in improving its billing tools, documentation, and cost management features to address this. They aim to guarantee transparency and empower customers to control their cloud spending.

Snowflake

Snowflake was founded in 2012. It emerged as an industry disruptor with its cloud-native platform and innovative pricing model. Unlike traditional data warehousing solutions, Snowflake separates computing and storage costs. This allowed businesses to scale their usage independently and only pay for their consumption. 

This cost-efficiency resonated with a wide range of customers, from startups to large enterprises. Snowflake's growth and successful IPO in 2020 show how its strategy attracts and retains users.

Six steps to implement a consumption-based billing model

Here are six steps to build a system that works:

1. Define clear metrics: Choose usage signals that map to value: API calls, user actions, storage, queries. This is your pricing foundation.
2. Design your pricing logic: Decide whether you’ll charge per unit, offer tiers, apply volume discounts, or use hybrid pricing. This is your consumption-based pricing strategy.
3. Track usage in real time: Use a billing system that ingests raw usage events. Accurate metering ensures correct invoices and customer trust. 
4. Automate billing workflows: Your billing platform should generate invoices, apply tax logic, manage discounts, and update accounts in real-time without manual intervention.
5. Test and simulate before launch: Use simulations to model real-world behavior. How would pricing changes affect revenue? Which customers would be impacted most?
6. Monitor and optimize: Review pricing performance monthly. Look at consumption billing receivable trends, churn, and margins. Adjust when needed.

FAQs

How will usage-based pricing impact my revenue predictability?

Usage-based pricing has the impact of making revenue more variable, but not necessarily unpredictable. With the right forecasting tools like Orb Simulations, you can model trends and build reliable projections based on real usage data.

When might it be a good idea to switch from consumption-based billing to a flat-rate billing model?

Flat-rate billing is a type of recurring pricing that may be a better fit when your product has consistent usage patterns and customers prioritize price predictability. It’s also useful in markets where simplicity or budgeting constraints outweigh usage flexibility.

Is usage-based billing software best for startups?

Yes, usage-based cloud billing software is especially ideal for startups offering APIs, AI tools, or infrastructure where usage varies by customer. It provides early monetization that scales with growth and lets you validate pricing with real usage from day one.

Let Orb help you unlock better billing

Now that you've explored the ins and outs of consumption-based billing, it’s time to implement it without breaking your existing workflows or your revenue model. The key lies in choosing a billing platform built for accuracy and scale.

That’s where Orb helps with enterprise billing.

Orb helps SaaS and GenAI companies to unlock their usage data and turn it into a dynamic pricing engine. Unlike rigid legacy systems, Orb is purpose-built for consumption pricing and usage-based billing, so you can move fast, iterate confidently, and bill with precision.

Here’s how Orb helps you launch and scale a modern consumption-based billing model:

• Adapt with agility: Use Orb’s SQL pricing editor to define value metrics and test them in minutes. With Orb Simulations, you can run side-by-side pricing experiments using your real product usage data to predict revenue impact and customer adoption before making any price changes live.

• Bill with precision: Orb ingests raw usage data into the Orb RevGraph and confirms that invoices are accurate, auditable, and aligned with how customers actually use your product.

• Scale with extensibility: Whether you process thousands or billions of usage events, Orb’s high-scale infrastructure keeps up. You get integrations with your financial stack and support for complex workflows via Orb Billing, Invoicing, and Reporting.

• Predict with confidence: Use Orb Simulations to eliminate pricing guesswork. Run simulations to test multiple consumption-based pricing models, model revenue impact, reduce churn, and select the strategy that drives long-term monetization success.

With Orb, you gain a trusted partner that helps you evolve your pricing with data. Check out Orb’s flexible pricing tiers and see why we’re the best AI billing provider in the usage-based billing industry and one of the best consumption billing providers in revenue ops today.