Usage-based pricing vs. subscription models: Clear pros + cons

Usage-based pricing means customers pay based on what they use. Subscription models charge a flat recurring fee. In short:

• Choose usage-based pricing if: Your customers' usage fluctuates and you want to align revenue with customer success.
• Choose subscription if: Your product sees consistent usage and your customers prefer predictable costs.

Usage-based (pay-per-use) pricing vs. subscription pricing

Here’s a quick look at how each differs from the other.

What is a usage-based revenue model?

Usage-based pricing charges customers for what they actually use. Unlike the SaaS subscription model, where you pay the same fee every month, usage-based billing adjusts with your consumption.

Companies offering cloud services (like Amazon Web Services), phone or messaging services (like Twilio), or even payment processing platforms (like Stripe) are examples of the usage-based model in action. 

The core idea is that users shouldn't have to pay for features they don't use or capacity they don't need.

Note: To learn more, check out this usage billing guide on Orb’s blog.

Pros and cons of the usage-based model

Advantages of usage-based revenue models

• Customer appeal: Paying only for what they use offers a sense of fairness and control. This is ideal if their needs change from month to month, or they don't use your SaaS product heavily.
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• Low entry point: Since there's no big upfront contract, new customers can quickly try the service at low risk, which can lead to faster customer growth overall.
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• Potential for quick revenue growth: If a customer's usage increases dramatically, your revenue grows alongside it. This aligns the business's success with the customer's success.
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• Flexible discounting: With usage-based models, you can offer discounts to customers who hit a certain usage level. This encourages higher usage and creates additional revenue streams.

Disadvantages of usage-based revenue models

• "Sticker shock" risk: If customers don't fully understand how their usage translates into cost, they might be surprised by a higher-than-expected bill. This can erode trust.
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• Low switching costs: Customers can easily switch to a competitor since they're not locked into long contracts, which makes customer satisfaction even more important.
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• Revenue unpredictability: Forecasting revenue can be harder, as income depends on fluctuating customer usage patterns.
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• Scaling is trickier: You have to confirm that your pricing metric is easy for customers to understand and reflects the value they get from your SaaS.

What is a subscription revenue model?

With this model, the customer pays a recurring fee (monthly, quarterly, or annually) and gets ongoing access to a product or service. It's a familiar and popular approach used by many businesses, including SaaS customer platforms (like HubSpot) and streaming services (like Netflix).

The core idea is that the customer pays the same amount each time, regardless of how much or how little they use the service.

Note: Learn more about subscription pricing on Orb’s blog.

Pros and cons of the subscription model

Advantages of subscription revenue models

• Predictable income: This is the standout benefit. Companies know how much revenue they'll generate, making planning and budgeting much easier.
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• Customer relationships: Subscriptions help build strong relationships, as customers interact with your product/service regularly, creating opportunities for valuable feedback.
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• "Sticky" customers: With recurring payments, there's less worry about customers jumping ship every month. This lowers customer acquisition costs.
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• Suitable for stable markets: Subscriptions work well where customer needs are predictable and the market isn't subject to wild changes.

Disadvantages of the subscription business model

• Higher churn risk: Subscriptions require excellent service to keep customers happy. They can still leave if they don't get enough value, leading to lost revenue.
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• Keeping things fresh: You need to continually provide enough value to justify a customer's ongoing payments. Stagnant products can lead to higher churn rates.
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• Vulnerable to trends: If a hot new competitor enters your space or there's a shift in customer needs, your recurring revenue stream could take a hit.

Which revenue model suits your SaaS business?

Choosing between usage-based and subscription models for your SaaS company isn't one-size-fits-all. Let's look at some key questions to help you figure out the best fit.

1. How complex is your SaaS product?

• Subscription revenue model: Subscription pricing works better for straightforward products where customers grasp value quickly.
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• Usage-based revenue model: Complex products with different feature sets or usage patterns might benefit from the flexibility of usage-based billing. However, you must make sure your pricing scales reasonably with customer usage.

2. What's your customer behavior like?

• Subscription revenue model: Does your product cater to consistent needs? Subscriptions work well when customers use your product regularly.
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• Usage-based revenue model: A usage-based model might offer more appeal if customer usage is unpredictable — some months high, some low — or if they need time to explore features before committing.

3. How important is predictability?

• Subscription revenue model: If stable revenue is crucial for your business planning, subscriptions are the winner.
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• Usage-based revenue model: If you're comfortable with some fluctuation and want to align revenue growth directly with the value customers get from your product, the usage-based model could be tempting. 

4. Can you handle the overhead?

• Subscription revenue model: Subscription management is often more straightforward to set up and maintain.
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• Usage-based revenue model: Tracking customer usage, ensuring billing accuracy, and preventing "sticker shock" demands robust systems, but platforms like Orb specialize in making this process easier and more cost-efficient for SaaS businesses.

Here are a few more things to keep in mind

• Don't ignore customer preferences: How do people in your market typically pay for similar services? Going against the grain can hurt adoption.
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• Transparency is key: Especially with usage-based models, make pricing clear upfront to avoid surprises and build trust.
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• Hybrid models exist: Some companies mix a flat subscription fee with usage-based charges for specific add-ons or premium features.

Build a better pricing model with Orb

Orb is a done-for-you billing platform for SaaS companies that want to grow without the limits of outdated billing systems. 

Whether you're moving from flat-fee subscriptions to usage-based pricing, designing a hybrid model, or comparing subscription vs. pay-per-use, Orb makes it easy to configure pricing that fits your product and your customers.

Many businesses adopt usage-based billing, which is the opposite of subscription models like fixed monthly plans. Others combine the two, creating hybrid models that blend predictable subscriptions with pay-per-use features. 

Orb supports both strategies. If you’re offering a pure usage model (the opposite of subscription) or a recurring subscription with flexible usage charge, here's why SaaS companies choose Orb:

• Accurate billing = no revenue leakage: Orb’s event-based billing engine turns raw usage data into precise, auditable invoices. Every API call, gigabyte stored, or message sent gets billed correctly, preventing revenue loss and eliminating customer disputes.

• Pricing experiments that drive growth: With Orb Simulations, your teams can test pricing changes using real usage data. Forecast revenue, model the impact on different customer segments, and adjust pricing confidently without breaking your live billing.

• Support for complex and hybrid pricing: Orb works for all types of subscription models, consumption-based products, and credit-based plans. You can roll out new pricing, create customer-specific deals, and add overage charges without rebuilding your billing system each time.

• Integrations for modern SaaS stacks: Orb connects directly to your product data and financial systems. Its modular design and API give you a single source of truth for usage-based pricing, subscription billing, invoicing, and revenue analytics that scales as your business grows.

• Built for SaaS billing realities: Most SaaS companies don’t pick just one model. They combine subscriptions with usage-based charges. Orb lets you bill for seats and feature access, all within one platform.

• A strategic partner that’s more than just a tool: Orb’s team works alongside you to fine-tune your pricing, improve your forecasts, and help you scale. You’ll get best practices, benchmarks, and hands-on support every step of the way.

Ready to experience how Orb helps SaaS teams build scalable pricing without the hassle? 

Explore Orb’s flexible pricing tiers and find one that fits your needs.