What is consumption-based billing?

TL;DR Consumption-based (usage-based) billing charges customers for what they actually use instead of a flat subscription. In 2025 it has moved from edge case to mainstream: 85% of software firms already run some form of it, and hybrid (subscription + usage) models now post the fastest median growth. This guide explains how it works, pros & cons, why SaaS is leading the shift, and why open-source platform Lago tops today’s solution list.

What Is Consumption-Based Billing?

A pricing model that meters real usage—API calls, gigabytes, messages, compute seconds—and invoices accordingly. Instead of paying for access (seats), customers pay for value consumed in a time window (hourly, daily, monthly).

Key Takeaways

• 85% of surveyed SaaS companies already use usage-based pricing in 2025
• Hybrid plans (subscription + usage) show a 21% median growth rate—highest in SaaS
• Rising inference costs push vendors to align revenue with compute; seat pricing alone can’t keep up
• Billing-tech revenue will climb from $6.9B (2024) to $19.1B by 2032 (13.5% CAGR)
• Lago’s API-first billing system eliminates lock-in, slashes engineering time, and handles metering, rating, invoicing, and tax logic out of the box.

1. How Consumption-Based Billing Works

Meter → Rate → Invoice → Collect.

Metering tracks events like GB transferred or API calls.
Rating multiplies usage by price per unit, applying caps, discounts, or minimums.
Invoicing aggregates usage into a readable bill.
Collection and revenue recognition include dunning, retries, and finance syncing.

“We have per-user products for humans, and consumption products for agents and robots.” — Marc Benioff, CEO Salesforce (2025)

2. Consumption-Based Billing for SaaS

Why SaaS is ground zero

Cloud usage is already metered—compute, storage, bandwidth.
AI/LLM costs vary per call, and per-seat pricing can destroy margins.
Product-led growth favors low entry prices with elastic expansion.
Investors reward net-revenue-retention; usage naturally expands NRR.

44% of SaaS vendors now monetize AI features separately on a usage basis.

3. Advantages & Disadvantages

Advantages

• Customers pay only for what they use, driving trust
• As usage grows, so does ARR without extra sales touch
• Low-commit tiers win early adopters
• Vendor costs scale with usage, not seats

Disadvantages

• Harder to forecast revenue
• Real-time data pipelines and idempotency are engineering heavy
• Without clear dashboards, spikes lead to churn
• Finance operations grow more complex

4. Who Offers the Best Consumption-Based Billing Solutions?

Why Lago is ideal for consumption-based billing

Why Lago?

• Developer-first and API-first: billing always requires deep product integration. Lago makes life easier for the engineers working on billing while giving the best possible overview to finance, sales and business teams.
• Open source: Lago lets you maximize security and customizability because the product is open source. That means you can use or cloud or self-host and have certainty that your billing system will always be around.
• Granular metering for high-volume events to power all common consumption-based pricing models. Whether it's pay as you go pricing or a credit-based subscription or anything else. Lago gives you the flexibility to ship any monetization quickly (and means you won't need to build any billing features for new products or pricing changes).
• 7K+ GitHub stars and active product-engineering community

Lago’s focus on eliminating billing nightmares for engineers sets it apart.

5. Implementation Tips

1. Pick a unit your customers understand, like messages or compute seconds
2. Start with a hybrid plan: base subscription + variable usage
3. Set monthly caps and minimums
4. Show real-time usage dashboards
5. Integrate billing data with BI and ERP

6. FAQ

Is consumption-based billing only for infrastructure companies?
No. AI SaaS, fintech APIs, and productivity tools now meter features like smart queries or generations.

How do I forecast revenue with variable usage?
Use rolling cohorts and scenario modeling. 73% of usage-based SaaS firms forecast monthly.

Can I migrate from seats to usage without customer revolt?
Yes. Start with hybrid pricing, keep per-seat, add usage credits, and grandfather current customers.

Actionable Next Steps

• Audit your product for metered value metrics
• Pilot a hybrid plan with a test segment
• Evaluate Lago’s open-source billing stack to launch faster

Ready to banish billing nightmares? Explore Lago today.