I’ve seen too many promising startups die on the hill of usage-based pricing. Founders fall in love with the idea, thinking it’s the magic key to explosive growth. They see companies like Snowflake and AWS and think, “That’s the dream.” But they’re not seeing the full picture. More often than not, they end up shooting themselves in the foot.
Pure usage-based pricing is a loaded gun. For every success story, I can show you a dozen companies that crippled their growth, confused their customers, and made their financial forecasting a living nightmare. I’ve personally advised a few of my portfolio companies to move away from it before it was too late.
The Three Fatal Flaws of Pure Usage-Based Pricing
So where does it all go wrong? It usually comes down to three critical mistakes.
1. You create a sales prevention department.
Your customers become afraid to use your product. Think about it. Every time they use a feature, the meter is running. This creates a constant, low-level anxiety. Instead of exploring and finding more value in your product, they start to ration their usage. They turn off features. They limit their teams. They are actively trying to use your product less. That’s the exact opposite of what you want.
I remember one of my angel investments, a brilliant AI-powered code review tool. They went all-in on usage-based pricing, charging per line of code analyzed. The result? Engineering managers, their target customers, started telling their teams to be “mindful” of how often they pushed code for review. It was a disaster. They were literally incentivizing their users to avoid the core value of the product.
2. Your revenue becomes a rollercoaster.
Predicting revenue is hard enough in a startup. With pure usage-based pricing, it’s nearly impossible. Your monthly recurring revenue (MRR) can swing wildly based on customer behavior, seasonality, or even a single customer having a slow month. Try building a financial model on that. It’s a mess. VCs get nervous, and you can’t make long-term hiring or spending decisions with any real confidence.
I was talking to a founder just last week who was struggling with this. Her company provides a serverless AI API, and her revenue chart looked like an EKG. One month they’d crush it, the next they’d miss their target by 40%. She was constantly stressed, and her board was getting impatient.
3. You’re leaving money on the table.
Your biggest and most successful customers, the ones who get the most value from your product, often end up paying a disproportionately small amount. If a customer is getting 100x the value from your product, but their usage is only 2x the average, you’re the one losing out. A flat, predictable subscription fee, tied to value, is often a much better way to capture a fair share of the value you’re creating.
The Hybrid Model: A Simple Framework for Sanity
So what’s the answer? It’s not to abandon usage-based pricing entirely. It’s to be smart about it. The solution is a hybrid model that combines a predictable subscription with a usage-based component. It’s the best of both worlds.
Here’s a simple framework I’ve used with my portfolio companies to get this right:
Step 1: Define Your Value Metric.
First, you need to figure out what your customers are actually paying for. What is the core unit of value you provide? Is it seats, projects, API calls, or something else? This will be the foundation of your subscription tiers.
For RemoteTeam, the company I founded that was later acquired by Gusto, our value metric was the number of active international contractors a business was paying. It was simple, predictable, and scaled with our customers’ growth.
Step 2: Create Your Subscription Tiers.
Once you have your value metric, create a few simple subscription tiers. I’m a fan of the classic three-tier model: Good, Better, Best. Each tier should include a generous amount of usage for your core value metric. The goal here is to make the subscription a no-brainer for the vast majority of your customers. They should feel like they are getting a great deal and never have to worry about their usage.
Step 3: Add a Usage-Based Overage.
This is where the hybrid part comes in. For the small percentage of customers who go over their subscription limits, you can charge a usage-based overage fee. This protects you from extreme outliers and ensures that your heaviest users are paying their fair share. But because it only affects a small number of customers, it doesn’t create the anxiety and sales prevention of a pure usage-based model.
The Bottom Line
Stop thinking of usage-based pricing as a silver bullet. It’s a powerful tool, but it needs to be used correctly. For most SaaS companies, especially in the early stages, a hybrid model is a much safer and more effective approach. It gives you the predictability of a subscription with the flexibility of usage-based pricing. You’ll have happier customers, a more predictable business, and a much better night’s sleep.
Frequently Asked Questions
What experience informs this perspective?
This perspective comes from over a decade of building companies in Silicon Valley, two successful exits (RemoteTeam to Gusto, MovieLaLa to Gfycat), and investing in 200+ startups including Anthropic, OpenAI, and Scale AI. I write about what I've lived.
How can I apply this thinking to my own situation?
Start by identifying the core principle behind the opinion, not the specific example. Then ask yourself: does this principle apply to my context? If yes, test it in a small, low-risk way before going all in.
Do all experts agree with this view?
No, and that's fine. The best ideas in business are often contrarian. I share my perspective based on my experience and data, but I encourage you to seek out opposing viewpoints and form your own conclusions.