I see the same mistake kill promising startups over and over again. They have a great product, a solid team, and early traction. Then they decide to implement usage-based pricing, and within six months, their growth flatlines. Sometimes, it even kills the company.
Most founders think usage-based pricing is a magic wand for growth. They read about Snowflake's success and think they can just copy-paste the model. But they end up shooting themselves in the foot. I've seen it happen a dozen times as an investor in over 200 companies. It's painful to watch.
The truth is, most founders get usage-based pricing completely wrong. It’s not a simple switch you flip. It’s a fundamental product and business model decision that requires deep thinking. Get it right, and you create a powerful growth engine. Get it wrong, and you create a churn machine.
Here’s the breakdown of the three biggest mistakes I see founders make and a simple framework for getting it right from day one.
Mistake 1: Your Value Metric is All Wrong
This is the big one. The original sin of bad usage-based pricing. Your value metric is what you charge your customers for. For a cloud provider, it might be CPU cycles or storage. For an API company, it’s often the number of API calls. The problem is that most founders choose a value metric that is easy to measure, not one that is aligned with the value the customer receives.
I remember a portfolio company—a fantastic team building a tool for data scientists. They decided to charge per hour of processing time. Seemed logical, right? The more you use it, the more you pay. But it was a disaster. Their customers were constantly worried about runaway costs. Every time they ran a complex model, they were staring at a ticking clock. Instead of encouraging usage, their pricing created anxiety.
They were measuring their own costs, not the customer's success. Their customers didn't care about processing time. They cared about the number of models they could build and deploy. The value was in the output, not the input.
We worked together to change the pricing. We switched to a model based on the number of active models in production. It was a simple change, but it transformed the business. Suddenly, customers were incentivized to use the product more. The more successful they were, the more they paid. And they were happy to do it. The company’s growth took off. It was a classic case of aligning the pricing with the customer's success. If your customers are afraid to use your product because they are worried about the bill, you have failed.
Look at some of the best companies I’ve been fortunate to invest in. Scale AI doesn’t charge for compute time; they charge for labeled data. The value is in the result. Anthropic and OpenAI don’t just charge for tokens; they offer different models at different price points based on capability. The value is in the quality of the output. They understand that the value metric is the core of the entire pricing strategy.
Mistake 2: You Have No Guardrails or Predictability
Imagine going to a restaurant where you pay for every bite you take. Sounds stressful, right? That's what it feels like for customers of many usage-based pricing models. They have no idea what their bill is going to be at the end of the month. This lack of predictability is a huge source of friction and a major driver of churn.
One of my early angel investments was in a serverless AI company. Brilliant technology, but their pricing was a nightmare. It was pure pay-as-you-go. The more you used, the more you paid, with no caps, no tiers, and no visibility into the costs until the bill arrived. Their biggest customers loved the product but hated the pricing. The finance department would freak out every month when they saw the invoice. It was completely unpredictable.
The startup was constantly dealing with billing disputes. Customers would complain that they didn't realize how much they were using the service. It was a constant battle. The founders were spending more time on billing support than on building the product.
This is a classic mistake. Founders fall in love with the purity of usage-based pricing and forget about the human element. People need predictability. Businesses need to be able to forecast their expenses. If you can't provide that, you're creating a problem for your customers.
The solution is to build in guardrails and predictability. This can take many forms. You can offer hybrid models with a base subscription fee that includes a certain amount of usage. You can create tiers that offer different levels of usage for a fixed price. You can provide real-time dashboards that show customers their current usage and projected bill. You can set up alerts that notify customers when they are approaching their limits.
Look at how my own company, RemoteTeam, which was acquired by Gusto, handled this. We had a per-seat price, which is a form of usage-based pricing. But we also offered enterprise tiers with custom pricing and volume discounts. This gave our larger customers the predictability they needed. They knew exactly what their bill was going to be each month, and they could budget for it accordingly. It removed the friction and allowed them to focus on the value of the product.
Mistake 3: You're Ignoring the Hybrid Model
Many founders have a religious devotion to pure usage-based pricing. They see it as the only way to go. They think that any form of subscription or tiered pricing is a compromise. This is a huge mistake. The reality is that the best pricing models are often hybrids.
A pure usage-based model can be great for attracting new customers. It lowers the barrier to entry and allows people to try your product without a big upfront commitment. But it can be a terrible model for retaining and growing your best customers. As I mentioned before, the lack of predictability can be a major source of churn.
This is where the hybrid model comes in. A hybrid model combines the best of both worlds. It gives you the acquisition benefits of usage-based pricing and the retention benefits of a subscription model. It allows you to capture value from all segments of your customer base, from the small user who is just getting started to the large enterprise that needs predictability and support.
I saw this firsthand with MovieLaLa, my second company, which was acquired by Gfycat. We were building a platform for movie fans. We could have gone with a pure usage-based model, charging for every movie they tracked or every review they wrote. But we knew that would create friction. Instead, we opted for a freemium model with a premium subscription. The free version was supported by ads, and the premium version offered an ad-free experience and additional features. It was a classic hybrid model. It allowed us to build a massive user base with the free product and then upsell our most engaged users to the premium subscription.
The key is to be flexible. Don't get locked into a single pricing model. Be willing to experiment and find the right hybrid model for your business. The best pricing model is the one that works for your customers and your business. It's not about ideology. It's about results.
A Simple Framework for Getting It Right
So how do you avoid these mistakes? It’s not about finding a magic formula. It’s about a fundamental shift in mindset. You need to stop thinking about what you can charge for and start thinking about how you can help your customers succeed. Here’s a simple framework that I’ve used with dozens of my portfolio companies to get usage-based pricing right from day one.
1. Start with the Customer's Value, Not Your Costs
This is the most important step. Before you write a single line of code for your billing system, you need to have a deep understanding of what your customers value. What is the job they are hiring your product to do? What is the outcome they are trying to achieve? Your pricing should be a reflection of that value.
Don't just guess. Talk to your customers. Ask them what they would be willing to pay for. Run surveys. A/B test different value metrics. This is not a one-time exercise. You should be constantly re-evaluating your value metric as your product and your customers evolve.
One of the most successful companies in my portfolio, a vertical SaaS for construction, spent three months just on this. They interviewed over 50 customers. They built mock-ups of different pricing models. They found that their customers didn't care about the number of users or the amount of data they stored. They cared about the number of projects they successfully completed on time and on budget. So, the company built its pricing around that. They have a small platform fee and then a success fee for each completed project. It was a radical idea, but it worked. Their customers love it because it aligns the company's success with their own.
2. Build for Predictability from Day One
Don't treat predictability as an afterthought. It needs to be a core part of your pricing strategy from the very beginning. You need to give your customers the tools they need to understand and control their costs. This is not just about being nice. It's about building trust and reducing churn.
At a minimum, you should provide a real-time dashboard that shows customers their current usage and their projected bill. You should also offer alerts that notify them when they are approaching their limits. But don't stop there. Think about creative ways to build in predictability.
For example, you could offer a
roll-over feature for unused credits, or a true-up model where they only pay for overages at the end of a quarter. The goal is to eliminate surprises. When a customer gets a bill from you, it should never be a shock. It should be an expected and justifiable expense.
3. Embrace the Hybrid—Don't Be a Purist
Finally, don't be afraid to mix and match. The best pricing models are rarely pure. They are almost always a hybrid of different approaches. Don't let ideology get in the way of what works. Be pragmatic. Be flexible.
Start with a simple, low-friction entry point. This could be a free tier, a trial, or a low-cost usage-based plan. The goal is to get customers in the door and using your product. Once they are engaged, you can start to think about how to monetize them more effectively. This is where the hybrid model comes in.
You can introduce a subscription component for your more advanced features or for your larger customers. You can offer volume discounts or enterprise pricing. You can create different tiers that bundle different levels of usage and support. The possibilities are endless. The key is to find the right mix for your business and your customers.
I’ve seen this work across the board, from AI API companies like Hugging Face to vertical SaaS platforms. The ones who succeed are the ones who are willing to experiment and adapt. They don't just copy what they see other companies doing. They build a pricing model that is unique to their product and their customers.
Your Pricing is a Mirror
Getting usage-based pricing right is hard. It requires a deep understanding of your customers, a willingness to experiment, and a focus on long-term value creation. It’s not a silver bullet. It’s a journey of continuous iteration and improvement.
But if you get it right, it can be a powerful engine for growth. It can align your success with your customers' success. It can create a virtuous cycle where the more value you create, the more revenue you generate.
So before you jump on the usage-based pricing bandwagon, take a step back. Ask yourself the hard questions. Are you measuring the right value? Are you providing predictability? Are you thinking about the hybrid model? If you can answer yes to those questions, then you are on the right track.
Usage-based pricing isn't a shortcut to growth; it's a mirror that reflects how much value you're actually creating. If you're afraid of what that mirror will show, you have a bigger problem than just pricing.
Frequently Asked Questions
What's the most common pushback you get on this?
People often push back by citing exceptions or edge cases. And they're usually right that exceptions exist. But building a strategy around exceptions rather than patterns is a losing game for most founders.
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.
How has this view evolved over time?
My thinking on most topics has changed significantly over the years. Early in my career, I held many conventional views that experience proved wrong. I try to update my beliefs when the evidence changes.
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.