Custom Usage

What is Custom Usage?

Custom usage is a pricing model where customers pay based on their actual consumption of a product or service, typically combining a base subscription fee with variable charges tied to specific usage metrics. Instead of paying a fixed amount regardless of use, customers are billed for what they actually consume.

AWS exemplifies this model: customers pay for compute hours, storage gigabytes, and data transfer separately. A small application might spend $50/month while an enterprise workload costs $50,000 — same platform, scaled pricing.

Why Custom Usage Matters

Custom usage pricing solves a fundamental mismatch in traditional subscription models: customers with vastly different usage levels pay similar amounts. A startup using 1% of platform capacity shouldn't pay the same as an enterprise using 100x more resources.

For vendors, this model captures revenue that scales with customer growth. As customers expand usage, revenue grows automatically without requiring sales-driven upsells. For customers, it reduces financial risk during early adoption and allows budget flexibility based on business cycles.

Core Components

Usage Metrics

The foundation is determining what to measure. Common metrics include:

• API calls or requests

• Data processed or stored (GB/TB)

• Compute time or resources

• Messages sent (email, SMS, notifications)

• Transactions processed

• Active users or seats

The metric should correlate with the value customers receive and the costs you incur.

Metering Infrastructure

Accurate, real-time tracking of usage events is critical. This requires systems that can:

• Capture usage events without data loss

• Handle high-volume ingestion

• Aggregate usage across billing periods

• Provide audit trails for dispute resolution

Pricing Structure

Most custom usage models use tiered pricing where unit costs decrease at higher volumes:

• First 1,000 units: $0.10 each

• 1,001 to 10,000: $0.08 each

• Over 10,000: $0.05 each

This rewards larger customers while maintaining profitability across segments.

Base Subscription

Many implementations include a base fee that provides platform access plus a certain usage allocation. This creates revenue predictability while maintaining usage-based scaling.

Implementation Considerations

Choosing Value Metrics

Select metrics that clearly represent customer value, not internal technical measurements. Avoid metrics that are:

• Too granular (creates billing complexity)

• Disconnected from value (customers won't understand why they're paying)

• Volatile or unpredictable (causes invoice uncertainty)

Start with one primary metric. You can add complexity later as your billing infrastructure matures.

Metering Accuracy

Billing disputes arise from metering inaccuracies. Build systems with:

• Idempotent event processing (prevents double-counting)

• Redundant tracking mechanisms

• Detailed usage logs customers can verify

• Clear definition of what constitutes a billable event

Revenue Predictability

Custom usage introduces revenue volatility. Finance teams need to forecast, but usage fluctuates. Common approaches:

• Minimum monthly commitments

• Prepaid usage credits at discounted rates

• Annual contracts with usage true-ups

• Maintaining a ratio (e.g., 70% subscription, 30% usage) for predictability

Customer Communication

Usage-based billing requires transparency. Customers need:

• Real-time usage dashboards

• Alerts before exceeding thresholds

• Historical usage data and trends

• Ability to set spending limits or caps

Without visibility, customers experience "bill shock" when unexpected charges appear.

Common Challenges

Bill Variability

Customers struggle with unpredictable invoices. A misconfigured automation or spike in usage can create unexpectedly high bills, damaging trust.

Mitigation strategies include usage alerts, spending caps, grace periods for accidental overages, and clear documentation of what drives costs.

Pricing Complexity

As you add metrics, tiers, and special conditions, pricing becomes difficult to understand. Sales teams struggle to quote accurately, and customers can't predict costs.

The solution is ruthless simplicity. If pricing requires a calculator and spreadsheet to understand, it needs simplification.

Technical Infrastructure

Usage-based billing demands sophisticated infrastructure:

• Real-time event streaming and aggregation

• Distributed metering across regions

• Integration with billing systems

• APIs for customer usage access

This represents significant engineering investment compared to simple subscription billing.

Sales Compensation

Commission structures designed for fixed subscriptions don't translate well to variable usage revenue. Companies must decide how to compensate sales teams when revenue from a single customer varies month to month.

Industry Examples

Cloud Infrastructure

AWS, Azure, and Google Cloud meter virtually everything: compute hours, storage volume, network egress, API requests. This works because resource consumption directly correlates with provider costs.

Communications Platforms

Twilio charges per SMS sent, per voice minute, and per phone number. SendGrid bills per email delivered. The transaction-based nature makes unit economics clear.

Data Platforms

Snowflake uses compute credits for processing and charges separately for storage. Databricks meters compute capacity and data processed. These align pricing with the computational intensity of customer workloads.

Developer Tools

Stripe charges percentage-based fees per transaction plus fixed amounts. GitHub Actions bills per minute of compute time used in CI/CD pipelines.

When to Use Custom Usage

Custom usage pricing makes sense when:

• Value delivered clearly correlates with a measurable metric

• Customer usage varies significantly across segments

• You have the technical capability to meter accurately

• Customers prefer to pay for actual consumption over flat fees

• Your cost structure scales with customer usage

It's less suitable when:

• Usage is uniform across customers

• Metering infrastructure costs exceed benefits

• Customers demand price predictability

• Your value metric is unclear or disputed

Hybrid Models

Many SaaS companies adopt hybrid approaches combining subscriptions with usage:

• Base platform fee for access

• Included usage allocation

• Overage charges beyond allocation

• Premium features as add-ons

This balances revenue predictability with scalable pricing. Slack's model combines per-seat pricing with message history limits — exceeding limits requires upgrades or archival.

Revenue Recognition Considerations

Usage-based revenue creates accounting complexity. Under ASC 606 and IFRS 15, revenue is recognized when services are delivered. For usage-based models:

• Revenue is recognized as usage occurs

• Prepaid credits create deferred revenue liabilities

• Estimates may be needed for unbilled usage at period end

• Auditable usage records are essential

Finance teams need billing systems that support compliance requirements while handling variable revenue timing.

Getting Started

If implementing custom usage pricing:

1. Identify your core value metric through customer research

2. Design a simple tier structure (3 tiers maximum initially)

3. Build or integrate metering infrastructure with accuracy requirements

4. Create customer-facing usage visibility and controls

5. Test with a limited customer segment before full rollout

6. Document pricing clearly with concrete examples

7. Train sales and support teams on explaining the model

Start simple. Complexity can always be added later, but simplifying an overly complex system is much harder.