August 6, 2025
Usage-Based Pricing for SaaS?
(NOTE: Unless you’re building a SaaS business, this post probably won’t apply to you.)
Because of AI, there has been a lot of chatter lately about usage-based pricing as an emerging pricing model for SaaS businesses.
My hot take:
Usage-based (i.e., metered) billing is only for massive government-regulated, publicly traded utilities like gas and electricity.
Using it for a SaaS is nuts.
So why would someone consider it in the first place?
The issue is that before AI, SaaS software had zero marginal cost when adding users to the system. This is a very high-profit model.
As SaaS businesses rush to add AI to their software, they’re learning that their costs go up significantly as more users are added to the system. This is a terrible effect on business profits.
So...
If you’re a SaaS business owner and you’re facing this apparent dilemma, here are some questions for you:
- What effect would adding AI have on your monthly profits?
- What effect would NOT adding AI have on your monthly profits?
- What effect would billing in arrears (a requirement of the usage-based model) instead of in advance have on your cash flow situation?
If you consider these questions and conclude that your profit (not your revenue!) will increase by adding AI, and you can take the cash flow hit of billing in arrears, then:
- How can you add AI in a way that isn’t dependent on another company’s API?
- How can you throttle AI usage without annoying users?
- What are the highest-value, lowest-cost AI use cases for users of your app?
Final thought...
Maybe there’s a marketing angle where certain SaaS businesses take a strong anti-AI stance to appeal to what seems to be a growing segment of users who hate it.
I dunno, but I guess we’ll see soon enough.
Yours,
—J