Usage-based pricing’s double-edged sword

tl;dr

• The fundamental conundrum in UBP is that value is continuous and has no upper-bound, but this means that spend has no upper bound, and customers fear an uncapped, unpredictable liability
• This fear can be mitigated by: 1) Providing continuous in-product visibility to help customers understand the value they get from your product, and 2) Creating spend control systems to allow customers to right-size their spend while building up long-term trust and value in your product

The fundamental conundrum

Usage-based pricing (UBP) is hailed as a model that perfectly aligns cost with value—the more your customers use, the more value they receive, and naturally, the more they pay. It sounds like a win-win scenario, right? Not quite. The challenge is that while UBP might offer a logical alignment of value and price, human psychology has other preferences. People crave consistency and predictability.

The inherent unpredictability of UBP is at odds with this need for security. Value in UBP is a continuous variable—incremental usage brings incremental value, but also incremental cost. There’s no fixed price to anchor expectations, meaning customers can feel adrift in a sea of fluctuating bills. This unpredictability sits at the heart of the usage-based pricing.

So, how can you navigate this?

Lead with value, map it to price

The first step in solving this UBP dilemma is simple: make the value crystal clear. When customers can directly tie their usage to the value they’re receiving, unpredictability becomes less daunting.

Let’s use a specific, personal example: Datadog. I do not own the vendor relationship here, yet every week my inbox is flooded with reports—time saved, incidents prevented, productivity gained. Why do they do this? They’re aggressively showcasing the value their product provides, reminding me that their service is indispensable to Metronome. This relentless visibility of value doesn’t just foster customer loyalty, it builds psychological safety for when the bill arrives. The message is clear: “Look at how much we’ve saved you; this is why the price is worth it.” By leading with value, they’re preemptively justifying their pricing.

Contrast this with my first personal experience with UBP way back in 2004. I was on a trip in Costa Rica, texting frequently. When I returned home, I was hit with a $600 phone bill— more than half my bank account balance at at the time. Verizon hadn’t made their pricing or value clear to me. This bill was so jarring that I rage-quit their service immediately. There was no upfront transparency or value framing, just sticker shock.

The lesson is clear: if you want to retain customers with UBP, you need to be transparent about value from the start. Lead with value, and the pricing will follow naturally.

Give me control, please

Visibility is great, but what’s even better? Control. Customers don’t just want to see how much they’re using; they want to manage it, especially as usage—and costs—grow.

When our startup was just getting off the ground, we used to manage our budget with a heavy dose of shame. We’d review everyone’s purchases, calling out unnecessary expenses, like when someone tried to expense a $400 mechanical keyboard. It wasn’t pretty, but it was effective.

Eventually, that stops working. For example, when Dropbox grew, they famously had an intern who flew his entire family first class on the company dime and used the office laundry service to handle all his clothes for the entire summer. When spending is so far from reasonable expectations, you need something more than just shame to control it.

So, what did finance teams do? They created budgets. Budgets give people the freedom to act within defined boundaries, providing flexibility without breaking the bank. The same principle applies to UBP. As your customer base grows, a new persona enters the decision-making process: finance. And finance loves control.

UBP needs to adapt by offering customers a range of tools—cost controls, usage tags, rate limiting, and even upfront credits—that allow them to manage spending without constraining their usage. These mechanisms don’t just provide flexibility; they offer peace of mind, helping businesses scale without losing control over their expenses.

Conclusion: Value and control are key

Usage-based pricing is powerful, but it comes with its own set of challenges. The unpredictability of continuous value and cost can make customers uneasy. However, by leading with clear value and offering robust control mechanisms, you can turn that unpredictability into an asset.

When customers can see exactly what they’re getting and have the tools to manage their spending, they’re more likely to trust the model, embrace it, and stick around for the long term. So, make value obvious and give customers the control they crave—that’s the secret to making usage-based pricing work for both you and your customers.

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