Usage-Based Billing

Why Usage-Based Billing Matters

Traditional subscription models offered predictability but created a fundamental misalignment: customers paid the same flat fee regardless of whether they barely touched the product or pushed it to its limits.

Usage-based billing replaces that rigidity with a flexible, scalable framework grounded in actual consumption.

• Lower barriers to entry: Customers start small and pay as they grow, reducing friction in sales cycles.
• Transparent pricing: Builds trust by letting customers pay only for what they actually use.
• Built-in expansion: Revenue scales automatically as customers increase usage, without renegotiation.
• Value alignment: Customers pay for what they consume, improving perceived fairness and satisfaction.
• More accurate monetization: Pricing reflects real usage instead of estimated seat counts or flat tiers.
• Greater flexibility: Ability to tailor pricing by customer segment, usage tier, or go-to-market channel.

Components of Usage-Based Billing

Usage-based billing relies on several foundational components that ensure consumption is tracked accurately, priced correctly, and billed transparently:

1. Measurement Unit: The unit used to track consumption, such as API calls, gigabytes stored, minutes used, or transactions processed.
2. Billing Cycle: The interval at which usage is aggregated and billed, typically monthly, quarterly, or annually.
3. Rate: The price charged per unit of usage, which may be flat, tiered, volume-based, or threshold-driven.
4. Usage Tracking: The system that records customer consumption in real time or near real time to ensure accurate and auditable billing.
5. Billing Adjustments: Mechanisms for handling credits, refunds, discounts, promotions, or corrections when usage or pricing needs to be adjusted.
6. Usage Notifications: Alerts that inform customers when they approach predefined usage limits or thresholds, helping prevent bill shock.
7. Reporting & Visibility: Usage and billing reports that provide customers and finance teams with insight into consumption patterns and cost drivers.

How Usage-Based Billing Works

Usage-based billing operates through a coordinated workflow that converts consumption events into compliant revenue:

Step 1: Metering: Customer activity is tracked and timestamped by product or infrastructure systems (e.g., API calls, data usage, transactions).

Step 2: Rating: Each usage event is priced using predefined rate cards, tiers, minimums, or thresholds.

Step 3: Aggregation: Usage is summed over the billing period (daily, monthly, quarterly) to calculate total consumption.

Step 4: Invoicing: An invoice is generated based on aggregated usage multiplied by the applicable rates, resulting in variable charges each cycle.

Step 5: Notifications: Customers may receive usage alerts or threshold warnings to prevent unexpected charges and reduce disputes.

Step 6: Payment & Cash App: The customer pays using standard payment methods (card, ACH, wire), and cash is applied to the invoice.

Step 7: Revenue Recognition: Revenue is recognized as usage occurs, subject to ASC 606 rules for variable consideration.

Common Usage-Based Pricing Models

Recurring-revenue businesses use several consumption models:

• Unit-Based Pricing: Flat rate per unit consumed (e.g., $0.01 per API call).
• Volume-Based Pricing: Lower rates at higher usage tiers.
• Threshold-Based Pricing: Usage is free or bundled up to a limit, then charged above it.
• Minimum + Overage: A committed minimum plus variable charges beyond it.
• Hybrid Billing: Fixed subscription combined with usage-based add-ons.
• Rollover Models: Unused usage credits roll into future periods.

Each model increases pricing flexibility but also increases accounting and billing complexity.

Accounting Treatment Under ASC 606

Under ASC 606 / IFRS 15, usage-based billing is treated as variable consideration.

Revenue is recognized:

• As usage occurs,
• Only to the extent it is known, measurable, and not likely to reverse,
• Often contemporaneously with or after usage reporting.

If usage data is delayed, companies must either delay invoicing or accrue revenue based on reliable estimates, with clear documentation to satisfy audit requirements.

SaaS Context and Challenges

Usage-based billing delivers flexibility and expansion, but it significantly increases operational and financial complexity.

• ASC 606 Revenue Complexity: Usage changes every period, so revenue must be recognized as it happens. Finance teams need to update revenue schedules continuously to avoid overstating revenue.

• Revenue Predictability & Forecasting: Because usage fluctuates, revenue is harder to forecast than fixed subscriptions. Poor estimates lead to missed targets, bad hiring decisions, and shaky investor reporting.

• Billing Accuracy & Data Quality: Every missed or duplicated usage event turns into a billing error. Inaccurate data drives disputes, revenue leakage, and customer distrust.

• Customer Visibility & Bill Shock: If customers can’t see usage building in real time, invoices feel unpredictable. Surprise charges increase churn and refund requests.

• Cross-Team Coordination: Engineering tracks usage, sales negotiates pricing, finance manages revenue rules, and support handles disputes. When teams aren’t aligned, billing breaks.
• System Fragmentation: Usage lives in product systems, invoices live in billing tools, revenue lives in subledgers, and cash lives in the GL. Without tight integration, reconciliation becomes manual and slow.

How Ordway Solves Usage-Based Billing

Ordway is a purpose-built billing and revenue subledger designed to handle the real complexity of usage-based pricing.

1. Automated Usage Capture & Pricing: Ordway ingests usage data via API or batch files, validates it, and applies pricing automatically. Tiered rates, volume discounts, minimums, and hybrid models are calculated accurately without manual work.
2. Built-In ASC 606 Revenue Recognition: Revenue is recognized as usage happens. Ordway applies the right accounting logic automatically, updates revenue schedules as usage changes, and keeps deferred and recognized revenue in sync.
3. Flexible Pricing Configuration: Finance teams can configure pricing tiers, minimum commitments, overages, and custom deal terms directly in Ordway. Pricing changes flow through billing and revenue instantly, without rework.
4. Clear Invoicing: Invoices clearly show how each charge was calculated. Usage details, pricing rules, and contract terms are attached automatically, reducing disputes and audit questions.
5. Seamless General Ledger Sync: Ordway posts accurate journal entries directly to NetSuite, Sage Intacct, QuickBooks, and Xero. Revenue, deferred balances, and performance obligations stay aligned without reconciliation headaches.
6. Usage-Driven Forecasting & Insights: Ordway tracks usage trends in real time, helping teams forecast expansion, spot churn risk, and understand revenue drivers as customers grow.

Example: Usage Billing with Monthly Minimums

A company signs a 24-month contract that includes platform access plus usage-based pricing with a $10,000 monthly minimum.

• Low usage month: Actual usage equals $7,500, but the $10,000 minimum applies. The customer is billed $10,000.
• High usage month: Usage reaches $15,000, exceeding the minimum. The customer is billed $15,000, including overages.

With Ordway: Usage events flow in automatically, minimums and overages are calculated in real time, invoices reflect actual consumption, and revenue is recognized correctly as usage occurs under ASC 606. Journal entries sync to the GL with a full audit trail.

Result: Finance closes faster, auditors get clean revenue schedules, and customer success uses live usage data to drive expansion—no spreadsheets, no guesswork.