Pricing Models
Usage-Based Pricing
Pricing model where customers pay based on their actual consumption of a product or service. Also called “consumption-based pricing” or “pay-as-you-go.” Common metrics include API calls, compute hours, storage GB, or data processed.
Example: $0.01 per API call, or $10 per GB stored per month
Subscription Pricing
Fixed recurring fee charged at regular intervals (monthly, annually) for access to a product, regardless of usage levels. Predictable revenue for the company and predictable costs for customers.
Example: $99/month for unlimited access
Seat-Based Pricing
Pricing model based on the number of users or “seats.” Each user who accesses the product counts as one seat. Also called “per-user pricing.”
Example: $15/user/month
Tiered Pricing
Pricing structure with multiple tiers or plans, each offering different features, usage limits, or service levels at different price points. Customers choose the tier that best fits their needs.
Example: Starter ($49), Growth ($199), Enterprise ($999)
Volume Pricing
Pricing that decreases per unit as usage volume increases. Encourages higher consumption and rewards larger customers. Can be graduated or packaged.
Example: First 10K calls at $0.01 each, next 90K at $0.008 each
Hybrid Pricing
Combination of multiple pricing models, typically a base subscription fee plus usage-based charges. Provides revenue predictability while aligning costs with value delivered.
Example: $99/month base + $0.01 per API call
Freemium
Business model offering a free tier with limited features or usage, with paid upgrades for additional capabilities. Used to drive adoption and convert users to paid plans.
Example: Free up to 10K requests/month, then paid plans start
Plan Structure
Plan
A distinct product offering with specific features, limits, and pricing. Customers subscribe to one plan at a time. Also called “tier” or “package.”
Example: Starter Plan, Professional Plan, Enterprise Plan
Feature
A specific capability or functionality available in the product. Features can be included or excluded from different plans to create differentiation.
Example: SSO authentication, priority support, advanced reporting
Entitlement
A customer’s right to access specific features, usage limits, or resources based on their subscribed plan. The system checks entitlements before allowing access.
Example: Customer on Growth plan is entitled to 1M API requests and advanced targeting
Limit
A quantitative restriction on usage or resources within a plan. Can be hard limits (blocking) or soft limits (triggering alerts or overage charges).
Example: 100K API requests per month, 5 team members, 50 GB storage
Quota
Similar to limit; the allocated amount of a resource available within a billing period. Resets at the start of each period (monthly, annually).
Example: Monthly quota of 1M requests resets on the 1st of each month
Feature Flag
A configuration that enables or disables specific features for different customers or plans. Allows dynamic feature access without code changes.
Example: advanced_analytics: true for Enterprise customers only
Add-On
An optional extra feature or capacity that customers can purchase in addition to their base plan. Allows customization beyond standard tiers.
Example: +$50/month for additional 500K requests, or +$99/month for phone support
Usage & Metering
Metering
The process of measuring and recording customer usage of a product or service. Critical for usage-based pricing and overage calculations.
Example: Tracking number of API calls made, compute minutes used, or emails sent
Usage Event
A single recorded instance of product usage. Events are aggregated to calculate total usage for billing.
Example: API call timestamp, user ID, endpoint accessed, response code
Billable Unit
The unit of measurement used for charging customers. Should be easy to understand and directly tied to value delivered.
Example: API call, active user, GB stored, transaction processed
Metering Interval
The time period over which usage is measured and aggregated. Common intervals are hourly, daily, or monthly.
Example: Usage measured daily but billed monthly
Rate
The price charged per unit of usage. Can vary by volume tier, time period, or customer segment.
Example: $0.015 per API call
Overage
Usage that exceeds the included quota in a plan. Typically charged at a per-unit rate, either automatically or requiring plan upgrade.
Example: Plan includes 100K requests; customer uses 150K; 50K overage charged at $0.02 each = $1,000
Overage Rate
The per-unit price charged for usage exceeding plan limits. Often higher than bundled rates to encourage upgrading.
Example: Included requests at $0.01 effective rate, overages at $0.02 per request
Usage Cap
A hard limit that prevents customers from exceeding their quota. Service is throttled or blocked once the cap is reached.
Example: API returns 429 error after 100K monthly requests
Soft Limit
A threshold that triggers alerts or overage charges but doesn’t block usage. Allows business continuity while capturing additional revenue.
Example: Send alert at 80% usage, allow continued usage with overage charges
Billing & Invoicing
Billing Cycle
The recurring time period for which customers are billed. Most common are monthly and annual cycles.
Example: Monthly billing on the 1st, or annual billing on subscription anniversary
Billing Period
The specific date range covered by a single invoice. For monthly plans, typically the previous month’s usage or the upcoming month’s subscription.
Example: Invoice for October 1-31 usage, issued November 1
Invoice
A formal bill sent to customers detailing charges for a billing period. Includes line items, amounts, taxes, and payment terms.
Example: Invoice #INV-2024-001 for $347.50 due November 15
Line Item
A single charge entry on an invoice. Includes description, quantity, unit price, and total amount.
Example: “API Requests - Overage (50,000 @ $0.02) = $1,000.00”
Proration
Adjusting charges proportionally when changes occur mid-billing cycle. Ensures customers only pay for what they actually use or access.
Example: Upgrade from $99 to $199 plan on day 15 of 30-day month: refund $49.50, charge $99.50
Arrears Billing
Charging customers after usage occurs, based on actual consumption. Common for usage-based pricing.
Example: October usage billed on November 1 after measuring actual consumption
Advance Billing
Charging customers before the service period begins. Standard for subscription models.
Example: Annual plan charged $1,200 upfront for upcoming 12 months
True-Up
A reconciliation charge or credit at period end to align billed amounts with actual usage. Common when estimates are used during the period.
Example: Estimated 100K monthly users, true-up at month-end showed 120K actual users
Minimum Commitment
A guaranteed minimum amount a customer agrees to spend over a contract period, regardless of actual usage. Common in enterprise contracts.
Example: $50K annual minimum commitment with quarterly true-ups
Credit
A positive balance on a customer account that offsets future charges. Can result from refunds, promotions, or overpayments.
Example: $500 credit applied to next invoice, reducing amount due
Payment & Collection
Payment Terms
The conditions under which payment is due. Includes due date, accepted payment methods, and late payment penalties.
Example: Net 30 (payment due within 30 days), or Net 15
Auto-Pay
Automatic payment collection using stored payment method on the due date. Reduces manual payment processing and improves collection rates.
Example: Credit card charged automatically on invoice date
Payment Method
The means by which customers pay invoices. Common methods include credit card, ACH/bank transfer, wire transfer, or check.
Example: Visa ending in 4242, expires 12/25
Dunning
The process of communicating with customers to collect overdue payments. Includes reminder emails, retry attempts, and eventual service suspension.
Example: Day 3: reminder email, Day 7: retry payment, Day 14: suspend service
Grace Period
A time window after payment failure before service disruption occurs. Allows customers to update payment methods without interruption.
Example: 3-day grace period after failed payment before account suspension
Failed Payment
An unsuccessful payment attempt, typically due to insufficient funds, expired cards, or bank declines. Triggers dunning process.
Example: Transaction declined by card issuer
Refund
Money returned to a customer for overpayment, service cancellation, or other reasons. May be partial or full.
Example: Prorated refund of $67 for unused portion of annual plan
Customer Lifecycle
Trial
A temporary period allowing customers to use the product for free or at reduced cost. Used to drive conversion to paid plans.
Example: 14-day free trial with full feature access
Activation
The point at which a customer begins using the product meaningfully. Key metric for conversion and retention.
Example: Customer makes first API call or invites team members
Conversion
When a free trial user or freemium user becomes a paying customer by subscribing to a paid plan.
Example: Trial user subscribes to Starter plan on day 10 of trial
Upgrade
Moving to a higher-priced plan with more features or capacity. Positive revenue expansion signal.
Example: Customer moves from Starter ($49) to Growth ($199) plan
Downgrade
Moving to a lower-priced plan with fewer features or capacity. Can indicate churn risk or right-sizing.
Example: Customer moves from Growth ($199) to Starter ($49) plan
Churn
When a customer cancels their subscription or stops using the product. Key metric for SaaS health.
Example: Customer cancels at end of billing period
Expansion Revenue
Additional revenue from existing customers through upgrades, add-ons, or increased usage. Tracked via Net Dollar Retention.
Example: Customer adds +$50 add-on, increasing MRR from $99 to $149
Contraction
Reduction in revenue from existing customers through downgrades or reduced usage. Negative impact on NDR.
Example: Customer downgrades from $199 to $99 plan
Revenue Metrics
MRR (Monthly Recurring Revenue)
The predictable monthly revenue from all active subscriptions. Normalized from annual contracts (ARR ÷ 12).
Example: 100 customers at $99/month = $9,900 MRR
ARR (Annual Recurring Revenue)
The annualized value of recurring revenue. Calculated as MRR × 12, or the sum of all annual contracts.
Example: $9,900 MRR × 12 = $118,800 ARR
ACV (Annual Contract Value)
The average total value of a customer contract over one year, including recurring and one-time fees.
Example: $12,000 annual subscription + $3,000 onboarding = $15,000 ACV
ARPU (Average Revenue Per User)
The average revenue generated per customer, typically calculated monthly. Total revenue divided by number of customers.
Example: $9,900 MRR ÷ 100 customers = $99 ARPU
LTV (Lifetime Value)
The total revenue expected from a customer over their entire relationship with the company. Key profitability metric.
Example: $99 ARPU × 24 month average lifetime = $2,376 LTV
NDR (Net Dollar Retention)
Percentage of revenue retained from existing customers, including expansions and contractions. Above 100% indicates net growth.
Example: Started year with $100K ARR from cohort, ended with $120K (including upgrades/downgrades) = 120% NDR
GDR (Gross Dollar Retention)
Percentage of revenue retained from existing customers, excluding any expansion. Measures baseline retention without upsells.
Example: Started year with $100K ARR, lost $10K to churn = 90% GDR
Contract Terms
Contract
A formal agreement between vendor and customer outlining services, pricing, terms, and obligations. Can be monthly, annual, or multi-year.
Example: 12-month contract for Enterprise plan at $999/month
Term
The duration of a contract or subscription. Most common terms are month-to-month, annual, or multi-year.
Example: 24-month term with annual prepayment
Renewal
The process of extending a contract or subscription for another term. Can be automatic or require manual action.
Example: Annual contract renews automatically unless canceled 30 days prior
Auto-Renewal
Automatic contract extension at term end unless explicitly canceled. Default for most SaaS subscriptions.
Example: Monthly plan automatically renews on anniversary date
Cancellation
The termination of a subscription or contract. May be effective immediately or at term end.
Example: Cancel at end of current billing period (no refund) or immediately (with prorated refund)
Notice Period
The advance warning required before cancellation takes effect. Protects vendor revenue predictability.
Example: 30-day notice required for annual contract cancellation
Lock-In Period
A minimum contract duration during which cancellation isn’t allowed or incurs penalties. Common for discounted plans.
Example: 12-month lock-in for annual prepay discount
Commitment
A contractual obligation to purchase a minimum amount over the contract term. Common in enterprise deals.
Example: $100K annual commitment with quarterly true-ups
SLA (Service Level Agreement)
A contractual guarantee of service availability, performance, or support response times. Often includes penalties for breach.
Example: 99.9% uptime SLA with service credits for violations
MSA (Master Service Agreement)
An overarching contract governing the general relationship and terms. Specific orders or statements of work sit beneath it.
Example: MSA establishing terms, pricing structure, and legal framework
Discounts & Promotions
Discount
A reduction in the standard price, offered as a percentage or fixed amount. Can be temporary or ongoing.
Example: 20% off for annual prepayment, or $50 off first month
Coupon
A code that customers enter to receive a discount. Used for promotions, partnerships, or customer acquisition campaigns.
Example: “LAUNCH50” for 50% off first 3 months
Promotional Credit
Account credit given to encourage trial, reward loyalty, or resolve issues. Applied automatically to future invoices.
Example: $100 credit for referral, automatically applied to next invoice
Annual Discount
Price reduction offered for annual prepayment instead of monthly billing. Typically 15-20% off monthly rate.
Example: $99/month or $950/year (20% discount)
Volume Discount
Price reduction based on usage volume or number of seats. Encourages larger purchases.
Example: 10% off for 50+ seats, 20% off for 100+ seats
Referral Credit
Credit given to customers who successfully refer new customers. Incentivizes word-of-mouth growth.
Example: $50 credit for each referred customer who subscribes
Advanced Concepts
Graduated Pricing
Pricing structure where different rates apply to different volume ranges, with each range priced independently. Customer pays blended rate.
Example: First 10K at $0.01, next 90K at $0.008, next 900K at $0.005
Package Pricing
Pricing that changes per unit based on total volume tier. All units priced at the tier rate achieved.
Example: 0-10K at $0.01 each; 10K-100K at $0.008 each (if you use 50K, all 50K are at $0.008)
Good-Better-Best
Three-tier pricing strategy with clear value progression. Anchors middle tier as primary target while offering entry and premium options.
Example: Starter ($49), Growth ($199 - most popular), Enterprise ($999)
Land and Expand
Growth strategy of acquiring customers with lower-priced offerings, then expanding revenue through upsells and increased usage.
Example: Start with Starter plan, grow usage to hit limits, upgrade to Growth plan
Seat Licensing
Traditional software pricing where each user requires a separate license. Being replaced by usage-based models in modern SaaS.
Example: Microsoft Office 365 charged per user
Reverse Trial
Starting customers on a paid plan immediately with option to downgrade or cancel. Reduces free trial abuse.
Example: $1 for first month, then $99/month
Threshold Billing
Only generating an invoice when charges exceed a minimum amount. Reduces processing costs for small accounts.
Example: Only invoice if monthly charges exceed $10
Consolidated Billing
Single invoice combining multiple products, services, or accounts. Simplifies enterprise billing.
Example: One invoice covering metering, feature flags, and A/B testing products
Tax & Compliance
Tax
Government-imposed charge on transactions. Rates vary by jurisdiction. SaaS tax rules are complex and vary by location.
Example: 8.875% sales tax in New York City
Sales Tax
Tax on the sale of goods and services. SaaS taxability varies by US state.
Example: California charges sales tax on SaaS
VAT (Value Added Tax)
Consumption tax common in Europe and other regions. Typically 15-25%. B2B reverse charge may apply.
Example: 20% VAT in UK
Reverse Charge
VAT mechanism where business customers self-report tax instead of vendor collecting. Requires valid VAT ID.
Example: EU business-to-business SaaS using reverse charge mechanism
Tax Exempt
Status allowing certain organizations to avoid sales tax. Requires valid exemption certificate.
Example: Non-profit organizations with 501(c)(3) status
Tax ID
Identification number for tax purposes. In EU, VAT ID; in US, EIN or sales tax permit number.
Example: DE123456789 (German VAT ID)
Nexus
Legal connection to a jurisdiction requiring tax collection. Triggered by physical presence, economic thresholds, or employees.
Example: $100K revenue in California creates economic nexus
Technical Implementation
Idempotency
API design pattern ensuring multiple identical requests have the same effect as a single request. Critical for billing to prevent duplicate charges.
Example: Using idempotency key to safely retry failed payment attempts
Idempotency Key
Unique identifier passed with API requests to enable idempotent behavior. Typically a UUID.
Example: Idempotency-Key: 550e8400-e29b-41d4-a716-446655440000
Webhook
Automated HTTP callback triggered by system events. Used to notify external systems of billing events.
Example: Send webhook to customer system when invoice is paid
API Rate Limit
Maximum number of API requests allowed in a time period. Can be a plan feature or overage trigger.
Example: 1,000 requests per hour on Starter plan
Metering Aggregation
Process of combining individual usage events into billable totals. Can be sum, count, max, min, or custom logic.
Example: Sum all API call events to get total monthly API calls
Settlement
The process of finalizing charges and generating invoices at the end of a billing period. Includes metering aggregation and proration calculations.
Example: On November 1, settle October usage and generate invoice
Subscription State
The current status of a customer subscription. Common states include active, trialing, past_due, canceled.
Example: Subscription moves to past_due after failed payment
Subscription Schedule
A pre-defined plan for future subscription changes. Used to schedule upgrades, downgrades, or cancellations.
Example: Schedule upgrade from Starter to Growth effective January 1
Summary
This glossary covers essential pricing and billing terminology for B2B SaaS companies, particularly those implementing usage-based or hybrid pricing models. Understanding these terms is critical for:
- Product Teams: Designing monetization strategies and pricing tiers
- Engineering Teams: Implementing metering, billing, and subscription systems
- Finance Teams: Revenue recognition, forecasting, and reporting
- Sales Teams: Explaining pricing and negotiating contracts
- Customer Success: Supporting customers with billing questions
As you build your usage metering and billing system, these concepts will form the foundation of your product’s core value proposition: helping other B2B SaaS companies implement sophisticated pricing models without building billing infrastructure from scratch.
Last Updated: November 2025
Version: 1.0