What is consumption-based billing?

Consumption-based billing, also known as usage-based billing, is a pricing model that charges customers based on their actual usage of a product rather than a flat subscription fee, and by 2025, it has become a mainstream approach with 85% of software firms adopting it in some form. This model, particularly popular among SaaS companies, aligns costs with value consumed and is often combined with subscription plans to create hybrid models, which show the highest median growth rate. The billing process involves tracking usage events, calculating costs, creating invoices, and managing collections, presenting advantages such as increased trust and scaling vendor costs with usage, but also challenges like revenue forecasting and complex finance operations. Lago, an open-source platform, is highlighted as a leading solution due to its API-first approach, flexibility, and ability to simplify integration for engineering teams, making it a preferred choice for implementing consumption-based billing.