What I Wish Someone Told Me About Prepaid Credits

If you’re scaling a SaaS company with usage-based pricing, you’ll quickly find that handling billing is a whole different ballgame. Billing becomes more than just invoicing—it’s the linchpin that impacts revenue, customer satisfaction, and even your customer success team’s workload.

When we started tackling usage-based billing at Lago, we learned there are two main approaches: prepaid credits and progressive billing. Each comes with its own quirks and advantages, depending on your business model, customer needs, and revenue goals. Here’s a rundown of what we wish someone had told us about these two billing options from the start.

1. Prepaid Credits: The Simplicity of “Pay First, Use Later”

Prepaid credits are essentially the “pay-as-you-go” of SaaS. Your customer buys a set amount of credits upfront, and as they use your service, the credits are deducted accordingly.

Pros of Prepaid Credits

•	Cash Flow Boost: Customers pay upfront, giving you a nice boost in cash flow. It’s like selling gift cards before a holiday—revenue without having to deliver service yet.
•	Predictability for Customers: Customers know exactly what they’re paying, which reduces the fear of unexpected charges.
•	Flexibility in Spend: Credits can be used on different features within your product, giving customers flexibility to try new things or scale up usage.

But There’s a Catch

•	Unused Credits: If customers don’t use all their credits, it can lead to frustration, especially if credits expire. You might have to manage refunds or deal with dissatisfaction from customers who feel they overpaid.
•	Complex Accounting: Credits affect your revenue recognition. Because you’re receiving payment for future services, you must defer revenue until the credits are actually used.

2. Progressive Billing: Bill as You Go, Avoid Sticker Shock

Progressive billing is the solution if your users’ usage varies dramatically, or if you’re targeting larger enterprise customers. Instead of paying upfront, customers are billed based on actual usage, with invoices triggered at specific usage thresholds or intervals.

Why Progressive Billing Works Well

•	Usage-Based Flexibility: Customers pay for exactly what they use, which can be a big plus if your product has high variance in usage (e.g., peak times during holidays).
•	Customer-Friendly Invoicing: With progressive billing, you can avoid sticker shock. Invoices are issued periodically based on usage thresholds, so customers aren’t blindsided by a massive bill at month’s end.
•	Great for High-Growth Companies: As customers scale, their invoices scale naturally. It’s a great match for products where usage can skyrocket, making progressive billing well-suited for products that grow alongside customers.

However, Progressive Billing Isn’t Perfect

•	Cash Flow Challenges: Progressive billing means cash only comes in as usage grows, which may not be ideal if you need upfront capital.
•	Invoice Fatigue: Some customers dislike frequent billing. If they hit usage thresholds often, you may need to consolidate invoices or create a grace period to avoid overwhelming them with too many charges.

3. Choosing Between Prepaid Credits and Progressive Billing

In our experience, the choice between prepaid credits and progressive billing largely depends on your product’s usage patterns and customer behavior:

•	If your customers prefer predictability (such as in SaaS for SMBs), prepaid credits can be a win. They offer customers control over their spend and eliminate surprise charges.
•	If you’re targeting high-volume, variable usage (think enterprise software or tools for scaling startups), progressive billing may be a better fit. It grows with your customers’ usage and supports scalable growth.

Some companies even use a hybrid model—offering prepaid credits for smaller customers and progressive billing for larger ones.

4. Lessons We Learned the Hard Way

After working with both models, here are a few takeaways:

•	Educate Your Customers: Whether it’s prepaid credits or progressive billing, make sure your customers understand how billing works. Simple, clear explanations can prevent misunderstandings and help build trust.
•	Track Usage Closely: Both billing models require detailed usage tracking. Prepaid credits need regular deduction tracking, and progressive billing needs precise usage monitoring to trigger timely invoices.
•	Be Ready for Feedback: Customers have strong opinions about billing! Gather feedback, adapt as needed, and don’t be afraid to iterate on your model.

5. The Bottom Line

There’s no one-size-fits-all answer for usage-based billing. Prepaid credits can be straightforward and predictable, great for cash flow and simple user experiences. Progressive billing, on the other hand, aligns with actual usage, giving customers flexibility while allowing your business to grow with them.

Whether you’re building your billing system in-house or using a platform like Lago, understanding these models will help you make informed decisions about the right approach for your business. After all, in SaaS, getting billing right can be the difference between happy, long-term customers and constant churn.

Each model has its pros and cons. The key is to understand what your customers value most—control and predictability, or flexibility and scalability.