Lago Blog - How usage-based pricing increases NRR

How usage-based pricing increases NRR

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39% of SaaS businesses now charge based on usage—a 16% increase in 7 years [1], representing a fundamental shift toward consumption-based pricing models. This evolution directly impacts Net Revenue Retention (NRR), with every 1% increase in revenue retention increasing a SaaS company's value by 12% after five years [2]. Modern metered billing solutions like Lago enable this transformation by providing the technical infrastructure necessary to implement sophisticated pay as you go pricing models that drive sustainable NRR growth.

Understanding NRR calculations for usage-based billing system implementations

Net Revenue Retention measures the percentage of revenue retained from existing customers over a specific period, including expansion revenue from upsells and cross-sells. A financially sound SaaS company typically targets an NRR above 100%, with top-performing companies achieving NRRs of over 120% [3].

For consumption based pricing models, calculating NRR requires tracking multiple revenue components:

ComponentDescriptionImpact on NRRStarting MRRMonthly Recurring Revenue at period startBaseline calculationExpansion MRRAdditional MRR from increased usageDrives NRR >100%Churn MRRRevenue lost from customer cancellationsReduces NRRContraction MRRRevenue decline from reduced consumptionReduces NRR

NRR Formula: (Starting MRR + Expansion MRR - Churn MRR - Contraction MRR) / Starting MRR × 100%

Lago's event-based architecture: Foundation for scalable consumption based pricing examples

Lago ingests up to 15,000 billing events per second with event-based architecture providing a solid foundation for building fair pricing models that scale [4]. This high-throughput processing capability enables real-time usage tracking essential for accurate metered billing solutions.

Technical architecture advantages

Lago ingests events at scale while preventing duplicates , ensuring billing accuracy through sophisticated deduplication mechanisms. The platform's API-first design provides:

Real-time event processing with sub-second latency
Automatic duplicate prevention using idempotency keys
Flexible aggregation engines supporting complex usage calculations
Multi-dimensional rating for tiered and graduated pricing models

Lago's billing product includes a first-class API for engineers and pixel-perfect user interface for business teams, ensuring every billing component is built to eliminate custom development needs [4].

Strategic advantages driving NRR improvement through usage-based billing system design

Flexibility reduces customer churn

Pay as you go pricing models provide customers with consumption flexibility, enabling cost control aligned with business value. Usage-based billing enables businesses to affordably implement SaaS solutions early and scale usage as they grow [1]. This flexibility reduces churn rates because customers can adjust consumption rather than cancel subscriptions entirely.

Lago supports all pricing models, enabling creation of pay-as-you-go and hybrid plans through intuitive user interface or API integration [4], providing the technical foundation for flexible pricing strategies.

Value-to-usage alignment drives organic expansion

When customers perceive direct value correlation with increased usage, organic expansion occurs naturally. Usage-based billing operates as a consumption-based pricing model where customers only pay for actual usage in each billing cycle [5]. This alignment creates expansion opportunities that can generate 10x revenue growth from high-adoption customers.

Lago's prepaid credit features unlock recurring revenue opportunities for pay-as-you-go pricing models , enabling businesses to capture revenue upfront while maintaining usage-based flexibility.

Implementation strategy: Lago's composable architecture for metered billing solutions

High-velocity data ingestion and processing

Lago enables companies to connect data sources directly without extensive pre-aggregation or data cleaning, simplifying the billing process by skipping cumbersome data transformation steps [6]. This approach reduces implementation time from months to hours while maintaining billing accuracy.

Key technical capabilities include:

Event streaming architecture processing 15,000 events/second
SQL-based custom metrics enabling complex usage calculations
Real-time aggregation engines supporting multiple pricing dimensions
Automated invoice generation with detailed usage breakdowns

Cross-functional data utilization

Implementing billing and usage tracking systems to monitor patterns provides insights into customer needs and preferences for product improvement [7]. Successful consumption based pricing examples require distributing usage data across teams:

Customer Success teams monitor consumption trends to identify expansion opportunities and churn risks
Sales teams leverage usage analytics to target high-growth accounts approaching tier limits
Product teams optimize feature development based on consumption patterns
Finance teams improve revenue forecasting accuracy using usage trajectories

Lago provides developer-first, API-first architecture with high flexibility, handling high volumes of events while working seamlessly with existing tools [8].

Lago's business outcome advantages: Faster time-to-cash and reduced billing errors

Automated revenue recognition and invoice generation

Lago automatically generates invoices according to plan models, billing subscription fees at period beginning or end while calculating usage-based charges at period end . This automation reduces manual billing processes and accelerates time-to-cash for usage-based revenue.

Lago automatically calculates what each customer owes and generates invoices depending on plan configuration , eliminating calculation errors that typically occur with manual billing processes.

Transparent customer communication

Transparency is essential for customer understanding and satisfaction, enabling various payment methods for usage charges [9]. Lago provides customer-facing capabilities including:

Real-time usage dashboards for consumption monitoring
Threshold notifications preventing surprise billing
Detailed invoice breakdowns with usage attribution
Self-service portal for subscription management

Lago provides a user-friendly customer portal for managing subscriptions and viewing invoices [10], improving customer experience while reducing support overhead.

Advanced pricing model support: Maximizing NRR through sophisticated saas pricing models

Multi-tier and graduated pricing implementation

Lago enables flexible usage billing with tiers, packages, or custom models [4], supporting complex pricing strategies that encourage consumption growth. The platform handles:

Volume-based discounts rewarding higher usage levels
Graduated pricing tiers with progressive rate structures
Commitment-based pricing combining minimum spends with usage overages
Hybrid models blending subscription and consumption components

Lago supports spending minimum rules for pricing units or entire invoices, prepaid usage credits with custom top-up rules, and percentage or price-based discounts with custom coupon configurations [4].

Enterprise-grade compliance and integration

Lago provides full transparency and customization as an open-source solution, enabling code audits, data control maintenance, and custom feature development, with seamless integration to tools like Stripe, NetSuite, AWS Marketplace, and accounting software [11].

The platform ensures compliance through:

SOC 2 Type II security compliance
Multi-currency support for global operations
Tax calculation engines for regulatory compliance
Audit trail capabilities for financial reporting

Measuring success: NRR optimization through Lago's analytics capabilities

Real-time revenue intelligence

Track key metrics beyond basic NRR calculations:

Expansion efficiency rates measuring revenue growth per customer
Usage adoption velocity tracking feature utilization patterns
Cohort-based retention analysis segmented by acquisition vintage
Predictive churn scoring based on consumption trends

Research demonstrates that 57% of teams with purpose-built Customer Success platforms report NRR greater than 100%, compared to 46% without dedicated platforms [2].

API-driven business intelligence

Lago operates as a developer-first product with intuitive interface, enabling all actions via API or user interface for both technical and non-technical users [8]. This accessibility enables cross-functional teams to leverage usage data for strategic decision-making.

Lago's competitive advantages for enterprise-grade usage-based billing system deployment

Open-source transparency with enterprise security

Lago's open-source nature appeals to engineers valuing transparency and control, providing flexibility to adjust systems according to unique business architecture without proprietary solution lock-in [6]. This approach enables:

Complete code auditability for security compliance
Custom feature development on proven billing infrastructure
Vendor independence preventing platform lock-in
Community-driven innovation accelerating feature development

Lago's open-source nature offers unique value through platform extensibility, enabling code audits and complete data control within existing infrastructure [6].

Proven enterprise scalability

Trusted by industry leaders including Mistral AI, Algolia, and GitHub, Lago has proven ability to handle complex billing requirements at scale [11]. The platform particularly serves AI companies, cloud services, API providers, and fintech firms requiring sophisticated usage-based monetization.

Lago's market success includes $22 million raised across funding rounds led by FirstMark and SignalFire, with early customers like Mistral.ai, Together.ai, and Juni leveraging the platform to streamline billing processes [6].

Implementation pathway: From deployment to NRR optimization

Cloud-first deployment with self-hosted flexibility

Users can deploy Lago's self-hosted version on existing infrastructure or request Lago Cloud access for immediate solution usage . The cloud-first approach provides:

Instant deployment without infrastructure management overhead
Automatic scaling handling usage growth seamlessly
Managed updates ensuring latest features and security patches
99.9% uptime SLA for mission-critical billing operations

For organizations requiring complete control, the self-hosted option maintains full data sovereignty while providing identical functionality.

Strategic NRR optimization roadmap

Foundation Phase: Deploy Lago's event ingestion and basic billing automation
Analytics Phase: Implement usage tracking and customer success dashboards
Optimization Phase: Deploy advanced pricing models and predictive analytics
Scale Phase: Leverage API extensibility for custom business logic integration

Conclusion: Transforming NRR through advanced metered billing solutions

59% of software companies expect usage-based approaches to grow as percentage of overall revenue, representing an 18% rise from 2023 [12]. This evolution requires sophisticated technical infrastructure capable of processing high-volume events while maintaining billing accuracy and customer transparency.

Lago operates as a billing/metering suite for complex pricing and monetization, ideal for AI, cloud, API, fintech, CPaaS and DevTool companies seeking accelerated scaling [4]. The platform's combination of event-based architecture, open-source transparency, and enterprise-grade scalability provides the technical foundation necessary for implementing consumption based pricing models that drive sustainable NRR growth.

By leveraging Lago's comprehensive feature set—from real-time event processing to automated invoice generation—organizations can reduce billing errors, accelerate time-to-cash, and create transparent customer experiences that drive organic expansion revenue. The result is higher NRR through improved customer retention and natural usage-based growth aligned with delivered business value.

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Last updated on:

August 18, 2025

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