Welcome to the deal room. Every episode I walk through a framework you can use to close enterprise software deals.
Why it matters
Every software CFO right now has two priorities that directly contradict each other. Cut software costs. Increase AI usage. Fair use is how you hold both.
More prompts, more data stored, more tokens / credits used. The bill keeps going up.
As companies scale, LLM usage scales with them. Even after negotiating unit costs down, you're looking at 40-50% margin at best. So how do you get back to 80%+ margins?
Few options:
1/ Increase prices
2/ Increase revenue (to cover cost of AI)
3/ Decrease costs
The reality is 5-10% of users are actually driving 90% of costs. A price increase for 100% of your base when 90% aren't the problem is a tough sell (e.g. 1Password’s price increase pushback). A company’s cost increase is a company problem, not a customer one.
So design a lever that only 10% will feel.
Take a simplified example. You have 1,000 customers on a $50/month plan. Your AI feature costs you roughly $2 per customer per month in compute at median usage. That's manageable — $2K in variable cost against $50K in revenue.
But the P95 customer isn't using $2 worth of compute. They're using $25. And the P99 customer? $80. That top 1% — just 10 accounts — might cost you more in compute than the bottom 500 combined.
You have two options. Raise prices across all 1,000 customers to cover the tail. Or set a fair use threshold at something generous — say the 95th percentile — and only trigger a conversation, overage, or throttle for the 50 customers above it.
Option one risks churn from 950 customers who were never a problem. Option two protects your margin without touching the experience for anyone using the product normally.
One large customer can move product COGS by multiple percentage points without anyone noticing. I've used fair use to cut product COGS by 33% in six months. And this isn’t unique to one industry.
4 real examples
These are 4 different approaches to fair use. Here’s how to figure out which one fits you.
How to create your own
1/ Inspect. Start with taking a deeper look at your usage patterns. If you have 1,000 teams that have adopted a product with an average of 10 users per product, pull up usage by user. If you see the 90/10 pattern then you have a great candidate for fair usage.
2/ Analyze. Take the P95 (pro tip - there is a percentile function in excel / sheets) of your usage. The 95th percentile = fair usage of customers. You can position this to customers as “95% of customers should be unaffected by this policy” and you can focus on negotiating with the 5% who fall outside these usage patterns.
Note: P95 makes sense for dev tools where there is a long-tail of usage. For infra or spiky usage, P90 may make more sense. For productivity tools, the fair usage may be closer to P99.
3/ Apply. My recommendation is to enforce fair usage in every single contract / apply to your entire customer base even if it only affects 5%. Then depending on the product you can decide if you want it to be a hard limit (e.g. rate limit, stop usage, or automatically charge more when customers pass it) or soft limits (e.g. notice to customers but allow them to continue scaling). The benefit of the latter is you have the right to renegotiate the pricing without any disruption in customer scaling / adoption. Win-win.
Walkthrough by deal type:
Renewal: roll out the policy for net new customers and existing at the next renewal. All current contracts should be grandfathered in. In the renewal conversation make sure you have a clear way for customers to track how close they are to the threshold. Proactive alerting is a bonus.
Expansion: exceeding the fair use policy is a great signal that the customer is a) rapidly growing and it’s time for a renegotiation b) the customer is misusing the product and needs support in how to use your product.
Contract vs. Website:
Enterprise -- as part of your sales conversation it’s important to proactively flag the fair usage. I’ve actually used it as a competitive advantage; other companies may actually charge for dimensions like queries as an alternative to fair usage.
Self-serve -- for credit-card based customers having fair usage clearly called out on the pricing page + examples in the documentation is enough. The key is a) help them understand what it is and how to track it, b) show them how to optimize so they stay under.
The irony of fair use is that it's better for the customer it's "enforced" on, too. That customer running 150x their expected usage? They're either getting massive value and should be on a bigger plan, or they're doing something wrong and need help. Either way, the conversation is worth having.
If you're building a fair use policy and want a second set of eyes, reach out to set up some time here.