Transitioning to usage-based pricing

Tips for making the jump from SaaS pricing to a consumption-based model

DEAR STAGE 2: What advice do you have for a VP Sales managing the transition from SaaS pricing to usage-based? Any ideas or learnings on managing existing customers, sales compensation, etc…? ~New to consumption-based pricing

DEAR NEW TO CONSUMPTION-BASED PRICING: For those out there just tuning in to this trend, usage-based pricing is all the rage right now! It’s the hottest thing since… PLG. Or maybe it’s the hottest thing because of PLG? 

With so many companies exploring a product-led approach to go-to-market and purchasing power shifting to the end user, charging based on consumption allows users to start engaging with your product for little-to-no cost. They can then pay more as they see value and as usage grows. Equally popular for startups and public companies, this pricing model aligns customer value to spend, and ultimately, revenue for your company. Common examples: AWS, Twilio, Snowflake, AWS, Datadog, Zapier, and HubSpot — Snowflake’s founding CRO discusses how it was implemented early on here. 

In order to share some real world advice on making this transition, we called on our friends (and Stage 2 LPs!) Carrie Bosworth, SVP of Sales at Checkr and Ken Ferguson, CRO at Virtualitics.

They each shared some amazing advice on making the decision, as well as how to enable your sales team and redefine compensation plans:

Before you go all in…

Yes, this is a popular trend, but before you dive head first into this new model, Ken advises taking time to consider if your solution is even a fit for a consumption-based approach. 

Not all solutions are ripe for consumption-based models — no one wants to pay per email sent from Outlook, or per meeting booked in Calendly. Ken challenges you to ask the hard question:

“Does the use of your software line up with a set of metrics that you can actually assign a revenue-oriented metric to? Metrics you can easily assess and monitor in a way that creates value for your customer, and is scalable for your revenue model?” 

If you can answer yes, it’s time to think about the right pricing metric and price point. As you work on picking a metric, it’s critical to test this with your customers. In software, we are used to asking for product feedback and gathering data points from customers, but we need to get comfortable talking about pricing too. How does the customer perceive value? What is their willingness to pay? Use this feedback to inform your decision. 

Once you’ve locked in on a pricing metric, Ken recommends that you take the time to model out the implications of this change on your existing customer base and plan for the year:

“Long-term, you will likely win as you begin to go the consumption route, but have the data on how consumption might change the average deal size, the bookings amount, and how much new pipeline you might need to create to pace toward your revenue targets. The more data you have on how the consumption model will impact deal progression, win percentages, average deal sizes, and time to revenue, the more you can begin to prepare your leadership and your board for any possible short-term blips in revenue attainment that might occur as you implement the new model.” 

These models can also be used as your benchmark to reflect on the transition and roll out of new pricing to customers — how did month 1 compare to your plan? What changes can you make to impact month 2? etc…

Enable your sales and CS teams

This is a dramatic change to your business model, and in all likelihood, your rockstar team of AEs is used to selling in a SaaS model. To make for a smooth transition, you need a great sales enablement plan. Invest up front in educating your customer-facing teams on how this pricing change maps to your buyer journey, as well as how to adjust the sales process to optimize for long-term revenue. 

Carrie shares 2 great tips:

1. Train your team on the importance of a thorough discovery process to align with your customer on expected usage. You need to invest in due diligence with the customer to project their 12-month spend with your company. Unlike a SaaS model with up front payment, an accurate revenue forecast relies on a deep understanding of how your customer will use your product over time. 

2. Once you have a forecast, you can rally your team around bringing this vision to life by defining the hand off between sales and CS, and investing in onboarding. Carrie shares, “In consumptive business models, if the customer ‘go live’ is delayed, it then puts risk into the projected annual spend which will have a negative impact on revenue for the company, as well as commissions for the rep (if paid on a 12 month revenue period).” While intuitive, this is easy to overlook. What are the processes you have in place? What are the leading indicators of success? How early can you identify and correct a delay in onboarding/activation?

Sales compensation

Ultimately, it all comes down to comp. 

Carrie and Ken both agree on the importance of building a plan that incentives the right behavior. It’s not enough to train your team — you need them tightly aligned with your customer’s adoption and success. 

Ken recommends adjusting “comp plans to a customer acquisition metric, success metric, and consumption metric that line up with the customers stated goals and timeframes to ensure steady, consistent growth.” And Carrie calls out the need to balance driving the customer to use the product with fairly paying the sales people for the work they have done. 

What does that look like in practice? A few comp plans that I’ve encountered recently:

• Developer tool: Flat rate on all consumption revenue for first 12 months — rep gets paid as revenue comes in

• E-commerce business: Rep gets paid on 50% of the predicted annual value at the time of booking; at the 6 month mark, Ops recalibrates and projects the rest of the contract year based on a seasonality curve to estimate the total revenue they will collect and pays out the remainder of the deal to the rep 

• Marketplace: Flat rate per logo that activates within first 30 days + X% on all consumption revenue for first 6 mos

Pulling it all together, Carrie notes “We all know the time (and effort!) it takes for salespeople to build a solid pipeline and close new business, and companies cannot afford for it to be wasted effort. The comp plan and collaboration between the sales teams and onboarding / customer success teams is so critical to the success of not only the customer, but to driving actual revenue.”

See you next week!