Put yourself in the shoes of a business-to-business (B2B) tech sales representative. Your paycheck depends on sales incentives. Your company sells annual subscriptions (i.e. paid up front) but now wants to offer a pay-as-you-go pricing model (i.e. not paid up front) as well.

Dear salesperson, which service offering would you push to your clients?

1. Option One, which pays you a nice, clear, up-front sales incentive
2. Option Two, which might pay your first, partial commission three to six months later

Unless Option Two has some other incentives attached, most sales reps will recommend Option One every time.

The sales team’s performance determines whether a company achieves industry dominance or sputters at the back of the pack. But the switch to consumption-based pricing (CBP) that is sweeping the software and services sector is turning traditional sales compensation models on their heads and creating friction with sales teams.

The old way of selling B2B software was "seats." Then as the cloud arose, the world moved to "subscriptions." Now many tech companies are marching toward pricing based on how much the customer actually uses the service. That’s CBP, which is also known as usage-based pricing and consumption-based billing. Customers like this model because they know their bills match their use of the products. Software companies like CBP because it helps them understand adoption rates and future churn risk. It also brings new customers in the door faster – due to the little or no up-front commitment – while opening the door wider for long-term potential growth.

It's taking off – and paying off. Some 61% of software as a service (SaaS) companies say they either use CBP or are actively testing it, according to a 2022 study by OpenView, and 22% of those companies have implemented it in the last 12 months. As to the payoff, year-over-year revenue growth was 31% higher in 2022 for SaaS companies with CBP models than the broader SaaS market, OpenView reports.

Here’s the hitch: CBP can make sales reps nervous. The account executive is being asked to present an option to the customer with less clarity and certainty about the overall revenue, commission, and timing.

“This upends a basic sales compensation principle,” says Donya Rose, managing principal at compensation consulting firm the Cygnal Group. “Companies should finish paying the salesperson when two things have happened: they’ve done the great majority of closing the deal and you want them to redirect their focus to the next opportunity, and you know what they sold with a high degree of confidence.”

“But in this world of consumption-based pricing, the latter requirement becomes elusive.”

In some cases, once the pay-as-you-go option is selected, it could take months before the software is implemented. “Then you’ve got to wait for the usage to start taking place, and it might be very slow out of the gate,” says Chris Semain, principal and tech practice leader at Alexander Group. “Several months could go by before revenue really starts to materialize. So there could be a large gap between the time the sale took place and when any meaningful revenue has been recognized and the rep begins to see commissions.” This goes against “sales comp 101” best practices, he adds.

It’s one thing to switch the pricing model. The harder part is that you have to change your entire sales process and the way you pay your sellers to make it work. And the compensation plan is just the tip of the iceberg. CBP brings new sales roles and responsibilities, challenges in setting sales quotas due to lack of historical data, and new transition points from selling to growing customer accounts.

“It’s completely disorienting to salespeople who have grown up with a SaaS model with committed contracts,” says Rose. “And if the sales team doesn’t buy in, they put the entire business strategy in jeopardy.”

There is, of course, no magic formula for every organization. Sales leaders should approach transitioning to CBP and compensation as a true business transformation process and appropriately staff the project. The sales team needs to align with the strategy, and getting them on board is key. Clearly, incorporating visibility into true usage will be a necessary part of the process; many organizations don’t yet track and report granular product usage data and trends to help inform and prioritize their sales activity, says Ben Chambers, a sales compensation consultant specializing in CBP models. “That’s definitely an area of underinvestment in the internal go-to-market systems and wasn’t a first-order priority before now,” he says.

Here are five key questions for leadership – from CEOs and CFOs to sales VPs – to think through regarding the type of CBP model to offer, the speed of transition, and how those choices will alter the roles, responsibilities, and compensation of sales reps and customer service teams. In addition, they’ll need to think through the selling process itself. Get your sales compensation model right, and your move toward CBP pricing will work great; botch it, and both sales and customers will suffer.

1. What type of consumption do you want to encourage?

It’s important to get a grip on your consumption strategy before you start cooking up changes in your sales incentives. For most companies, consumption is not one-size-fits-all monetization. Alexander Group identifies four CBP models:

• 100% pay-as-you-go.
  This is low risk to the customer but typically a higher price per unit. Vendors have no guarantee of revenue, and forecasting is difficult. Reps must be retrained to drive consumption. “While the 100% pay-as-you-go model is very customer-friendly, it’s not easy to execute in terms of compensating salesforce and forecasting,” Semain says.
• Uncommitted contract.
  The customer still has no spending requirement but has some contractual obligations such as term length. The buyer benefits from having a contract that gives a discounted price, but forecasting and spend predictability are still challenging for vendors.
• Committed and uncommitted contract (floor with upside).
  Here a customer is contractually obligated to spend a certain amount. It may also be permitted to spend beyond that – or pay for overage. Most companies that allow for overage convert to list price once a customer goes over their committed spend; this encourages the customer to recontract with a higher commitment. This gives vendors more visibility into monthly recurring revenue and more predictability with longer-term usage. But it also requires vendor resources to proactively engage customers near the point of overage to avoid pricing surprises and to renegotiate new contracts.
  
  “This hybrid of committed and uncommitted pricing is easier,” Semain says of this model. “You can pay the rep on any committed value as well as the incremental overage of any subsequent usage.”
• Committed contract.
  The customer commits to an up-front credit purchase that is drawn down over time based on consumption, also known as prepaid. “That’s even easier” to compensate, Semain says. It’s very much like a classic SaaS subscription, in which bookings and revenue are mostly equal.
  
  Semain cautions that offering customers too many choices could undermine the adoption of CBP pricing models. “It’s hard if the organization’s strategy is either to be pricing-neutral – let the customer choose their pricing model – or to position the consumption option ahead of subscription,” Semain says. “The sales rep is usually going to be more motivated to sell by subscription because they can get paid earlier.

2. How quickly do you want to transition to a consumption-based model?

When an organization comes out of the gates with a new consumption offering, it’s hard to predict how well it’s going to take off. They will want to consider what they’re hearing from customers, how quickly the market is converting, and what their competitors are doing.

Do they want to ease into a consumption-based model starting with a 10% growth goal in the first year and increase at that same rate annually? Or do they want to go from zero to 50% consumption-based in the first year? These choices will mandate how quickly companies should make changes to the sales process, different sales roles, and the compensation plan.

Most companies phase in CBP slowly, introducing the tenets of the new usage model while still offering more traditional licensing models. Some examples include:

• Snowflake, a cloud-based data warehousing company, began incorporating a consumption element into sales around 2019, which proved to be both disruptive and strategic, according to Andrew Straus, vice president of sales strategy and planning, in a detailed post on the company’s blog. Today Snowflake offers options for both pay-as-you-go and prepurchased capacity options, similar to a subscription.
• New Relic, which makes observability software, offers both pay-as-you-go options and committed contracts for long-term expected usage.
• At online automation software company Zapier, revenue is mostly generated on a subscription basis, but the subscription includes some combination of product consumption, functionality, and services. This is an entry point for CBP.

3. How will sales roles and responsibilities shift?

CBP is also shifting roles and responsibilities inside the sales team. Companies that no longer focus as much on large, up-front committed deals in favor of billable usage may have staffed up on whale hunters – sales reps who snag the multiyear megadeals. “That deal-making ability is no longer at the top of the skill set list you’re looking for,” Chambers says.

The old sales “hunter” and “farmer” roles are getting a makeover of sorts too.

CBP organizations are leaning toward account management teams – a more efficient model from a cost perspective. The sales rep (hunter) lands new accounts, then a customer success person (farmer) or team is accountable for ensuring adoption and growing usage over time – while the hunter heads back out to search for new business.

But this handoff from hunter to farmer is more difficult to solve from a compensation standpoint in the consumption world. “If the sales reps don’t retain account ownership and their compensation plans don’t have a meaningful trailing revenue element, why would they ever want to sell a consumption deal?” Semain asks. To remedy this, some companies might offer a unit-based compensation plan in which the rep is compensated not on the dollars brought in but the number of new customers, he says.

The makeup of the customer success team may need updating as well, including adding more tech-oriented people, Chambers says. “Sales organizations are rethinking and rebalancing their resourcing allocations toward more technically savvy pre- and post-sale people versus a more deal-oriented profile. They’re shifting their headcounts and hiring folks who truly understand the products and can legitimately help their customers adopt and find more value from the products,” he says.

4. How will you compensate reps for consumption?

With pricing models nailed down, most organizations know they’ll need to make some adjustments to their sales compensation models – but because they lack firsthand experience with this model or process, few understand what lies beneath the tip of the iceberg.

Even when starting a consumption-based model, most companies will be selling both old and new pricing models for a number of years. “You need to anticipate using both and finding a way to put them both in your quotas and compensation plans,” Rose says.

“If they’ve got a good model working well for precommitted subscriptions and if they expect 10% to be consumption-based in the first year, they probably don’t want to flip their compensation model quite yet,” Rose says. She advises finding ways to give the sales rep credit in the “currency” of the old model. For example, the minimum commitment plus 25% would count as the first-year contract value against the rep’s quota.

Right now, most sales organizations are using either of two compensation approaches to CBP, Rose says. Each has pros and cons.

The first is compensating on recognized revenue. For example, a salesperson has a set of accounts they are responsible for, and their job is to grow revenue across those accounts by $10,000 each month for a year, for a total of $120,000 in revenue growth over the initial book size. “It’s pretty straightforward to measure on the monthly growth, but that does so little to recognize the value creation of getting the increment. When I get the increment, I don’t get a year’s worth but a month’s worth that dribbles out over time,” Rose says. “That’s the model most favored by finance because their compensation costs line up with the revenue.”

The second method is a hybrid of a subscription plus true consumption, or true-up. Here sales reps are paid when they land a new committed contract – so there’s compensation on the committed revenue of the contract (similar to subscription pricing). But they also get an extra payout for the customer’s actual usage every month or quarter above the baseline.

“This is more appealing to the salespeople, but it’s much messier in terms of all the calculations – to see where the commitment was against what actually happened and determining the increment. And sometimes they pay differently for the increment versus the commitment. That complexity keeps finance irritated and confused, but it supports the salespeople by paying them for the two parts of their jobs, landing the new contract and supporting usage,” Rose says.

5. How much risk are you willing to take on in your compensation program?

Some organizations want to drive parity in the compensation plan and find ways to pay the rep before the consumption actually happens, which requires a leap of faith because they don’t know how much a customer is going to spend. So the question is how much financial risk the organization is willing to take on by potentially paying commission dollars before receiving the not-fully-guaranteed revenue. If the risk appetite is low, CBP should be phased in slowly to allow more time for new quotas and KPIs to be established.

With so many questions to answer and variables to consider, it’s doubtful that CBP will be the only way to sell SaaS, Rose says.

“It’s the right way to handle unpredictable surges, and it’s good for trying out [new SaaS services], but if you’ve got a service that you know you’re using at a certain level consistently every month, the software vendor has an interest in just selling you what you know you’re going to commit to, and they can give you a break to do it,” she says. “But overall, I think it’s going to be a hybrid model of subscription and consumption-based pricing for the long run.