Usage-based pricing (or consumption-based pricing) is becoming popular in Enterprise sales. The core is balancing customer spending with actual usage of your product. This brings more flexibility to customers. But for Revenue Operations (RevOps) teams this model is challenging.
How do you forecast accurately when usage fluctuates? How do you design compensation plans that drive the right behaviors?
In this blog, we explore insights from industry leaders and strategies to navigate usage-based pricing effectively.
Challenges with Usage-Based Pricing in Enterprise Sales
Unlike subscription models, where contracted revenues offer predictability, usage-based pricing is dynamic. Apart from that, here are the other challenges:
- Lack of historical data: Enterprise sales often involve longer cycles and customized plans. With limited usage history, predicting future consumption becomes complex.
- Pipeline unpredictability: Sales pipeline forecasts tend to overestimate potential consumption without evidence of deployment or adoption.
- Aligning incentives: Compensating sales reps based on fluctuating consumption can bring to misaligned behaviors.
"If it is truly consumption vs. use-it-or-lose-it contracted consumption, this is hard. Particularly for Enterprise where you probably have very little usable history to use," says Bill Kantor, Co-founder and CEO of Funnelcast.
Forecasting Sales Pipeline for Usage-Based Pricing
To forecast usage-based revenue you need to account for key variables that align with customer usage trends and segment them.
Develop a usage scoring system
"You'll need to develop a scoring system based on whatever variables seem to trend with usage. Categorize predicted usage in ranges (Low, Medium, High) or a numbering system (1-5 levels) to account for increased segmentation," says Preston Robitaille, Business Development Representative, Lane Four .
To build a scoring system and improve pipeline reliability:
- Identify key variables: Watch out for trends that influence customer usage, such as company size, historical deployment timelines, or industry-specific adoption patterns.
- Segment customers: Classify customers into tiers (e.g., Low, Medium, High consumption potential) or a numerical scale.
- Validate scoring accuracy: Regularly refine your scoring model as more usage data becomes available.
Avoid over-reliance on "Mythical" pipeline
Bill Kantor, co-founder and CEO of Funnelcast, offers a cautionary note on inflated pipeline forecasts: "Pipeline is mythical fiction until it is closed, deployed, and the customer is consuming. Forget about pipeline size. It is meaningless."
Instead of measuring pipeline coverage ratios, RevOps teams can:
- Focus on closed deals with deployment timelines and usage milestones.
- Monitor actual consumption growth over time to validate initial predictions.
- Classify deals based on their total consumption potential, ensuring Sales understands the true upside.
Here's article on pipeline pitfalls that you might like: PCR Pitfalls: Prediction Perils of Pipeline Proportions.
Designing Compensation Plans for Usage-Based Pricing
The right comp plan incentivizes:
- Driving initial adoption.
- Increasing steady-state usage.
- Upselling or expanding consumption over time.
Here are three approaches to consider:
1. Pay for potential consumption + growth
How this works:
- Potential consumption tier: Sales reps earn commission for securing deals with specific usage potential (e.g., $50K, $100K, $250K tiers).
- Net growth incentives: Additional commissions are earned as actual usage grows beyond the initial tier.
This dual-tier model rewards reps for landing high-potential customers and also keeping them accountable to maintain long-term usage.
2. Split commissions based on milestones
To avoid overpayment before actual consumption occurs and then clawing back, split commissions across usage milestones:
- Contract Signing: Pay a % when the deal is closed.
- Deployment Completion: Pay a % when the customer activation and adoption is done.
- Usage Realization: Pay remaining commissions based on actual consumption growth over a defined period (e.g., quarterly).
3. Reward actions that drive consumption
"Figure out what metric is important and compensate for the behaviors you want to see (reducing churn rate, upselling, customer feedback reports)," Preston Robitaille, Business Development Representative, Lane Four.
Here are some of the behaviors that drive adoption and growth:
- Encouraging high-value integrations.
- Training customers on features to increase usage.
- Proactively addressing churn risks.
Practical Recommendations for RevOps Teams Considering Usage-Based Pricing
1. Align GTM motion with business impact
RevOps should work closely with Sales, Customer Success, Marketing and Product teams to:
- Identify customer use cases that deliver value.
- Develop playbooks and guides to keep the time-to-value for customers as low as possible .
- Align compensation plans with usage metrics that reflect customer success.
2. Build accurate reporting systems
Robust reporting is essential to monitor usage and assess compensation:
- Usage dashboards: Track real-time consumption across accounts.
- Forecast accuracy Reports: Measure predicted vs. actual usage over time.
- Customer milestone metrics: Report on adoption timelines and steady-state usage growth.
3. Continually optimize plans
Usage-based pricing is iterative. Regularly revisit your compensation plans and forecasting models to:
- Adjust scoring variables based on emerging trends and adjust payout structures to incentivize desired behaviors.
- Gather feedback from Sales to ensure plans are motivating and achievable.
Commission calculation for usage based pricing is easy with ElevateHQ
Paying commission is complicated when there’s usage-based pricing. It becomes a lot more difficult when you have to do it on spreadsheets. With ElevateHQ you can quickly set up your commission plan on our platform and automate commission calculation by just integrating your data sources such as CRM, invoice software and other spreadsheets.
Schedule a demo to find out how you can do it easily on ElevateHQ
