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Frameworks, core principles and top case studies for SaaS pricing, learnt and refined over 28+ years of SaaS-monetization experience.
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In today's evolving SaaS landscape, usage-based pricing (UBP) has emerged as a powerful alternative to traditional subscription models. Companies like Snowflake, Twilio, and AWS have demonstrated how this consumption-driven approach can accelerate growth and improve customer alignment. However, one significant challenge remains: how do you effectively compensate your sales team when revenue depends on future customer usage rather than upfront commitments?
This shift requires a fundamental rethinking of sales compensation strategies. Let's explore how forward-thinking SaaS executives can design compensation plans that motivate sales teams while supporting the unique dynamics of usage-based pricing models.
The Challenge: Selling Promise vs. Selling Certainty
Traditional SaaS compensation models are built around annual contract values (ACVs) and predictable subscription revenue. Sales representatives secure commitments upfront, making it straightforward to calculate commissions at the time of sale.
Usage-based pricing introduces a different paradigm:
- Revenue materialization is delayed and variable
- The initial sale might generate minimal immediate revenue
- Customer expansion happens organically through increased usage rather than through explicit upsells
According to OpenView Partners' 2022 SaaS Benchmarks report, companies with usage-based models report 38% higher net dollar retention compared to their subscription-only counterparts. This demonstrates the long-term value potential, but creates a challenging disconnect for sales compensation.
Core Principles for Effective UBP Sales Compensation
1. Balance Immediate Rewards with Long-Term Incentives
The most successful UBP compensation plans provide sales representatives with both:
- Short-term compensation: Immediate rewards tied to customer acquisition and implementation
- Long-term incentives: Ongoing benefits from customer usage growth
Kyle Poyar, Partner at OpenView, notes: "The best usage-based compensation plans create a sense of ownership, where representatives benefit from customer success long after the initial deal closes."
2. Establish Meaningful Forecasts and Commitments
While usage can't be guaranteed, effective usage-based sales teams still establish expectations:
- Minimum commitment levels: Base threshold guarantees that customers agree to purchase
- Usage forecasts: Projected consumption patterns based on customer size and use case
- Implementation milestones: Tracking customer onboarding progress as leading indicators of future usage
These elements provide the anchors needed to build meaningful compensation structures.
3. Compensate for Customer Success, Not Just Acquisition
In usage-based models, the line between sales and customer success blurs significantly. Compensation should reflect this reality:
- Reward successful onboarding and implementation
- Track and incentivize time-to-first-value metrics
- Provide ongoing commissions for usage growth within existing accounts
Four Tested Models for UBP Sales Compensation
Model 1: The "Committed Capacity" Approach
How it works: Sales representatives are compensated primarily on negotiated minimum commitments, with smaller incentives for exceeding those thresholds.
Example structure:
- 70% of commission based on initial committed spending level
- 30% of commission tied to actual first-year usage above commitment
- Residual micro-commissions (1-3%) on account growth in years 2-3
Best for: Organizations transitioning from subscription models or those selling to enterprise customers who prefer predictable budgeting.
Datadog employs a version of this approach, according to former sales leaders, providing significant upfront compensation while maintaining alignment with long-term customer value.
Model 2: The "Expected Annual Consumption" Model
How it works: Sales teams forecast expected first-year consumption and are compensated against achievement of these projections.
Example structure:
- Commission calculated on expected first-year consumption value (ECV)
- 50% paid at signing based on the forecast
- 50% reconciled quarterly against actual consumption
- Accelerators for exceeding forecasts
Best for: Companies with predictable usage patterns and reliable forecasting methodologies.
Model 3: The "Customer Lifetime Value" Approach
How it works: This forward-looking model ties compensation to projected multi-year customer value.
Example structure:
- Initial commission based on a calculated 3-year customer value projection
- Quarterly or semi-annual "true-ups" based on actual usage patterns
- Potential for negative adjustments if usage falls significantly below projections
Best for: Mature usage-based companies with sufficient historical data to make reliable lifetime value projections.
Snowflake reportedly uses elements of this approach, with sales compensation factoring in expected long-term account value beyond initial commitments.
Model 4: The "Milestone-Based" Framework
How it works: Compensation is tied to specific implementation and usage milestones rather than purely financial metrics.
Example structure:
- Commission installments paid at key milestones:
- Contract signing (25%)
- Successful implementation (25%)
- First production deployment (25%)
- Usage threshold achievement (25%)
- Additional accelerators for expansion beyond initial use cases
Best for: Complex technical products with longer implementation cycles and multiple potential expansion paths.
Implementation Considerations
Effective Transition Strategies
If you're shifting from subscription to usage-based pricing, consider these transition approaches:
- The hybrid period: Run parallel compensation plans during a 6-12 month transition
- The guarantee period: Provide compensation "floor guarantees" during the initial transition
- The education campaign: Invest heavily in helping sales teams understand the new model
Data Requirements
Successful UBP compensation requires robust data infrastructure:
- Real-time usage visibility for sales teams
- Reliable forecasting tools based on customer segments
- Clear attribution of usage growth to specific sales activities
Sales Team Structure Implications
Usage-based models often benefit from specialized sales roles:
- Technical solution sellers who can map product capabilities to usage growth
- Usage consultants who help customers optimize implementation for maximum value
- Account growth specialists focused on expanding consumption in existing accounts
Measuring Success: Beyond Traditional Sales Metrics
Traditional sales metrics like ACV and CAC don't fully capture the dynamics of usage-based pricing. Consider adding these key performance indicators:
- Time to first value: How quickly customers begin meaningful product usage
- Usage ramp rate: The slope of consumption growth post-implementation
- Usage-to-commitment ratio: Actual usage relative to initial commitments
- Expansion efficiency: Resources required to grow account consumption
According to Bessemer Venture Partners, elite usage-based companies see new customers reach projected steady-state consumption within 12 months, while average performers take 24+ months. This metric directly impacts sales compensation effectiveness.
Conclusion: Designing for the Future of SaaS
Creating effective sales compensation for usage-based pricing requires balancing immediate incentives with long-term alignment. The most successful models create a sense of "customer partnership" where sales representatives' financial outcomes are directly tied to customer success and ongoing value realization.
As you design your approach, remember these key principles:
- Align compensation timing with value creation
- Create clear visibility into usage and growth metrics
- Balance predictability for sales teams with flexibility for customers
- Continuously refine based on actual usage patterns
By thoughtfully designing compensation that supports your usage-based pricing strategy, you can create a powerful advantage in customer alignment, revenue growth, and sales team effectiveness.