Sales Compensation in a Consumption Pricing World

🧠 Free Recall ❓ Quiz 🔍 Cues 🔮 Simulation 🥷 ShadowBox 📐 Encode Cards

Today’s organizations want stronger alignment between the cost of SaaS solutions and the value derived from these products. As a result, many software companies are looking at adopting consumption-based pricing models as an alternative to subscription models. 
With consumption-based models, customers only pay for what they use, and usage is tied directly to the value customers derive.
Of course, consumption means software companies don’t experience revenue until customers use the solution. Unlike subscription models, consumption revenue is earned through usage rather than generated from bookings and renewals. 
This begs the question: How do you best align your sales team to the way the customer derives value from your product?
The answer is to take a fresh approach to compensation that accounts for the new role that sales reps play. You must incentivize sales reps to think about usage and how each customer can uncover more value by using your solution. Pay should be based on the value that a sales rep helps a customer realize by using your solution, which can be measured by customer consumption as well as more traditional measures.
About three years ago, Snowflake started to incorporate a consumption element into sales compensation, which proved to be both disruptive (as expected) and strategic (as hoped). Throughout the process, we’ve learned a lot, made adjustments and improvements, and continue to improve alignment between customer value, Snowflake’s strategic objectives, and the seller’s role. Here are some of the benefits, learnings, and best practices we’ve discovered.

Considerations for aligning consumption and compensation
Not surprisingly, customers appreciate a consumption pricing model because it represents a customer-centric approach to sales. It ties a salesperson’s incentives to the customer realizing value for the duration of the relationship.
But software companies can also benefit when they design a compensation system that reflects how consumption works in practice. The key is to encourage sales reps to become active participants in the entire customer lifecycle. 
This approach requires a sizable mindset shift. Sales reps must stretch their thinking beyond the initial sale and invest in customers’ long-term success. They must know why the customer bought the solution and what use cases will encourage early adoption and usage. Building that strong relationship and understanding the customer’s evolving needs creates a natural opportunity to upsell by identifying new use cases. As soon as sales reps recognize the connected nature of these activities and how they relate to the overall incentive structure, things really start to click. 
In addition, customers know that sales reps only realize the value in their paychecks when customers realize the value of the solution. This reality builds a synergistic relationship where sales reps are more attuned to the customer’s strategy, which in turn builds trust and confidence with the customer. 
Software companies also need to recognize that consumption contains a certain amount of inertia. Think of consumption as a flywheel where you need to build upon usage over time in order to gain momentum and experience growth. In practice, this means customers may start using your solution heavily at first—for example, when they initially migrate—but consumption may flatten out as they settle into routines. These slowdowns require sales reps to step up and find new workloads that get the usage patterns back on an upward swing.

Compensation best practices discovered through experiential learning 
We’ve learned a lot through our transition from traditional, bookings-oriented sales compensation to a hybrid compensation model with a consumption component. If your company is adopting or moving to a consumption-based pricing model, here are five things that will help you design a solid compensation plan:

Define excellence
When setting compensation rate tables, you must think about excellence. What does excellence mean, and what multiple of the target incentive do you want to pay when sales reps meet that excellence point? 
For bookings and subscription plans, there are industry-standard breakpoints and excellence points. These are tuned and tailored within each company, as much experience translates reasonably well between SaaS businesses. However, none of that exists for consumption-based models just yet. There isn’t enough history with this pricing model to build generally accepted norms. And you can’t easily go to peers or advisors for benchmarks on what excellence means with a consumption-based plan, because no one knows yet. That means there’s a bit of trial and error going on, which is why you should view this as an iterative process

In our second year, Snowflake became much more deliberate in using our company revenue forecast for setting quota. Revenue forecasts also became a major input into how we think about setting incentive compensation. We used data around the accuracy of the forecast to help us understand what excellence means. A year later, we were able to use historical data to look back at performance and view actual sales rep performance against quota numbers. This analysis enabled us to understand the distributions and know even more deeply what excellence means and how aggressively we should accelerate rewards for overachievement.

Match sales talent to customer needs
The expertise of your salespeople becomes even more important with consumption. Closing a customer requires a certain type of talent, while working with customers to help them use the solution and realize its value requires another. The skill sets needed in a greenfield territory that’s ripe with prospects also differ from those needed in a mature territory with well-established customers.
To address this challenge, we introduced territory profiles where, based upon the intent of the sales rep’s territory, we differentially weight their plan between bookings and consumption. For example, if there’s a lot of greenfield accounts to land, the sales rep might have a 70/30 plan where 70% of the target incentive is allocated to bookings and 30% to consumption. In contrast, a rep in a mature territory may be put on a 30/70 plan where only 30% of incentives come from bookings and 70% come from consumption. 
We aim to align this mix with where we want the sales rep to spend time and apply effort. We can then tune the compensation plan based on the desired behavior of that territory and, therefore, of the rep. 
Territory profiles also enable sales managers to determine what type of people they need. Sales teams can be tailored to the profiles of the accounts and what’s required for a particular region. For example, a manager might have three greenfield territories and two mature territories. At Snowflake, we give these managers the flexibility to hire or assign current sales reps to match the territory, based on the skills and strengths of the reps. 
What it comes down to is management having a strong understanding of their business, their sales reps, and the needs of a territory to ensure the right talent is assigned to support the individual needs of the customer.

Align your compensation plan to support your product and sales strategy
You may want to tune your incentive structure to your sales model across customer segments. Some software companies have gravity around either a “sales-led” or “product-led” growth model; many have a mix of both, with this mix driven both by the target customer segment(s) and user onboarding experience.
Product-led growth often begins with users signing up for an on-demand account, reading the documentation, and starting to use your solution without ever talking to a sales rep. Later on, sales reps will likely engage through a high-velocity motion to convert active users to a committed contract once they’ve demonstrated a pattern of consumption. In this scenario, you might consider aligning your rep to primarily a bookings component, with less intended time spent on ramping a customer up (since they are already using the product).
This product-led growth motion has a critical sales overlay but requires a different approach than a sales-led interaction with a larger enterprise prospect. In this case, the prospective customer might trial the solution, but chances are they are not going to do anything material with it until a contract is negotiated. And once the contract is signed, they may need to do a migration before they start using the solution. Here, you’ll likely want your rep thinking through that full ramp to production, including orchestrating engagement with your professional services team or service partners to ensure the customer has a good shot at getting the intended value out of the solution within the target time frame. This is a situation where you’ll likely want consumption to make up a larger portion of the reps’ plan.
Set appropriate expectations and enable the field 
By nature, sales reps want to exceed goals and achieve sales above and beyond their targets. However, doing 200% on a bookings number with subscription is very different from achieving 200% on a consumption number, which carries an element of inertia. While a salesperson might exceed a bookings quota by landing a big deal that nobody anticipated during planning, that really doesn’t happen with consumption. Any new customers that a sales rep is working with will need time to get up and running, and that time is often factored into consumption-based planning.
All of this makes consumption a bit of a double-edged sword. When your company forecast is good, it’s easier to set quota and feel confident about the numbers you give salespeople—but your reps may feel disempowered if they can’t influence that number. They may ask, “How am I going to overachieve if the forecast is so accurate?”
Sales leaders need to incentivize salespeople to bring in the planned revenue and find ways to keep them motivated. Commission plans are not intended to be an annuity, but there’s a risk of them becoming one (or being viewed as such) with consumption-based plans. 
That means ensuring that your sales reps feel empowered to influence consumption, and that capability needs to be built into your sales methodology, account plans, and customer quarterly business reviews (QBRs). Sales reps should be equipped with the required tools and have visibility into each customer’s consumption so they can see not only the amount the customer is consuming, but also how the customer is using the solution. These insights empower them to have informed conversations with customers around how they are achieving value and what additional use cases might make sense. Ideally, you should also enable sales reps to trace performance against milestones in a migration or implementation plan so that these data points can be used to manage the customer dialogue over time.
Instill customer success 
If it sounds like sales reps should play a role in “customer success,” that’s because they should. While many software companies have come to rely on separate sales and customer success functions, consumption requires a new way of thinking about the lifecycle of the customer and what customer-software company interactions should look like. 
With consumption, there’s no reason to think of customers differently based on how long they’ve been a customer. Every customer represents opportunity. Every customer has a relatively unique use for your solution. Every customer has new use cases or workloads to be discovered. It’s up to sales to understand and work with each customer to expand consumption and deliver more value. 
Sales reps become customer advocates and hold the reins on the customer relationship, with the whole company behind them to ensure the customer is successful.
What’s needed for consumption compensation to work
If you’re designing a compensation plan that includes consumption elements, be sure to set quota appropriately. While sales reps don’t always think of the incentive compensation plan and quota differently, they should. The former is the structure, which determines what your plan measures are and how you pay on those measurements. Quota is how much each salesperson holds and needs to do for the year (and what they get paid on). 
Here are five things to focus on when refining your compensation plans: 
Primary measures in the compensation plan. Be clear on how sales reps will be paid on consumption relative to your overall business. You need to answer questions such as: What exactly is included and excluded from the compensation plan? How do you pay for consumption with contracted customers versus on-demand customers? Do sales reps only get paid on net-new consumption after a specific sales event for on-demand customers? These types of questions point to the nuances you must address to align compensation plans with company strategic objectives and to deliver value to customers. But these questions are also important for sales reps, who must understand what their goals are when driving customer consumption and how they align with the primary measures of their compensation plan.
Plan mechanics and rate tables. Bookings rate tables cannot be translated directly to consumption because consumption behaves differently. You need to do your homework and determine what makes sense for your business within the parameters of consumption. It will be challenging to set an effective acceleration table until you have an idea of the bell curve—the distribution of actual performance. You also need to understand what excellence looks like in order to build acceleration tables that reflect when reps should receive a multiple of their target incentive. The only real way to do that is to understand the performance of accounts and those situations where reps deserve an accelerated payout, which takes time and data. This is an area ripe for continuous refinement, and it’s smart to set the expectation that it will take some time to get it right. And don’t forget that the bell curve is going to be narrower on revenue than on bookings, due to the nature of consumption.
Revenue forecasting to facilitate quota setting. Effective incentive compensation must align with revenue and booking, and the quota that the field holds must align with the company’s forecast and bookings plan. Ultimately, the revenue plan at the company level needs to flow down through all of sales. Start by understanding the outlook for every existing customer and then look at how new customers are going to layer on, which forms the foundation for setting quota. Also, it’s important that quota setting is not purely formulaic. While critical, a forecast is only one input into setting quota; knowledge of the accounts within a territory and their plans for your solution are equally as important. That’s why a sales manager should ultimately set a rep’s final quota, not the Ops or Finance team, by using the forecast for company and regional targets alongside the account-level forecasts. These inputs give the manager a quota that they can adjust, based on their knowledge of the accounts, to produce the final quota.
Instrumentation and data visibility. A consumption-based pricing model must be supported by tooling and infrastructure that enables you to monitor consumption by customer. This is table stakes. You need to have all the right metering of your product and how customers are using it, and then you must build a data pipeline that translates your customers’ usage into crediting for sales reps. This usage data, coupled with territory data across all teams, is required to make sure everyone is paid accurately. Depending on your coverage model, your data pipeline for crediting may end up being pretty complex, but it’s really important to get it right and pay sales reps correctly.
Education and reporting. It’s important to demystify consumption and ensure that sales reps understand it. Because it’s a new concept for most people, you should create or update sales onboarding, training, and enablement assets. They must educate sales reps on the vernacular and empower them to advocate for consumption. Reporting should also be available immediately so sales reps can dive in and understand how their accounts are consuming, who or what is driving consumption, and what the use cases look like. Proper training and enablement, coupled with data-driven insights, will enable sales reps to focus their efforts and champion the benefits of consumption-based pricing with prospects and customers.
Iteration pays off with compensation plans
Adopting a consumption-based incentive plan is the right move when it aligns with the overall strategy of the company. Sales becomes the customer-facing extension of that strategy, and the goal should always be the alignment of sales compensation with customer value. 
Startups may find it easier to adopt a consumption pricing model and build a consumption-oriented compensation plan because they are starting greenfield. This focus enables companies to ease their way into building out consumption plans as data is gathered and bell curves are determined. 
For more mature companies, the process will require a bit more planning around how to handle current accounts and bookings. Chances are, you won’t build the perfect compensation plan in the first, or even the second, iteration. However, you will be gathering the data and experience necessary to hone the plan, which ultimately should reflect the nature of consumption and align your sales reps to customer value.

Unstarred

Dunk (exclude from study)

Sales Compensation in a Consumption Pricing World

Review Questions

Todos

Sensemaker