Metrics that Measure Up

Usage Based Pricing & Sales Compensation Models - with Rachel Parrinello, The Alexander Group

February 03, 2022 Ray Rike
Metrics that Measure Up
Usage Based Pricing & Sales Compensation Models - with Rachel Parrinello, The Alexander Group
Show Notes

Usage-Based Pricing is trending across the B2B SaaS and Cloud industry.  This pricing model is not new and is also known as Consumption pricing as the cost of the service or product increases as the "consumption" of the product increases.

Saas has traditionally become known for the use of subscription pricing, which often associates an annual subscription cost for each user of the product.  In this scenario, the cost would only increase as additional users were assigned a "seat" and were then able to use the product in an unlimited fashion for that one annual "subscription" price.

One of the challenges that come with the use of Usage-Based pricing in the SaaS industry is how to compensate salespeople for both the acquisition of a new customer, but also for the actual usage and relating revenue over time.

Rachel Parrinello leads the Sales Compensation practice at The Alexander Group and works with many leading B2B SaaS companies that use a Usage-Based pricing model.  Based upon her unique insights into and experience with multiple different compensation models and plans, we dove right into the evolution of sales compensation plans within Usage-Based pricing environments.

Rachel uses an acronym called ILAER model which stands for Identify, Land, Adopt, Expand and Renew model.  In this environment, there are multiple variables to consider in the design of compensation plans such as how to compensate retention, renewals, and expansions - then in the context of a much smaller value to the initial contract value.

Four basic types of pricing models in Usage-Based Pricing environments:

1. No contact and no minimum contract - Pay as your Go

2. Uncommitted contract - There is a contract but no minimum commitment to usage or revenue

3. Committed contract - Prepaid pool of funds that will be used against usage over the agreement term, often a year.  The agreement includes the minimum usage, price per unit of usage, and the associated minimum revenue over the agreement

4. Hybrid (committed + non-committed) contract:  A minimum usage is agreed to, however the projected usage is typically forecasted to be much larger than the contractual minimum and reduced unit pricing  is predetermined within the agreement

We then moved to the "sales compensation" plan for the above models.  Rachel started with the importance of identifying the "persuasion" event and ensuring the sales compensation plan is aligned and rewards for achieving the persuasion event.  The persuasion event may be the original customer acquisition event and paying for a part of the "projected revenue" be paid at the time of the persuasion event and additional compensation as the actual usage and associated revenue happens.

The conversation quickly moved to the different roles involved in the acquisition and growth of the customer.  One traditional model is the hunter/farmer model where the hunter is responsible for acquiring the customer and the farmer is responsible for growing the customer after the initial acquisition.  A new role, called the "rancher" has evolved in the Usage-Based Pricing world, and they have the responsibility for both acquiring the customer and growing the customer.

In the "rancher" model, one defining variable to determine if this is right for a company, it starts with the amount and level of information that needs to be transferred after the initial close.  If the knowledge and level of customer information are large, consider using the rancher model, at least for the first 12-24 months after the initial close.

If you are a participant or leader responsible for sales compensation models in a Usage-Based environment,  Rachel is a must listen!