Navigating the Shift to Usage-Based Sales Models

Join us as we explore the transformative shift towards usage-based sales models in enterprise organizations, especially within the SaaS industry. In this episode, we're thrilled to have Anthony McPartlin, a seasoned expert in sales operations and enablement, share his invaluable insights. Together, we unravel the compelling benefits of usage-based pricing, from aligning better with perceived customer value to enhancing net revenue retention. With examples from industry leaders like Snowflake and Datadog, we highlight how this model can drive growth and foster lasting customer relationships. However, this transition also brings challenges, particularly for sales leaders who must rethink compensation plans and sales strategies. This episode aims to equip Chief Revenue Officers with the knowledge they need to navigate this significant shift.

Listen in as we also examine the evolving roles in revenue operations and the implications of usage-based pricing on sales compensation and forecasting. The discussion underscores the importance of advanced data analytics in making informed decisions and highlights the shifting responsibilities of Customer Success Managers towards revenue generation. Anthony and I discuss the potential merging of Customer Success Manager and Account Manager roles, emphasizing the need for collaboration to drive strategic growth and maintain strong customer relationships. With Anthony's expertise, this episode promises to be an enlightening journey into the future of revenue operations and sales models.

(00:05) Usage-Based Sales in Enterprise Organizations

(10:56) Evolving Roles in Revenue Operations

(00:05) Usage-Based Sales in Enterprise Organizations

This chapter focuses on the transition to usage-based sales models in enterprise organizations, particularly within the SaaS industry, driven by AI data and customer preferences. We explore the benefits of usage-based pricing, including better alignment with perceived customer value, lower barriers to entry, and higher net revenue retention, exemplified by companies like Snowflake and Datadog. While acknowledging that this model can enhance growth and create durable customer relationships, I also address the challenges it poses for sales leaders, such as adjusting compensation plans and sales strategies. By offering insights into how this model can drive stickiness and provide accurate signals of product-market fit, we aim to equip CROs with the knowledge needed to navigate this significant shift.

(10:56) Evolving Roles in Revenue Operations

This chapter focuses on the complexities of transitioning to usage-based pricing models and the implications for sales compensation and forecasting. We explore how quota and compensation design must adapt to ensure fairness and motivation for sales representatives, given the variability in usage patterns. The discussion highlights the importance of advanced data analytics and telemetry in making informed, data-backed decisions, reducing reliance on sellers for forecasting. We also address the evolving roles within organizations, particularly the shift in Customer Success Manager (CSM) responsibilities towards revenue generation, and the potential merging of CSM and Account Manager (AM) roles. Finally, the chapter emphasizes the need for collaboration between these roles to strategically drive growth and maintain strong customer relationships.

Transcript

SPEAKER_01: 0:05

Hello everyone, welcome back to the Innovative Revenue Leader Podcast. Today we shift gears and move from how CROs can build and create growth through AI to a topic that I've spent a lot of time on and my guests spent a lot of time on, which is how to handle usage-based sales in enterprise organizations. There's a huge shift happening in this area where and it's largely driven by AI, data, how all that stuff is charged. So we're going to spend some time talking about that. And couldn't have a better guest on. I have Anthony McFartland. He spent 19 years at Lionsbridge. He was leading translate, which is a leading translation and localization services company. While he was there, he led sales operations and enablement before moving over to Serious Decisions, where he used the experience that he gained over those 19 years to help revenue and sales operations leaders elevate the function beyond just the operational norms into something that is truly strategic and helping their companies win. So he's continued doing this at Forrester, where him and I work together and has helped hundreds of companies in this space. Anthony, welcome. Thanks, Seth. Good to be here. Yeah, great, great to have you. I I mean this is a this is a personal idea. You and I were talking before, and I wonder if I can keep a straight face as we're going through this because we've worked together for a long time around a lot of different topics, had a lot of of really valuable debates. I truly consider you thought partner, somebody that if I have a difficult problem I need to work through, you're the guy I call. So and this is one of those difficult problems. So what I'll let should we jump in?

SPEAKER_00: 1:45

Absolutely.

SPEAKER_01: 1:46

Yeah, that's doing it so first question. Why should a CRO care about usage-based sales? Like what's the big deal? Why is it important? What what should we what should they do about it? Why do they care about it?

SPEAKER_00: 1:59

Yeah, yeah. And I think look, look, let's just say up front that usage-based pricing, usage-based revenue models are not a new thing, right? In traditional B2B that they've been there for a long time. But I think in in SAS, we've seen a kind of a shift away from a kind of a purity seat-based or contract-based approach to this usage-based or at least usage plus some sort of commit hybrid model, right? And I think some of that is is clearly driven by kind of buyer preferences, and we'll maybe talk a little bit more about that. And some of it's about kind of investor preferences around usage uh-based models. But you know, you look at companies like Snowflake, you look at Datadog, AWS, right? They've all moved to usage-based pricing, and and they've shown that when you do that, it can accelerate growth, you can improve NRO, you can you know create maybe more durable customer relationships. Um the question is is is how, right? What's the hypothesis for for usage-based pricing? And the first part of it, I think, really is around better alignment with how customers perceive value, right? So in in traditional models, customers pay for seats or licenses regardless of usage, but with UBP, usage-based pricing, you're you're paying in proportion to the value that you've realized, or maybe maybe more accurately the value you've perceived to have realized, because it's not always an easy one to clearly measure. Um, and so the idea is that that builds more trust and it lowers the friction in in buying decisions. So the the kind of second benefit there is that it it should, in theory, make it easier to land customers because you're gett giving them a lower barrier to entry, right? Um so they start small and they scale as they grow. And I think in markets where you know it's very competitive and maybe where speed to land matters more than maximizing ACV, then then that that that can be really important. Um so you know, the the other part of it is the higher net revenue retention, right? So um when the pricing model grows with usage, expansion becomes embedded in the customer lifecycle. And so you know the company, some of the companies that we already talked about here, Snowflake, Datadog, those types of companies, they have very high NRR, right? 130 to 140 percent type of thing. And you know, so that's clearly very attractive for for a lot of organizations. It it's also a very, you know, it's a more accurate signal, I think, of of fit to product market fit, right? Because you know, it it's tied to real adoption, it's not tied to your your skill at negotiating big contracts. And um, so if if if usage Google goes up, then the product's delivering value, and and if it's not, well, it's kind of a fairly clear sign about your product or about you know the level of service that you deliver or your go-to-market message, those types of things. So it's it gives you a pretty strong feedback loop, right, in terms of what what's working and what isn't. Um I think as well, a big big part of it is that it it drives a level of stickiness because you know the the usage is based on real views of value, and so it becomes a lot more embedded, or at least that's the theory behind it, right? And that hopefully then leads to a lower level of churn, uh, etc. Right. And then I we talked already about the fact that from an investor perspective, they they look at the fact that the NRR is higher and and that the upside is kind of uncapped. So that there's those they're the kind of primary benefits, I think, when people think about why UVP.

SPEAKER_01: 5:45

Got it. Now, when you when you look at it from a sales leader perspective, it can be kind of scary, right? Because you've got I used to sell a contract, I get a million dollars, now I sell a contract that I think I'm gonna get a million dollars in a year and a half, and my comp plan's blown up, my planning process is blown up, all that stuff is blown up. Like conceptually at the company level, I can get, I can grow. You basically have unlimited growth because you un you unlock the I only have one sales cycle, that's a year or two years from now. But there's benefits to that. That's that becomes kind of scary to a CRO. And then also you have a new role coming in with the CSM that's gonna play possibly a bigger role in upsell than the salesperson kind of can be scary for a sales team. Like when you when you think about that, like those are the negatives, right? And everyone immediately goes to you're moving my cheese and and this is a this is the change. What are some of the positives that that a sales leader should? I mean, you talked a little bit from a from a CRO sample. I think the macroeconomic side of it and like how this can scale and does scale, those things make sense. But if I'm a CRO, what are the what are in your mind, like what are some of the things that they should be excited about in doing this?

SPEAKER_00: 7:00

Yeah, so look, I I think that there's you know, you talked about risks and and and and kind of benefits, right? So there are trade-offs here that that people I think have to understand as part of this process, right? So yeah, uh, I we talked just uh already about some of the kind of the the upsides around uh you know why why people move to usage-based model. Uh and that certainly, you know, from the perspective of a CRO is exciting, but I think you have to be aware that that it's a it's a shift in in approach, right? It's not just a a change in pricing model, but it's a it's a shift in your how you essentially your revenue operating model, right? So you're you're to your point, right? You're you're the the point of revenue capture moves downstream. So you're shifting the focus from those big upfront deals to sustained usage. And and um that's uh you know that that creates opportunity, but it it creates some level of risk as well, because you you're you're seeing less upfront revenue, right? Smaller initial deal sizes. Um, and so you know that means you're delaying the realization of revenue, and and so top line growth can look slower earlier on. And so some of that is about managing expectations from the perspective of the CRO, right? Because the board and the investors may misinterpret that as kind of smaller bookings or or underperformance. So you you have you need to make sure that the organization and the key stakeholders in the organization really understand how usage-based uh models evolve, right? And uh it starts small and it builds and scales. Um, and so you have to have a long-term mindset towards it. It it's not going to deliver in the in the really short term. Yeah.

SPEAKER_01: 8:51

I mean, to a certain extent, doesn't it pull it pulls the sales role into a more strategic focus for growth rather than the quarterly slog of I need to hit my number, I need to go get the contract sales. You you're it the you see it kind of shifting this the focus to being more strategic rather than very tactically trying to sell one digit.

SPEAKER_00: 9:10

Exactly. You you the focus is not on getting a deal over the line, the the focus is on how do I help a client get value, realize value from our products and services over the longer term, because that's how we grow the the usage-based revenue, right? And so it it's it is all about product adoption, it's all about usage behavior, it's not about sales execution, and that you know, is that that there's implications of that is that you know to a certain extent CROs have less direct control, right? Because uh you need to all of a sudden it's not just about the individual sales team, it's about the entire go-to-market organization, it's about marketing, it's about customer success, right? You talked about customer success role being a key part of it, but it's also about product as well, right? Because if you know the customer has a poor onboarding experience, poor service, or you know, a weak product user experience, then that means the revenue ramp isn't going to be what you maybe hoped it was. So that there's um it's a it's a significant kind of shift for CROs beyond the sales organization into something that is is much more holistic across the whole go to market.

SPEAKER_01: 10:27

Got it. Yeah, let's talk about just some of the cadences that a typical CRO goes for that will be challenged by this. So, like what are some of the things that you see happening around forecasting comp? Like, what are those challenges that a CRO needs to? They look at this and they go, okay, I get it. It's a chance to be more strategic, it's a chance to ramp revenue quickly. I have a million sales cycles rather than one every three years. What are some of the challenges they need to think through as they're going through this process?

SPEAKER_00: 10:56

Yeah, I mean, there's there's a lot of areas here, right? I I mean I think an obvious one would be to look at things like quota and compensation design, right? Because that that becomes more complex, right? In in contract-based selling, reps you're paying them on bookday or some version of that at signing. But right, but with usage models, that value it unfolds over time, right? So do you pay the rep on on initial commit or do you pay them on actual usage? Um, how do you avoid reps being penalized, right, for slow ramp or overpaid on on spikes that they didn't actually drive? Yeah, um, you know, how do you how do you reward that expansion? Um, so from a CRO perspective, designing fair, motivating compounds can be can be more tricky, right? And it's uh there's a risk there of demoding reps if they feel that maybe usage growth is kind of out of their control. So that that's a that's that's a big part of it. The other part of it that I think is is a huge part, and you and I have spent quite a bit of time on this with clients is forecasting, right? So um you know, forecasting gets a lot more dynamic, a lot more data driven, um, and you know, it it's all based around consumption patterns, not locked-in contracts, right? So um that makes forecasting harder and for for a couple of different reasons, right? Um you have this because you you're you're relying on future usage patterns, that's that's highly variable, and it's very hard to predict. And you know, we've been working with clients in terms of helping them figure out how do we model that, how do we forecast against that, how do we get all the data together to be able to do that, right? Especially in organizations who maybe haven't got the kind of maturity around things like telemetry, right? Usage, um, billing, and the integration of all of that into their CRM systems and other systems like that, or into their data lakes to be able to analyze it. So there's a there's a kind of a level of of data management and analytics complexity there that I think for a lot of organizations means they have to re-look at things like their revenue operations model. Like, do they have centralized teams who can help them figure out this stuff, who can help them solve for some of these types of challenges? Um, and I think that's kind of a probably a foundational element of kind of readiness for for usage-based pricing, right? Is can you do you have a level of maturity around the telemetry and and uh do you have you know maturity around the reporting and analytics to support the modeling and the forecasting that's required?

SPEAKER_01: 13:39

Yeah, and that's critical, right? And I mean, to a certain extent, it means I need to rely less on the seller for what's gonna be delivered and more on the analytics, the telemetry, because that's it's a it's gonna be a database, data back decision. Yeah.

SPEAKER_00: 13:59

Yeah, absolutely. I mean, and and that's a you know, for a lot of organizations, that that's a significant effort involved. And and so they have to think about who's actually gonna make that happen within their organization. But it you know, it is a shift, uh and you've written about this when you're at Forester, right? It's a shift in terms of responsibilities when it comes to uh who owns what when it comes to modeling and forecasting um you know the the the the usage patterns in in organizations. In in a lot of organizations, that is a a process that is uh too often controlled by the sales organization without really any kind of level of data.

SPEAKER_01: 14:39

Yeah, for better or for worse, right? I'm accountable, but oh, I'm accountable and and and not having the levers isn't good. I have one more one more question around this one, which is is there a CFM and an AM in the future, or does that role sandwich together and just become that role that handles the strategic growth of a company by leveraging and building the relationship?

SPEAKER_00: 15:01

Yeah, look, there's definitely going to be a I think uh the the CS role is is transitioning from one that that was very much focused on keeping the customer happy to one that now has a much larger role in terms of revenue. I still think that particularly over the over the next couple of years, there's got we're going to see a spectrum there in terms of the relationship or the demarcation between account management and and CSMs. And certainly in some organizations, especially ones, some of that depends on the size of the organization, right? Because for some organizations, they they do not they don't have the capacity to be able to have um you know different roles that that support that entire process. So there's going to be scenarios where CSMs are covering areas that traditionally you would expect AMs to cover, but there there are going to be parts of your segment, your customer segmentation, your your triangle where you know you're going to have clear distinction, I think, particularly in terms of your your most important accounts. So um I think that yeah, you will see a mix, but uh ultimately you're seeing the CS the CSM role evolving to take on more responsibility in that regard.

SPEAKER_01: 16:11

Yeah. More critical than ever for those two organizations within a company to talk to each other to make sure that they do that the right way.

SPEAKER_00: 16:19

Yeah. So I think that that raises questions as to how we organize, right, between the types of functions. But I think you know, for CROs are gonna have to look at the pros and cons of different types of operating models.

SPEAKER_01: 16:31

Awesome. Anthony, thank you for joining. Great to have you. Have you back soon?