4 Factors to Consider for Consumption-based Compensation Plans

Consumption-based sales models have gained popularity in recent years because they reward sales teams based on how much customers actually use a product or service. This approach places a strong emphasis on customer success, ensuring that sales teams are not just closing deals, but are also invested in the long-term value customers derive from the product.

As businesses recognize the importance of customer retention and satisfaction, consumption-based models are emerging as a strategic way to align sales incentives with customer outcomes. 

In this blog, we’ll explore the key factors to consider in order to develop a successful consumption-based sales compensation plan and, ultimately, help your revenue team meet their business objectives.

What is a Consumption-based Compensation Plan? 

With consumption-based compensation plans, salespeople are rewarded based on the customer’s actual usage—or consumption—of a product or service, rather than simply for closing the sale or reaching a revenue target. 

In this model, compensation is directly tied to how much value the customer derives from the product over time, which is typically measured by metrics like product usage, access frequency, or the volume of services consumed.

For example, artificial intelligence (AI) software has an ideal business model to benefit from this type of compensation plan, since inputs, data usage, and processing can be tracked and billed at a user level. With a growing number of AI solutions coming to market, the SaaS industry is seeing a significant uptick in consumption-based compensation plans, and revenue leaders need to be able to support them. 

4 Factors in Building Consumption-based Compensation Plans

While consumption-based compensation plans can be highly effective at driving customer-first businesses, they require a fundamentally different approach compared to traditional subscription-based models.

Typically, consumption-based sales compensation can incentivize:  

• Number of new logos, workloads, or other unit-based measurement
• Overall usage, whether that’s through tokens, access, or volumes
• Incremental revenue 
• Commitments

In order to develop compensation plans that are motivating for sellers and aligned with company objectives, revenue leaders need to think critically about how customers use their product(s) and how the sales team influences customer behavior. 

Here are four factors to understand before developing a consumption-based compensation plan. 

Factor #1: What Does Consumption For Your Product(s) Look Like? 

First, business  leaders need to deeply understand how customers use their product(s) in order to establish consumption benchmarks and quantify success. 

Know what a typical consumption path looks like, and consider the following questions: 

• What trends do you see in a user’s consumption?
  
  • Do users have accelerated activity in the beginning as they onboard, with usage dropping off afterward? 
  • Do customers increase their usage over time as their business scales? 
  • Is there seasonality to customer usage? For example, accounting software may see peaks during tax season and e-commerce software likely experiences high volumes over the holiday shopping season. 
  • Is there any inertia to adoption and/or usage growth? Conversely, are there intrinsic accelerators or contrived motivators to increase adoption? 
  • What’s the average lifetime usage of your customers, and what churn trends can you uncover? 
• What do your pricing plans look like? 
  
  • Are most of your customers on contracts? Are these contracts month-to-month, annual, or multi-year? Is there guaranteed revenue baked into the contracts that should be reflected in the sellers’ incentive compensation? 
  • How many of your customers are using an on-demand model? What’s the churn process like? 
  • Are you employing a hybrid model, with contracted base fees, and then variable consumption costs? If so, your compensation plan will likely need to reflect a mix of revenue types. 

Understand what an ideal consumption path looks like, and what incentives or motivations can influence customers to take that path: 

• How does the ideal path differ from the typical or average path? 
• What was the onboarding experience like for users within your ideal customer profile? 
• Do ideal customers experience the same inertia or drop-off points? 
• Were there any incentives (either for customers or sellers) that influenced those differences? 

When building your consumption-based compensation plan, you need to be fully grounded in the reality of your customers’ usage. Of course, you’ll want to incentivize the sales team to influence desired behavior, but make sure that desired behavior is achievable in historical context. Otherwise, you risk de-motivating sellers and missing important sales targets. 

Factor #2: What are Your Revenue Objectives and How Do They Relate to Consumption? 

Next, you’ll want to understand your business’ revenue objectives, eventually mapping those goals to consumption trends. 

Does your ideal prospect match your ideal usage profile? 

You want to make sure that you’re incentivizing sellers to achieve the desired behavior. An important first step is to make sure that target accounts and prospect lists match the profile of an ideal user. 

If your sellers are solely focused on customers with the highest usage, but those types of users don’t match those on your target account lists, you’re going to get frustrated sellers and unwanted behaviors. 

Is your business focused on new bookings or expansion opportunities with existing customers? 

Usage incentives will be very different for brand-new customers vs. existing ones. If your business is highly focused on new bookings, there may be a smaller portion of the compensation plan attributed to consumption. But, if your business is focused on upsells and cross-sells for existing customers, then you may see a higher portion focused on consumption. 

You’ll also want to avoid incentivizing usage types that are a poor experience for customers. If customers enjoy the on-demand model, but your sellers are incentivized to secure contracts, the disconnect will cause friction and frustration. 

You want to make sure that you’re incentivizing the right behavior. To do that successfully, you need to make sure that behavior maps to the company’s revenue goals. 

Factor #3: How Do Your Sellers Impact the Customer Experience? 

Your goal is to focus your sellers’ efforts—and, therefore, their variable compensation—on the persuasion events that matter most. 

There are many types of persuasion events: sales conversations; quarterly business reviews (QBRs); support queries; the platform’s user experience (UX), dashboards, analytics, etc.; gamification; and more. 

Identify which persuasion events are important to achieving the ideal usage profile. Then, understand which of those events are driven by the sales team. 

The Alexander Group, for example, suggests that revenue leaders, “Align the sales compensation plan to the seller’s role and tie the incentive as close as possible to the multiple persuasion event(s). Pay for closing a contract or signing up a new customer with no contract—use contract value (e.g., ACV, TCV), estimated contract value, or contract/activation signing bonus.”

Factor #4: What are the Right Compensation Levers to Influence Seller Behavior and Encourage an Exceptional Customer Experience? 

Finally, you’ll want to consider the compensation plan itself, determining what is the best incentive compensation to motivate sellers appropriately. 

Above, you determined the persuasion events you want the sellers to focus on. Now, you’ll need to figure out how best to incentivize the sellers to achieve those milestones. Should you provide upfront commissions, pay them out over time, or leverage a mix of the two? 

What will it look like for a seller to exceed their targets? In a traditional subscription or contract model, it’s pretty common for sellers to outperform with one unanticipated new booking. But, with consumption-based models, a customer’s usage is forecasted pretty accurately, which makes it harder for sellers to exceed their goals unsuspectingly. 

When sellers are properly incentivized, everyone wins: sellers are satisfied with their compensation plans and business objectives are within reach. 

Conclusion

Consumption-based compensation plans can be a powerful tool in aligning sales incentives with customer success and long-term value. 

By considering these four key factors, revenue leaders can build a plan that motivates their sales team and drives sustainable growth. With careful planning, businesses can create compensation structures that not only reward salespeople but also foster stronger, long-lasting customer relationships—a win-win for any customer-obsessed organization.