Consumption-Based Comp Best Practices

Dear Calcy,

Our business is moving to a consumption-based pricing model in the new year, and as our compensation team begins our annual planning exercise, we’re struggling with how to translate this new strategy into our plan design. Can you share a few best practices to get us on the right track?

Appreciate the guidance!

Challenged by Consumption Plans

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Dear Challenged by Consumption Plans,

Implementing a consumption-based compensation plan (also known as a usage-based compensation plan) to fit this new-to-you pricing model can be a powerful strategy, but you’re right in thinking it can also be a bit tricky – it requires careful consideration as you think through how to best motivate your sales team while keeping in alignment with overall business goals.

Here are some best practices to keep in mind when adopting a  usage-based pricing strategy and implementing incentive compensation plans to most effectively support it:

1. Align Sales Motivation with Long-Term Customer Success

When transitioning to a consumption-based compensation model, it’s crucial to understand how your sales reps will be incentivized.

One key risk to consider is that reps might push the most expensive plans even if those deals are not the best fit for the customer, leading to potential losses due to pricing concerns. Another risk is if your comp model puts an emphasis on closing a high number of deals by favoring upfront payments versus consumption-based payouts, which might encourage reps to focus on deal volume rather than long-term adoption.

Striking the right balance between upfront and ongoing incentives is essential to ensure that your reps are motivated to sell the right plans and drive customer success over time.

2. Accurately Forecast and Measure Consumption

Understanding how to measure and reliably predict consumption is critical when adopting a usage-based model. You’ll need to decide whether to estimate consumption at the time of closing based on historical data and trends, or pay commissions based on actual consumption over time.

Each approach has its trade-offs: paying upfront based on forecasts may require true-ups and adjustments, while paying strictly on actual consumption might delay compensation and impact rep motivation. Carefully vet the potential impact of each method on your reps and your bottom line, and as a part of that, be sure to consider your business’ ability to forecast and track usage effectively.

3. Focus on Increasing Consumption

To drive long-term value, your compensation plan should incentivize reps to increase customer consumption over time. This requires a deep understanding of customer needs and how they might use your product more extensively as adoption and use cases expand.

If your plan is too heavily weighted toward landing customers and not nurturing then post-initial sale, reps may not be incentivized to drive adoption and usage. A balanced approach that rewards reps for both landing deals and increasing consumption will encourage them to focus as much on customer success and product value as on closed-won deals.

4. Consider the Role of Upfront Commissions Vs Payments Over Time

In a consumption-based model, it’s important to evaluate whether upfront commission payments make sense for your business. Offering a portion of the commission upfront can provide reps with immediate rewards, particularly if there is a built-in revenue floor for the deal. Alternatively, milestone-based commissions – where reps are paid in stages as key milestones are achieved (after a successful implementation, for example, or once the first invoice payment is achieved) – can be effective as well. Finding the right balance will help align the rep’s incentives with both the initial sale and the ongoing success of the customer.

5. Track and Utilize Consumption Data Effectively

A successful consumption-based compensation plan relies on accessible and – more importantly – accurate, trustworthy data.

It’s essential to know where your consumption data is stored, how it can be imported into your commission processes, and whether it’s structured in a way that’s useful for managing commissions. Ensure that your data includes unique identifiers that can be tied back to your CRM (Customer Relationship Management) solution, enabling you to track usage effectively and compensate reps based on real-time data. Having a robust data infrastructure in place will make it easier to manage and optimize your compensation plans over time.

While it’s no doubt a challenging shift, successfully making the shift to an effective consumption-based compensation structure is by no means impossible. By carefully considering each of the points above, you’ll be well-equipped to implement a consumption-based plan that both effectively motivates your sales team and drives long-term customer success.