Alexa, CEO of Pocus, hosts Product-Led Sales (PLS) AMAs with PLS experts to share best practices, frameworks, and insights on this emerging category. These AMAs are an opportunity to ask PLS leaders any question - ranging from hiring to sales compensation to tech stack - in a low-key, casual environment.
The PLS AMAs are for members of the Product-Led Sales community, the go-to-place to learn, discuss, and connect with GTM leaders at product-led companies. The goal of the community is to bring together the most thoughtful and innovative GTM leaders to build the next generation of sales together.
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Kyle leads OpenView’s Growth Team, responsible for advising portfolio executive teams on strategies to increase revenue growth and dominate their markets. The team has helped the portfolio generate over $100 million in additional enterprise value in the last three years.
Kyle specializes in pricing & packaging strategy, which is the most effective yet overlooked growth lever at a SaaS company’s disposal. He’s an expert in Product-Led Growth, optimizing go-to-market strategies, and SaaS benchmarks.
Many of you may recognize Kyle’s work floating around LinkedIn - the OpenView benchmark reports have become a hotly anticipated release every year. The Pocus community was particularly excited to talk about Kyle’s latest report on all things usage-based pricing.
In this AMA recap, we’ll dive into our favorite topics from the discussion:
- Trends for usage-based pricing adoption
- How to get buy-in for usage-based pricing with key stakeholders
- Usage-based pricing impact on sales teams (success metrics, compensation, hiring)
Usage-based pricing, the hottest new trend
If you’re in the world of B2B SaaS (especially product-led), you’ve probably noticed an uptick in the number of companies adopting usage-based pricing (UBP). So, to kick off the AMA, we asked Kyle why he thinks UBP is trending and if it is here to stay.
“We're in this third wave of software where companies let you get started for free and pay only for what you use. As software has become so ubiquitous and mission-critical for businesses, it is becoming more of a utility or an infrastructure as well.”
Kyle sees UBP as a natural evolution, similar to the evolution we’ve seen with how companies sell software. We went from a large enterprise software sales model - sell multi-million dollar annual contracts for on-prem licenses directly to the CIO - to Product-Led Growth (PLG) model - giving end-users access to the product before purchase. So, if you are already adopting PLG, then usage-based pricing can be a nice complement to your product.
Is usage-based pricing for everyone?
According to Kyle, this question is the same as “is PLG for everyone?” PLG and UBP go hand in hand. Kyle likes to re-frame this from the perspective of value creation: “how does your product create value?”
He outlines a few scenarios to consider where UBP may not be a fit:
❌ Complex onboarding and integration. In this scenario, you only see value from the product if the entire organization is using it and there is a lot of complicated integration work to get started. This requires upfront work with onboarding, a lot of change management in the process, and slow payback period for offsetting customer acquisition costs (CAC).
❌ A product that is pushing to users instead of pulling. For example, a learning management solution is pushing a user because the users have to adopt a non-innate practice. In this scenario, adoption is already a challenge and adding another layer of complexity with UBP may slow it down even further. This also requires a lot of upfront coaching.
Compare this to products like Stripe and Hubspot who pull users in through alignment with company goals. Hubspot’s UBP scales with the number of contacts and Stripe’s UBP scales with the number of payments. Companies want more contacts in their database and to process more payments because these metrics correlate with an increase of revenue.
❌ Procurement is the main buying center. For example, products sold to the government or regulated bodies run purchasing through a procurement department who are often not even allowed to sign off on contracts that are priced on consumption.
However, if you have strong bottom-up adoption in a SaaS organization, procurement is probably not a blocker. You can go to procurement once you have strong adoption and offer a discount for an enterprise plan that consolidates the licenses.
What are the common objections to usage-based pricing?
Understandably with any new pricing model, Kyle sees a lot of objections, mostly based on fear.
“Although customers were asking for usage-based pricing, companies were hesitant. They were hesitant because this isn't predictable subscription revenue, so they couldn’t count this as traditional ARR and worried about churn if customers were not locked into a contract.”
The other key blocker to UBP adoption: lack of visibility into product usage data. Revenue teams historically never had any visibility into usage, so moving to UBP would feel like placing blind trust that consumption was high enough.
In 2020, Kyle and his team saw an acceleration in UBP adoption due in large part to subscription models’ inflexibility during the COVID downturn. When slowdowns happen, a company can’t turn off their subscription the same way they can with UBP. Therefore, there has been a sharp rise in tools to track product engagement metrics like usage, retention, and churn, which in turn has provided a boon to UBP adoption.
Making the case for usage-based pricing
If you decide UBP is right for your product and you have buy-in from internal stakeholders, then the next step is messaging to customers.
How do you alleviate customer concerns with UBP?
Put simply, Kyle says it should be straightforward. It’s important to lead with a message that clearly ties to value and ROI.
“On a subscription model, customers are paying for something they don’t know whether they will use. With usage-based pricing, you only pay for what you use.”
Kyle offers the example of Twilio. They want to adopt a UBP model based on the number of SMS messages sent. But, this could be a difficult metric to forecast for one of Twilio’s customers.
To help with forecasting, Twilio positions the cost of SMS as directly impacting ROI for the customer.
A key use case for SMS that Twilio can illustrate to the customer is SMS reminders before demo calls. The customer is incentivized to book more demo calls so the SMS reminder is directly related to that ROI.
A Twilio sales rep can ask the customer in this case “what is the current no-show rate on demos booked?” and “would an SMS reminder before demo calls help reduce the rate of no-shows?”
That framing successfully ties the pricing metric (# of SMS sent) to clear ROI with the customer.
Kyle’s advice is to lean into the idea that your product is a key part of the infrastructure or COGS of the customer’s solution. In this case, sending an SMS text before a demo call is part of the built-in cost for the customer.
Do companies opt for a hybrid model* to appease customers?
*Hybrid model example: usage-based pricing + seat-based pricing + platform fee
Short answer: yes
Longer answer: yes, but remember to always root your pricing model decisions in how you want your customers to adopt the product, see the value, and how much they are willing to pay.
Kyle suggests looking at our mutual friends Cypress.io and their pricing model for a great example of the hybrid approach:
Are there any tactics to de-risk the transition from subscription to UBP?
Rather than moving existing customers to an entirely new (and unproven) model, trial UBP only with new users. You can also cohort new users and only trial UBP with a small group to further de-risk the transition and A/B test the new pricing model.
After working out the kinks in the model, then you can think about how to roll out UBP with existing customers. Where do you begin?
- Opportunities where UBP can unlock upside - are there accounts that are only spending a small amount today but your sales team sees a much larger opportunity?
- Accounts that may want a ton more users - can you offer these accounts more seats for free which will naturally lead to increased usage?
Usage-based pricing impact on sales
As a Product-Led Sales community, Pocus has a lot of innovative sales leaders thinking about how these changes in software sales will impact their org structures, compensation, and hiring profiles.
Historical models for compensation do not work with UBP at all, so we dove into this topic first.
How are you seeing usage-based teams handle sales commissions?
Kyle points to more mature organizations with UBP as a model. Both New Relic and AWS have seen success with compensation models that only reward based on consumption instead of landing the logo/deal.
But this does not always work at an earlier stage company or even a high-growth SaaS company according to Kyle.
“The reality is that for most companies, especially high growth companies, you want your reps focused on selling new business. You don't necessarily want them chasing a ton of consumption behavior in month nine with an account and you want to recognize them for landing that logo or landing a logo in your ICP.”
Other models Kyle suggests to consider for consumption:
- Offering a bounty or SPIFF for closing a logo - this can be adjusted based on the industry or size of the company (i.e. get a higher SPIFF for landing a logo that is a perfect customer fit).
- Forecasted ARR - this is based on an assumption of what will happen to an account’s revenue. You compensate the rep based on the forecast and either top-up or clawback then the actual numbers are known.
Another member of the community, AJ Bruno, CEO of QuotaPath, is an expert in sales compensation. He offered his own suggestions:
- SPIFF + 90 day retention bonus
- Paying commission on the first two months of MRR
Note of caution from Kyle to all companies considering UBP:
- Really scrutinize whether you have the balance sheet to support this. There may be a 6-12 month period of growing pains.
- Determine if your business is ready to make the shift. This is a business-wide shift (not just for the go-to-market team), so you need the right tools, processes, roles, and culture to support UBP.
Does the role of the salesperson change with UBP? Is there a particular sales profile to look for?
Kyle still sees a lot of learning happening here.
Back to the example of New Relic, Kyle explains that successful sales reps focus more on getting the customer to a POC/trial rather than an emphasis on demos/relationship building.
In general, Kyle suggests looking for sales folks who are:
- Commercially motivated (i.e. driven to win)
- Credible when explaining the product
- Strong understanding of the product’s value
- Able to uncover use cases
- Solution consultant-like skills
- Make sure you have business-wide buy-in for usage-based pricing before making too many investments into the model. Especially for more mature organizations with big revenue numbers, you want to ensure buy-in exists both internally and with customers before launching.
- Usage-based pricing should always align with your product value and how users/customers experience that value. UBP is not for every SaaS product, just like PLG is not for every SaaS business.
- Usage-based pricing will impact your sales compensation, hiring, and culture. Have a plan for how you will adapt your current processes, tools, and roles to adapt.
- Start small - deploy UBP with only a handful of new customers to work out the kinks before rolling out to your entire customer base.
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