Seth Marrs: Hello everyone,
welcome back to the Innovative
Revenue Leader Podcast.
This is the fourth and final
podcast in the series around
usage-based sales.
The goal of this series was not
to talk about how to implement
usage-based pricing, but to
provide revenue leaders with
tools and insights into how to
optimize growth when you're
working with these types of
sales models.
So, just to recap a little bit,
the series started with Anthony
McCartland, where we went
through why CROs should care
about this, like how pricing
aligns to value and how you can
actually drive up sales faster
because you don't have the
chunky contract periods that are
in most like SAT sales.
So the opportunities there, but
also the declines that come with
that in that you can stop using
things as much as possible and
how it also changes the dynamic
of the role of a CSM versus the
role of a seller.
And then we moved on and we
talked with Dara, where he was
talking about how do you
operationalize and really go
after realization and what that
looks like and how he's putting
that into place with XPO.
And then finally, we the last
one was with Chuck Lee, who
talked about how you compensate
for this and how you make the
most of those things by going
after compensation plans that
are really set up to optimize
the key components of that.
So in this session, what I want
to do is pull these things
together and talk a little bit
about strategies for these
different areas.
So the first one that we'll talk
to is really around when you're
managing consumption or usage
base, there are two different
sales motions.
So the first one is you have to
earn the right to buy.
So this is what you typically
see in an opportunity management
process.
I create the opportunity, I get
the customer to agree that
they're going to buy from us.
And as a SaaS model, they buy
and then they sign a contract
and they're signed in.
You can pay the seller on the
booking and let them move on to
another sale.
In a usage-based pricing model,
that's just the right to spend
money in most cases.
Now, there are different types
where you have a minimum spend
and different flavors with it,
but by and large, the right to
buy is just a starting point.
There isn't a ton of sales that
comes with it.
It actually just allows you to
go into the next phase, which is
the most important piece, which
is the realization side.
And when you're dealing with
realization, you have certain
components that you have to work
into.
And this is where opportunities
using a standard
opportunity-based approach.
So you're a SaaS company that
has been using opportunities to
drive sales, and now you're
moving into consumption and
trying to still use
opportunities, like for example,
saying, Oh, I think this person
is going to buy something.
So I'm putting an opportunity in
for what I think will be like
$4,000, or you're putting in
opportunities for contracts that
you sign that haven't realized
revenue.
Those things are different in a
usage base.
So when you're thinking
realization, there are key
components.
You need to start.
How do I get you to start
spending once you've signed the
contract?
How do I ramp you up?
And we'll talk a little bit more
about that in the coming slides.
And then how do you move into
growth?
Like, how do I find new ways to
grow you as the company?
So you're really doing it
through account management
because for a number of reasons,
it's just very hard to use the
opportunity.
And I've had people say, Well,
yeah, you could do it.
So if you are a single product
company, you could potentially
do it, or you're selling one
thing into an account.
But where this gets problematic
if you're using opportunities,
even if you're trying to be very
sophisticated about how you
allocate, think for a second
about an opportunity where
you're selling into a large
multinational where you have
multiple divisions under the
same account.
So you could have eight
opportunities open in that
account.
Now, if you're selling the same
product into each one of those,
you have no real good way to
allocate those sales into an
opportunity.
So it makes it really tough to
know if I won the opportunity,
how do I make sure I realize it?
And the reason I say this is
because a lot of companies say,
well, I just want to keep using
the opportunity and allocate
funds.
It gets really tricky.
The simplest way, and the way
that is that is structured to
work best, you lose a little
resolution, but if you manage it
at the account level where a
seller is assigned to that
account, and you're looking at
the total sales for the account,
that's much more manageable,
much more tangibly affect by
tangible in that you could
actually do it, and it allow for
you to effectively go after
growth with realization.
It's a lot bigger discussion,
but that's something that you
really need to think about.
Don't use opportunities for
usage base, use accounts and use
account structures to be able to
do this.
The next thing is you need to
develop a usage-based
forecasting model.
So what I'll go through here is
you the account is what you're
going to need to use to do this.
The opportunity was just there
to say, Did I earn the right to
buy?
And then ideally, in that
opportunity, you would say, How
much do I think?
And then now it's trying to go
and figure out how much can I
earn.
So typically what you would see
is you've got the opportunity,
and that estimate in a common
setup is done by sales.
That is really not a good idea
because there's a lot of reasons
why sales would and would not
understand what's going on in
usage base.
And ideally, you would have the
data, and you actually do have
the data, you would analyze the
data that you have because the
good part about usage base is
you get a lot of information
with run rate sales where you
can look at customers and
understand what typically
happens.
So the best practice is you have
that done by a deal desk using
analytics or your finance team,
somebody who can look at all of
these accounts and understand
how much is typically a deal
like this in this customer.
How much do you typically sell?
And you let that guide you for
how much the opportunity is
worth rather than a seller,
because this the salesperson is
either going to be overly
optimistic or really
pessimistic, depending on how
you set up the comp plan.
You want to use real data to see
what the true potential is.
If you want to hold the
salesperson accountable, that
that is you need to have another
piece on the back end that where
they that where you're going to
motivate them to try to better
forecast, but they're really not
the best people to do it.
The next thing is looking at run
rate.
What typically happens is that
same prediction is made by
sales, where you ask the seller,
how much do you think it's going
they're going to spend this
month, this quarter?
That is an unfair ask to a
seller because they don't have
the data and their job is to
sell.
Their job is not to understand
how run rate is happening.
Remember, usage-based sales,
these are transactions.
They're going to happen,
thousands, millions of
transactions that are happening.
Tools are out there, machine
learning is out there,
technology's out there to run
the analytics and understand
what those trends look like.
Don't burden your salespeople
with what that looks like.
Instead, give that to them.
So the best practice to do that
is just use finance or analytics
to tell you what that run rate
is so you have an idea of what's
going on.
What you want the seller to do
is to act on that and be able to
address an issue if it comes up,
ramp if they're seeing potential
to grow, those types of things.
And the final thing when you're
looking at forecasting is
growth.
So what a lot of companies do
because it's easy, is they look
at year over year.
I did a million last year, I
want to do 1.1 this year.
That is not the right way to
look at it because there are so
many things that go into a year
over year increase.
The ideal scenario is you look
at the opportunity commitment.
So what is the run rate for the
year?
And then what is the opportunity
commitment?
So there's a stack that goes
with that.
So you could use run rate once
you've made it through your
first year.
So if I sell a usage-based model
a year in, I see it's$120,000.
Okay, I think I'm gonna do, I
want to grow that$120,000 in the
next year.
But if you sold a usage-based
model in that previous year, the
opportunity commitment for that
is probably say that's$120.
Well, you wouldn't use run rate
on that because it's not visible
yet.
So you would take the run rate
from the one-year-old deal, add
it onto the commitment that was
made for that, and the growth
should be the addition of those
two.
And in a lot of cases, the
commitment that was made gets
ignored, and you don't even see
what's going on and how badly
you're missing on the
usage-based side until a year
later when your run rate's way
lower than you expect it to be.
Or you don't even see it because
you're still doing run rate and
ignoring the commitment side.
So you need strong functional
forecasting models to be able to
do this well.
And they're different types of
models than what you've used
before.
The cool thing about this is
because it's so there's so much
data happening with this, the
ability to effectively predict
it is much, much better.
Next thing uh you need to look
at real the game with usage base
is with realization, not run
rate.
You want to look at the
realization side of things.
So just going through like what
what this looks like typical run
rate, say you have 100k, you're
gonna have 20k in churn, you
generate 60 60k in new
opportunity, and then you have a
realization gap, and you have an
annual result of 110.
So beginning of the year, end of
year, you're at 10%.
Is is that a good thing?
Did you have a good year?
Like if you're looking at it
from a run rate standpoint, 10%
growth in some companies is is
really good.
Um now, maybe for a fast-growing
tech company that'd be bad, but
in a say an established company
is doing that, if you set a
target for 10% growth and you
were around that 10% target, you
could feel really good about
that.
The thing is that account was
supposed to grow by 40% with
churn.
So you had committed to grow
that by 40% and you only grew it
by 10%.
So the reality is when you look
at the commitment, going back to
the previous slide, when you're
looking at that commitment
piece, you actually weren't
successful in that account.
What you should have sold
actually means that you missed
pretty badly.
And then most companies, when
working on this, don't even
realize that they're celebrating
the success of the 10%, and they
really should.
And like what when you think of
how to focus on it, I would much
rather focus on that 40% and
driving the hell out of that
than being happy with the 10%
because I'm only looking at
runway.
There's so many blind spots that
come with it.
Also, think about it if you're a
company that is doing this and
actually working towards that
40% when you're looking at the
realization potential, you have
an advantage because you're
hustling to find out what's
going on.
You're getting insights of what
you could have done that most
companies don't really have
because they're just focusing on
the real on the run rate side of
things.
Another thing to think through
is the time window to
disconnect.
So when do you take the seller
out and when do you transition?
This is very, very important and
usage-based.
So when you think about the
different areas and where you
compensate, every deal that you
have with usage-based should
have the opportunity that you
created to get the right to buy,
close one at the point of the
first purchase.
So that deal, the opportunity
window closes you got the first
purchase.
Great.
Deal, that part of the deal is
one.
Now I'm moving into the
realization game.
And in almost all businesses,
actually, in all businesses,
there is a ramp period that
happens.
It could be a month, it could be
six months, it could be a year.
And that time period is where
you get that person from
purchasing or that company from
purchasing to where they're
typically where they typically
grow to.
And they're different for every
organization.
It's something you should
analyze to understand what the
typical ramp period is.
So, how do I go from my first
purchase all the way to what the
typical period is?
Where you would look on it like
so, if you ran the analysis,
you'd run the analysis and you'd
see the growth curve going up
and start to level off.
And you're gonna see that happen
with all of your customers.
And what you'll find is there's
a subtle period where you'll see
most customers will ramp at a
certain period of time.
You need to cut that.
And that is the period that you
need your AE driving to get to.
So when you're incentivizing,
you're incentivizing for the
ramp period.
That next period transitions.
That is when you take the AE
out, and then now you bring in
the AM or the CSM to drive or
maintain growth, depending on
what you're trying to do, who's
involved, CSM.
In a lot of cases with usage,
the growth is in just using the
product.
So the CSM becomes much more
important than potentially an
AM.
It's also why you see AMs and
CSM roles kind of morphing a
little bit.
But that is the group that's
going in, and their job is to
maintain what you have ranked
to.
Then the AE's new game that
they're trying to do is to
build.
So now they need to find that
next opportunity within that
deal where they can go grow that
business.
So it could be a cross-sell, it
could be an upsell of that
product, could be going to a new
division, whatever.
But that's what they're going to
be focusing on is that new
business and that they the
additional growth.
So you have a CSM and an AM
that's working to maintain what
you've already built.
And then the AE is going in and
finding that new pathway to
really drive growth.
So just I hope that gives you a
little bit of insight into usage
base.
If you have any questions, feel
free to reach out on LinkedIn.
This is a complex subject, but
it's also what I believe is one
of the biggest opportunities to
drive growth in most
organizations.
Because in most businesses, the
consumption or usage-based side,
remember the definition of
usage-based.
A lot of people think
usage-based is things like AI,
date AI tokens or data or just
like technical stuff.
Usage-based is anything that is
highly transactional, in this
definition that I'm talking
about.
And almost all large
organizations have that.
And most of those organizations
just kind of sit on that
consumption revenue because they
have no real way to drive
realization.
This is an opportunity to get an
advantage where you can drive
growth in places where sellers
just don't have the tools to do
it.
So I hope you guys take
advantage of it.
I hope this is useful.
Thank you.