SPEAKER_01: 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: Absolutely.
SPEAKER_01: 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: 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: 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: 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: 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: 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: 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: 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: 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: 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: 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: 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: 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: 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: Awesome.
Anthony, thank you for joining.
Great to have you.
Have you back soon?