Is the usage based comp plan for you?

By QuotaPath Team • June, 2022 • 5 mins

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A usage-based comp plan is all the rage right now. But will it work for your team? Read on.

Consumption-based pricing or usage-based pricing is a model that has gained tremendous popularity in the recent past. And, it’s not expected to slow down any time soon. The pricing model is particularly common in SaaS companies. But the challenge that companies face in implementing this model is formulating procedures that help them succeed in Usage-Based Pricing (UBP).

Revamping and aligning sales commission plans to this new, flexible, and consumer-friendly approach can be daunting. 

On the consumers’ part, the pros of conducting business with vendors who embrace a usage-based pricing model are clear. They understand the benefits of the new model. They know that it allows them to use the product or service they need the way they want and then be billed for what they have spent.

But for sales reps paid in commission, the company experimenting with the process will require them to entice the consumers to spend as much as possible. Using UBP to incentivize the workforce and motivate them to make more sales can create bad work relations with the customers as they may use unorthodox practices to achieve the end. It may also misalign their incentives for the products and services sold.

Even more, a usage-based sales commission structure can complicate the commission tracking process because it often involves tiered, over-time payouts, and clawbacks. That is unless you use sales compensation software that can handle it. 

So, let’s take an in-depth dive into how an organization can effectively apply usage-based comp plans.

How to structure a comp plan fit for usage-based models

In UBP, finding a viable comp plan that serves both the sales reps and the business is not easy. 

Sometimes fixating on sales incentives corrodes customer relations. For example, to earn higher commissions, the sales team may convince customers to make selections that aren’t the best fit. Then, when they close the deal, the once-friendly sales team ghost the consumers.

Reversely, leaders need to be mindful of how a usage-based comp plan can impact reps. If it’s set up poorly, where the rep is consistently paying back on clawbacks or having to wait a full year to earn anything, they’ll be less likely to stick around. 

So, before settling for a particular sales incentivizing structure, you should conduct sufficient research.

Here are some examples of comp plan structures that avoid these issues:

Total consumption vs. incremental consumption

In total consumption structure, the software company evaluates the gross consumption of services amongst customers. The business takes into account the projected final consumption when compensating sales reps. They then examine the services procured by a household or consumer and the total services provided during a particular timeframe before paying sales commissions.

Incremental consumption structure assumes services and products are homogenous and considers choice as an outcome derived from an intuitive process of information search. The strategy outlines how services or products are incrementally traded with time, and the company utilizing a UBP model uses the criteria to incentivize its sales rep. A comp plan that embraces incremental consumption considers future consumption patterns to carve the reps’ commission.

Actual billed consumption vs. consumption run rate

In actual billed consumption, customers pay for what they have used. For example, a consumer may be charged less by the power company during summer as they consume less energy. By analyzing the payments made, a company using a consumption-based pricing structure then pays the reps a percent of the gross.

In consumption run rate, businesses use their current financial status to forecast future performance. In this structure, an organization assumes the existing condition will stay the same and uses the extrapolated data when charging consumers to incentivize the sales rep with a percent of the payment.

If forecasted usage doesn’t match actual usage, the company may issue a clawback on the rep’s commissions for the difference if it’s substantial.

The structure yields optimal choice, where consumers can rank different services and goods as per the levels of utility.

Pros of using consumer-based pricing for business

  • Increases flexibility when responding to changing consumer needs
  • Raises profits as sales reps strive for more quality customers to earn higher commissions
  • Improves rep retention
  • Strengthens budget management
  • Enables a business to experiment quickly on a variety of recurring finances
  • Minimizes revenue leakages
  • Allows the creation of bundles and packages which gives organizations a competitive edge

To consumers

  • Improves customer satisfaction as they pay for only what they use
  • Empowers consumers

• Grants consumers control over their spending

How QuotaPath maps out usage-based comp plans

Does QuotaPath support usage-based comp plans? Yes! 

At this time, we have several customers on usage-based comp plans. How our incentive compensation software ingests and automates it will depend on how a team sets it up and what they want to accomplish. 

Like all comp plans, if your team moves toward a usage-based model, make sure it’s clear,  understood, and visible across your team. 

What are your thoughts on usage-based comp plans? Is it the future of SaaS sales compensation? 

To learn more about QuotaPath’s commission management software, find a time here to chat with our team. 

Updated on June, 2022

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