When it comes to implementing usage-based pricing, one of the pain points I consistently hear from founders is the work it takes to re-orient your go-to-market (GTM) operations to set up your team and customers for success.
I recently sat down with Allison Pickens, former COO of Gainsight, to get her thoughts on the rapid adoption of usage-based pricing and how she’s seen companies navigate the shift in go-to-market operations.
Allison is currently a solo GP investor in companies such as Jasper, Mutiny, Hex, Tackle, and others, as well as a Board Director at dbt Labs. She’s known as a top expert on revenue growth and has advised many companies on operationalizing a usage-based pricing model.
Kevin: Thanks for taking the time, Allison! Can you start off with some background on your experience with usage-based pricing?
Allison: Sure! I’ve had a front-row seat to the rise of usage-based pricing in SaaS. I was first exposed to usage-based models during my time at Gainsight. While Gainsight didn’t have a usage-based model, we supported customers who did. During my time there, we increasingly saw and heard from Customer Success teams using our product that they didn’t have contractual, predictable ARR. They were responsible for generating net dollar retention and needed different workflows from Gainsight to help facilitate that.
When I started working full-time with a portfolio of founders two years ago, I saw that product-led growth (PLG) and usage-based pricing models were becoming the dominant model. Since then, I’ve gone deep with several companies on thinking through the shift to usage-based pricing and what that should look like.
Kevin: Let’s dive deeper into Customer Success. Why do you think Success becomes so much more critical in a usage-based pricing model? How do you think their goals change?
Allison: If you think of Customer Success as being responsible for adoption and revenue through adoption, then Customer Success becomes even more important, because they're driving the adoption that generates the revenue.
Another company that I worked with, which is very successful overall, missed their number in a critical growth year because they had transitioned to a usage-based pricing model and didn’t realize how important the Customer Success function would be. In the new model, Sales started taking on the Net New ARR number and were now formally accountable and paid based on generating usage. However, Sales didn’t have the skills to generate that usage and were hounding the Customer Success team to ensure they were helping drive adoption. The company realized they had underinvested in Customer Success and were playing catch up later in the year.
They hadn’t accurately forecasted how much each account that they were transitioning to usage-based pricing would generate in revenue, what their usage would be, and how that would translate into revenue. This forecasting exercise is really hard for a lot of companies. OpenView’s analyses have shown that your top 10% of accounts will typically generate 70% of your revenue in a usage-based pricing model. It can be difficult to predict which accounts end up in that top 10%, but Customer Success often has the subjective insights into different accounts and knows the customer use cases, and can provide color to the data your teams already have.
Kevin: You mentioned the interplay between Sales teams being responsible for net new ARR and Success teams being responsible for driving adoption, which ends up driving ARR. What does a healthy relationship between Sales and Success look like in a consumption-based world?
Allison: It depends on the product, but in my experience, Sales tends to be best at aligning stakeholders, working with more senior people at accounts, the art of persuasion, closing an outcome, and spotting new opportunities for monetization. Customer Success is good at imparting best practices, educating and training, having the technical skills to navigate a product, and problem-solving for the customer. Both Sales and Success have key skill sets required for generating strong net dollar retention, but they’re just best applied to different aspects of the relationship.
You could imagine a classic scope for Sales in a usage-based pricing context as organizing and driving regular meetings with executives of their accounts and Customer Success helping demonstrate the value and the current use cases to those accounts.
It can make sense for Sales to help lead those executive meetings because the conversations may help them uncover new teams or business units within an account where they can tap into pools of people that can generate new usage. Customer Success ensures that usage within the existing deployment is strong and that on an ongoing basis, the customer’s actually getting value.
Kevin: We’ve discussed the importance of monitoring and understanding usage given its direct impact on revenue. How important is getting this data to cross-functional teams and for it to be more real-time?
Allison: That's a great point and certainly points to the need for Metronome. Everyone needs real-time visibility. Internal teams need visibility, and customers need real-time visibility into how much they owe, and how much they're likely to owe in the future.
Internally, it becomes really important for people to have that kind of real-time visibility so they can anticipate problems. One example is getting ahead of overages and having those conversations earlier. In the inverse case, if you see a customer's usage decline, your team needs to intervene quickly to get back on track.
To give you an example of this in practice, one of the first use cases of our product at Gainsight was a rule-based workflow that triggered an alert if usage declined by a certain percentage. It would notify the CSM to call the customer to understand what happened and identify solutions. In a usage-based model, it becomes even more important to intervene quickly because the risk isn’t some far-off date when the contract might churn; by contrast, you may literally be losing revenue in real-time as customer usage declines.
Kevin: Thanks for sharing all these insights, Allison. On an ending note, what’s the one thing you’d recommend folks spend extra time on when transitioning to a usage-based model?
Allison: The most important thing is that you're picking a usage metric that aligns with how the customer perceives value, and you’re aligned on why you’re moving to a usage-based model. Some companies make the mistake of picking a metric that is more aligned with cost because they're trying to make sure that they don't destroy their gross margins, which is obviously an important concern. You need to make sure that in your new pricing model, you're able to cover your COGS, but the customer wants to pay according to the value that they're getting. That's one of the advantages of moving to usage-based pricing, so it’s critical to choose the right metric.