Mastering Revenue Operations in a Consumption-Based Business Model

Consumption-based business models in SaaS continue to be in vogue. Unlike traditional subscription models where revenue is predictable, consumption-based businesses require deep operational insight and flexibility to navigate fluctuating demand. The shift to this model, particularly in AI-powered software, presents unique challenges, especially for operators accustomed to conventional SaaS metrics and processes.

To explore these nuances, we turn to the experiences of Lauren Davis, Director of Revenue Operations at Checkr—a company built on a consumption model centered around background checks and employment screening. Her insights reveal the complexities of managing RevOps in this dynamic environment.

Key Insights from the Interview

1. The Critical Role of Data Definitions in RevOps

• Unified Data Definitions: In a consumption-based business, data definitions are paramount. As Lauren emphasizes, aligning on what constitutes a customer, upsell, or any key metric is essential across departments. This alignment ensures consistency in reporting and decision-making.

• Annual Re-evaluation: Regularly reassessing these definitions during annual planning helps maintain relevance as the business evolves. This practice prevents reliance on outdated metrics that could mislead operational strategies.

2. Navigating Pipeline Management in a Usage-Driven Environment

• Extended Pipeline Management: Unlike traditional SaaS, where pipeline management ends at contract signing, consumption-based models extend this to ensure the customer begins using the product. Lauren outlines a three-stage pipeline: pre-signing, post-signing but pre-usage, and active usage. Each stage requires distinct strategies to drive revenue.

• Ramping Revenue: Tracking customer ramp-up is critical. Understanding expected usage patterns based on data and actively managing deviations helps maintain forecast accuracy and revenue predictability.

3. The Complexity of Forecasting in a Consumption Model

• Blending Art and Science: Forecasting in a consumption model integrates both historical data and market trends. The inherent unpredictability of usage introduces a level of art into the forecasting process, especially in volatile markets.

• Segment-Specific Strategies: For large enterprises, the forecast relies heavily on deal-specific insights, whereas, for SMBs, data-driven models predict usage more accurately. The dual approach helps balance forecast accuracy across segments.

4. Compensation Strategies: Balancing Revenue and Control

• Multi-Lever Compensation Plans: Effective compensation in a consumption-based model requires incentivizing both contract signing and actual revenue generation. By compensating sales reps on initial bookings and subsequent revenue milestones, businesses can align sales efforts with long-term revenue goals.

• Avoiding Pitfalls: Lauren advises against 100% bookings-based compensation, as it can inflate forecasts and distort true revenue potential. Instead, introducing guardrails like commitment thresholds ensures alignment between sales efforts and company objectives.

How to Implement These Insights in Your Business

For operators transitioning to or managing a consumption-based model, here are actionable steps:

1. Establish Clear Data Definitions: Ensure cross-departmental alignment on key metrics. Regularly review and update these definitions to reflect current business realities.

2. Extend Pipeline Management: Recognize that pipeline management doesn’t end with contract signing. Develop strategies for customer activation and usage ramp-up.

3. Adopt a Hybrid Forecasting Approach: Combine data-driven insights with market analysis to create a robust forecasting model that can withstand market volatility.

4. Design Multi-Faceted Compensation Plans: Balance immediate sales goals with long-term revenue objectives by diversifying compensation metrics.

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Additional Materials

• Listen to the full podcast here or watch the full Interview here

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FAQs

• What are the key challenges in managing a consumption-based business model?

  Managing a consumption-based model requires precise alignment on data definitions, extended pipeline management, and hybrid forecasting. Unlike subscription models, where revenue is fixed, consumption-based models demand continuous monitoring and adjustment to customer usage patterns.

• How can companies effectively compensate sales reps in a consumption model?

  Compensation plans should incentivize both contract acquisition and revenue generation. Companies can achieve this by blending bookings-based bonuses with revenue-based commissions, ensuring sales efforts align with long-term revenue goals.

• Why is data alignment crucial in a consumption-based business?

  Inconsistencies in data definitions can lead to misaligned goals and inaccurate reporting. Regularly revisiting and updating these definitions ensures that all departments work from the same metrics, maintaining operational efficiency.

• How does forecasting differ in a consumption-based model versus a subscription model?

  Forecasting in a consumption model is more complex due to variable usage patterns. A hybrid approach, combining historical data with market trends, allows for more accurate predictions and better adaptability to market changes.