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What else can I be doing to drive revenue? How do I optimize our go-to-market strategies to ensure effectiveness and ROI? If questions like these keep you up at night and occupy your thoughts by day, have we got a podcast for you.
Welcome to Market Mastery presented by The Bridge Group, the podcast where sales professionals learn to advance their careers. Join host and revenue expert Kyle Smith as he talks to elite B2B sales and revenue experts about the strategies they're using to win in the market.
From cultivating a killer company culture to navigating compensation questions, we'll provide you with the insights, education, and strategies you need to thrive.
For more from The Bridge Group, visit www.bridgegroupinc.com.
Matt Bertuzzi [00:00:00]:
You know what this reminds me of? You're selling Windows 95 licenses. That's all you're doing. Consumption is licenses. It's not per month though. Take out recurring. How many conversations do you want? A million. Here you go. Pay me my commission. Hey, I think you're almost using your million and you're on pace to use 2 million. Let me give you a better deal. Buy 2 million. Because then it's like, dude, it's literally. It's like it was before.
Kyle Smith [00:00:21]:
Welcome to Market Mastery, the podcast dedicated to uncovering revenue-driving strategies for sales leaders in B2B tech. All right, on today's episode I talked with Matt Bertuzzi, The Bridge Group's Director of Research and Operations about consumption-based pricing. All stemmed from the Salesforce Agentforce announcement at Dreamforce 2024. And we talked through what are the implications if this becomes more broadly adopted across SaaS? If we see more organizations shifting away from per user per month pricing and towards some type of consumption based pricing model, what does that mean in terms of sales team strategy? Does it change the structure? Do we move back away from role specialization and ultimately how do we set quotas if at all, and how do we compensate reps appropriately based on a consumption based pricing model? All right. At Dreamforce 2024, Salesforce announced Agentforce, which is essentially going to be an AI platform deployed across all clouds, sales, cloud, service cloud and so on and so forth. And one of the really interesting things that they announced was that they were going to potentially shift the pricing model for this new Agentforce platform. And $2 per conversation is the thing that I've seen and heard we'll see once it actually gets rolled out. But a shift towards consumption based pricing, which we've seen across some of our clients over the years, but knowing that Salesforce was the OG of SaaS, if you will, and emerge as a behemoth in the per user per month pricing model, wanted to just explore what would happen if this push by Salesforce has a cascading effect.
Kyle Smith [00:02:05]:
And we see more and more software companies moving away from per user per month pricing into consumption-based pricing.
Matt Bertuzzi [00:02:11]:
Right? Yeah. I mean it was back in the day you had licenses, right? You literally bought X amount of licenses to install and use as you saw fit. And then with SaaS it became per user per month with some degree of overages. Right. Like there's always been like a little bit of usage component, but it hasn't been like a throughput based like this idea of like cases handled by AI. It's Very different. It's interesting.
Kyle Smith [00:02:40]:
It's extremely interesting. And we'll be. I think it's going to shake up a lot of things and a couple different categories that I think are worth at least discussing are going to be strategy. So is your actual go-to-market strategy modified by the fact that you're shifting your pricing model pretty significantly? The next bucket would be actual team roles, I guess, which falls under strategy. But does it still make sense to have the level of role specialization that exists today if the pricing model and the way that you actually capture revenue changes fundamentally and then quotas and comp is the other big one. So taking that through. So from a strategy perspective, if you think about the types of accounts that you currently define as your ICP and tier into, let's just go simple - enterprise, mid-market SMB, does that still hold if there's a fundamental shift in pricing model to consumption?
Matt Bertuzzi [00:03:34]:
So here's the question, right? Like there's always been a PLUR for accounts of per user per month or like five seats, whatever that is. Right. There's always been a floor. Not always, but there's generally been a floor. So is the, is the consumption side, does it also have a floor? Is it, do they only sell it at 5,000 conversations a year, a day, a month, whatever that number is. So it's like, it's like minutes, you know what I mean? Like on the old cell phone plan, like you get minutes. There's no zero minute plan, there's 120 minutes and it only goes up from there.
Kyle Smith [00:04:06]:
Right? Well, I think about even things that we are consumers of because it's the easiest way for me to actually think about it. So pre-2020, when we used to actually travel a lot, Expensify is the first one that comes to mind.
Matt Bertuzzi [00:04:18]:
Sure, yeah.
Kyle Smith [00:04:19]:
And so for Expensify, we paid per user per month when expense reports were actually being submitted through Expensify. And so yeah, sure, we're SMB, but there was a chance that we paid nothing over the course of a given month. Correct?
Matt Bertuzzi [00:04:36]:
Correct, yeah. Versus like a payroll system, 401k is $100 for the company per month and then whatever, $8, $16 per employee. So that has a floor and then it scales up, but Expensify was truly you could get as you would get zero bill, zero dollar bill months.
Kyle Smith [00:04:56]:
Right. So that introduces massive risk exposure for the company. If they have a customer count and an assumption of what they'll capture in terms of revenue from them, that can change really quickly. And so that idea of recurring revenue that led to these amazing valuations goes away because you're not playing a game of recurring revenue with net dollar retention. It changes the way that even an investor might look at the organization which, which is an interesting added complication. But from a strategy perspective, I still feel you're going to target the same accounts. I don't think that you're going to see a shift in the enterprise accounts. Same as today.
Kyle Smith [00:05:34]:
Like I like using like a sales engagement platform, like a sales author and outreach. Like the account that has 5,000 sales reps is an enterprise account yesterday, today and tomorrow. And even if you're not charging per user, even if those are just the accounts with the highest likelihood of high spend on your platform and therefore are going to stay in their logical buckets.
Matt Bertuzzi [00:06:03]:
Right. The question is like from a, from a gross retention perspective, like if I'm Zoominfo and I told you you have 150 person sales org. Well, what if it's now you get seats are irrelevant. It's profiles consumed. Right. So if it's sales planning season, maybe you consume a ton and then you don't do it again for 13 months or does it turn down to zero for a year? It's crazy to think about, right? Like what if I did it all in February 2025 and then 2026. I was like, now we're good, we got what we needed.
Kyle Smith [00:06:36]:
Right. You see massive spikes in revenue realization over the course of a year based on seasonality, which it's interesting.
Matt Bertuzzi [00:06:45]:
Yeah. Like I'm trying to think of like what exists today that's like that for with sales reps. I keep thinking about like insurance, but insurance is so different except in as much as you can just stop paying your insurance and cancel it at any time really. And then your broker takes the hit or you can add a line and then your broker gets the benefit. So they have a book now reps really don't have books. Like you said, it's a specialization. It's close it and flip it to expand.
Kyle Smith [00:07:11]:
Right. Okay, so on that topic, I'm going to skip over team structure because I think quota is in comp segues back into it nicely. And so today if I close a deal and it's 4K MRR, right. I get quota retirement on $48,000. I get comped on $48,000 per my comp plan. Let's say I get 8%. It's really clean. It's very simple.
Kyle Smith [00:07:35]:
And if contraction happens, it's going to happen after the 12 month period. Where it's beyond my pay cycle anyways.
Matt Bertuzzi [00:07:42]:
Right. If you. Or more to the point, if usage doesn't. If they only ever go to $2,000 worth of value. That's not your problem. It's not your company's problem. It's their problem. They overbought.
Kyle Smith [00:07:52]:
Yeah. Or they're just going to churn.
Matt Bertuzzi [00:07:54]:
Or they're just going to churn or contract.
Kyle Smith [00:07:56]:
But either way you know exactly what you're going to get over that 12-month time period. Now let's use Agentforce for example. If you sell Agentforce. Well, how do you know what to pay a rep?
Matt Bertuzzi [00:08:09]:
First thing is you guess, if you pay and you win and. You lose some reps. The problem then again is the rep who sells a million conversations. If they made as much as the rep who sold 100,000 conversations, they're not going to be very happy. I sold AMD and Intel.
Kyle Smith [00:08:25]:
Yep.
Matt Bertuzzi [00:08:26]:
And then for whatever reason, intel used a million conversations and AMD used 100,000.
Kyle Smith [00:08:33]:
Yeah. So you're going to first make a data driven approximation as to what the likely consumption rate would be over. Is 12 months the appropriate timeframe?
Matt Bertuzzi [00:08:43]:
Not if it's a book. Really. Well, but maybe if we were just going to make it the way it is today, but different, we would guesstimate what the total contract value is and then pay it out normally.
Kyle Smith [00:08:52]:
Okay, so you do the guesstimate and let's stick on this example. So basically you make an approximation. Say this is how much we think this account would be worth based off of everything we've learned about them and how they look like other customers that we have. You pay that out. Now. If they do 150%, what do you do?
Matt Bertuzzi [00:09:11]:
Nothing. Because you don't know what it's 150% going forward. They just did 150%. I still don't know what they're going to do next month or next quarter.
Kyle Smith [00:09:19]:
So basically either the rep could get crushed, the company could get crushed.
Matt Bertuzzi [00:09:25]:
Yes.
Kyle Smith [00:09:26]:
Or you could predict perfectly and yay forever.
Matt Bertuzzi [00:09:29]:
Yeah.
Kyle Smith [00:09:30]:
Okay.
Matt Bertuzzi [00:09:31]:
Basically all this is doing is spreading the pain around all the reps. The best that we can guess. I mean, I sold this when I sold online backup. So you had a contract minimum and then overage. So you back up 20 gigs. It was whatever, 400 a month and then $32 a gig. If there's a storm coming and you're in Fort Myers, Florida, you might say, I want every single server backed up in the cloud out of the state of Florida. Then the storm comes through, there's no problem.
Matt Bertuzzi [00:09:57]:
Okay. Now I just want my mission critical ones. So we would get commission for the overage. Right. Because they had, they backed up 100 gigs on a, whatever 20 gig contract. I'd get paid on that. Then they clawed back two months later so I would have a negative quota balance to pay back off that claw back. I mean that was real life for us.
Matt Bertuzzi [00:10:18]:
Our commission statements were a nightmare to.
Kyle Smith [00:10:19]:
Figure out, but they got clawed back. Why? Because it didn't extend beyond.
Matt Bertuzzi [00:10:25]:
Because it was one month of that consumption, not 12 months of that consumption.
Kyle Smith [00:10:29]:
Right. Okay, so this is where I run into it where I think that there's an interesting opportunity to do a couple different things. Okay, what if you just paid on the consumption, the real consumption of your book?
Matt Bertuzzi [00:10:43]:
Sure, sure.
Kyle Smith [00:10:44]:
Every single month.
Matt Bertuzzi [00:10:46]:
So I got, for every dollar I get 10%. Whatever.
Kyle Smith [00:10:49]:
Yeah, I think it would have to be lower because current is 8. So like do a fraction of 8.
Matt Bertuzzi [00:10:55]:
Well, let's say it was a 12, that it was 12%. The commission rate now it's 1% because it's monthly. I get 1/12. Because they're going to consume monthly. No, they're not going to consume monthly. They're just going to consume.
Kyle Smith [00:11:08]:
No, it would be, it would be the same rate because the amount is 1/12. Okay, but instead of it being 8, I think you extend beyond the 12-month error.
Matt Bertuzzi [00:11:17]:
Well, yeah, sure.
Kyle Smith [00:11:18]:
Because I think especially in a consumption model, there's no way that if you're billing based on actual that you're going to be able to capture a steady state monthly run rate over the course of the first 60 days with implementation, onboarding, adoption, whatever. And I don't think it's, it sends the right message to basically crush your reps for three months of fumbling around through the adoption period when really you're going to then get nine months of the true value of the account comped back to you. So instead you extended the time period, which is a different point that I have, but let's say it's two years. You get comped on that account for two years. So for every account that you close, Instead of getting 8% of an annualized contract value, you get 5% of monthly build. And so every single month at the end of the month we know exactly how much all your all closed one customers from Matt Bertuzzi. What was the total amount that was received by the company that you work for times 0.05? Yeah, cut you the check.
Matt Bertuzzi [00:12:25]:
So then it's peaks and valleys. We're just back to the same thing, peaks and valleys. Except I start from zero because my book's at zero. So you have two options. You can either pay more in the first half of the contract and less in the back. So a higher rate in the first six months at a lower rate in the subsequent 18 months, you try to smooth that out. That's one option. Dude, you know what this reminds me of? You're selling Windows 95 licenses.
Matt Bertuzzi [00:12:49]:
That's all you're doing. Consumption is licenses. It's not per month though. Take out recurring. How many conversations do you want? A million. Here you go. Pay me my commission. Hey, I think you're almost at, you're almost using your million and you're on pace to use 2 million. Let me give you a better deal by 2 million. Because then it's like, dude, it's literally. It's like it was before, but then.
Kyle Smith [00:13:08]:
The rate doesn't matter. Is your point. So you could consume that, but then do you have to put time based parameters on it? Do you, does that have to be used by. If you want the million conversations, it can't be unlimited. What if it, it's 100 years at some point? Just to use an extreme example, that's.
Matt Bertuzzi [00:13:26]:
A legal problem, not my.
Kyle Smith [00:13:27]:
Yeah, yeah, right. Okay, but, but in theory, in theory people would buy.
Matt Bertuzzi [00:13:32]:
Now it's not opex, it's capex. It's literally turning back time to like 2007, 2009. But people bought software all the time and then they called it shelf where they literally bought 100 licenses, used 50 and put 50 on the shelf and never used them again.
Kyle Smith [00:13:47]:
Yeah, buy a million conversations, use a thousand a month and realize, oh, oh, we overbought.
Matt Bertuzzi [00:13:54]:
Right.
Kyle Smith [00:13:54]:
Yeah. But if you constantly do rebuys to avoid that.
Matt Bertuzzi [00:14:00]:
Yep.
Kyle Smith [00:14:00]:
Or you could just do triggers. Like you could structure a contract to where there's automatic triggers and inflection points. It's like this is a strange example, but commercial leases, like I remember a building for higher ed, were in 2010. The commercial lease was a 15 year lease with five three year renewals on the tenant side.
Matt Bertuzzi [00:14:24]:
Okay.
Kyle Smith [00:14:24]:
So basically it was, it was a, a preferential treatment for the tenant where you can't kick me out within 15 years. There's pre negotiated price escalations over each three year increment at the signing of the 15. But I can back out every three years.
Matt Bertuzzi [00:14:41]:
Right.
Kyle Smith [00:14:41]:
And so you could do something similar. You could say you get thousand conversations. As soon as you go over, there's an automatic trigger that takes you to 5. We need written approval to go from 5 to 15 and then we have different price tiers baked into those. I think it's going to make contracting significantly more complicated. But is it better for anyone? Is it better for the seller of the software? Is it better for the consumer of the software?
Matt Bertuzzi [00:15:08]:
It's better. They both have the same issue. They both have a people buy more. You cannot buy less than you're using. Let's assume that that is technically impossible. I cannot buy 10 seats and use 15 or 150. So what I would like to do is buy the number of seats I need at all time when I need them, like I do with paywall. I hire 100 people, 100 people resign.
Matt Bertuzzi [00:15:39]:
That's good for the buyer. No one's gonna buy a million conversations because in theory everything is despite inflation, technology makes things cheaper over time. Like I was literally selling back up at $32 a gig. It's like 50 cents a gig now. Right. So nobody bought 100 million gigs to use over the rest of their life because the price just kept falling, falling, falling, falling. Much better for the buyer. This is a change and it's easy to negotiate for the seller.
Matt Bertuzzi [00:16:07]:
I don't have any flexibility. You want to discount buy more.
Kyle Smith [00:16:10]:
Well and I think the big push and from my understanding, while not as publicly stated, is really one of the big pushes behind it is the assumption is your user count is going to slow, plateau or decline. And that's where the, the fear comes from.
Matt Bertuzzi [00:16:30]:
So they want the same or growing MRR.
Kyle Smith [00:16:32]:
Exactly. So if let's use back to Agentforce. If I sell service cloud user licenses.
Matt Bertuzzi [00:16:38]:
Right.
Kyle Smith [00:16:39]:
And with the emergence of AI I need less service reps to be able to handle my customer base. Then you don't see license growth because I don't hire as many service reps. And so you want to see growth from somewhere and something that's consumption-based so that you as Salesforce gets to ride the wave of my AI efficiency gains. That's what you implement to be able to do that.
Matt Bertuzzi [00:17:06]:
I mean the only thing I could think of that would be absolute. The absolute worst is a both a combination of. It's the cell phone model again. Number of lines and number of minutes. Like the matrix of you have like five lines and then 100 million minutes. That's just where it starts to get annoying.
Kyle Smith [00:17:22]:
Yeah. It just puts you and your customer at odds with each other especially.
Matt Bertuzzi [00:17:26]:
Yeah, exactly. Right. I call three months in, we're implemented and what you said we were going to use, we didn't use you were way off.
Kyle Smith [00:17:33]:
How much time do we spend with CSMs around driving adoption? Yeah. Yeah. And now if there's a point of friction between us getting them to adopt and love what we do and them not necessarily wanting to take adoption too far because it directly impacts how much they pay us, that's a difficult little point of friction to add to the process, which I think is going to undo a lot of what you're hoping to gain from it.
Matt Bertuzzi [00:17:55]:
If company A like and we're thinking like, I think Adobe went from everything licensed to everything recurring. They made that transition if they wanted to. Let's say Adobe Acrobat per PDF edited. You know, something silly. That transition can happen. Do you even need really like quotas right out of the gate? Like if you're doing something this novel, can you take the existing monthly, annually recurring hunter, lander, farmer model? But you just try something different and be like, we pay all our engineers 150, we pay all our sales reps 150 and then it's company bonus.
Kyle Smith [00:18:30]:
That is interesting, but. Or you don't have a quota, there's no accelerators.
Matt Bertuzzi [00:18:36]:
Yeah, of course.
Kyle Smith [00:18:37]:
And you go for a retention play where we know how annoying it is to constantly try to rebuild your team, which happens every what, 24 months for AES, the tenure is not great and so you go a completely different direction and you say there's no quota and there are certain expectations or parameters, but MBOs. Yep. But you get 5% of everything and you build your book. And so then there's incentive.
Matt Bertuzzi [00:19:05]:
It's like it feels like an insurance agent.
Kyle Smith [00:19:06]:
Yes, it is exactly like an insurance agent. It'd be way harder to recruit for because I think the cost of year one for the AE would be pretty significant because you have to actually build it, build the book. But the three year return starts to look pretty juicy if all of a sudden you are actually establishing a book and you roll into year three and now you're just cashing checks. The issue is, yeah. How do you promote additional new business sales? And now we end up back. Fast forward, we're back to role specialization.
Matt Bertuzzi [00:19:39]:
But to your point, like if I am year one and I started zero for year zero, I started zero year one in SaaS, my quotas, I'm back to zero. Now I'm coming in at 50,000 recurring per month. Great. I know in January if I do I'm getting 5% if whatever. 5% of 50,000. Year two maybe made 100,000.
Kyle Smith [00:20:04]:
Now how do you go take another job? Correct how do you go take another job?
Matt Bertuzzi [00:20:10]:
Yeah.
Kyle Smith [00:20:10]:
And then if anything you could put like a long outlier on it, like five years. It might need to be like three. But let's go with the five year example. You get comped over the first five years at x percent of every dollar billed and then there is still some incentive because you don't want a never ending degradation of your commission rate because you know people are going to get to year five, you don't get paid on them anymore. Some people are going to turn you don't got paid paid on them anymore. You want a never ending escalation, not degradation of your book that you get comped on. So you have some protections in place to continue to incentivize them to go get new business sales. But how do you go look for a new job in Q1 after you get your big Q4 commission rate when to your point you're back at zero in this scenario you're like I don't want to start over.
Kyle Smith [00:21:03]:
This is awesome.
Matt Bertuzzi [00:21:04]:
Do you think insurance agents have longer tenure than realtors? They still have their personal people businesses. But you don't get a recurring because the house you sold me I still live in. So it's like I'm going to go from A to B, what does it matter? I'm not getting a recurring versus if I'm geico, do I go to Allstate, do I start over again? I don't know. I mean I don't have any idea.
Kyle Smith [00:21:22]:
Yeah, I would assume it. Yes. Significantly better retention for 100 reasons.
Matt Bertuzzi [00:21:29]:
But yeah, yeah, it's the challenge is like wins above replacement. If I took that book and paid nothing on it, if I just put it on the shelf, it's not going to go to zero in 12 months, in six months, in 50 months. So what is the value of the rep doing to keep that 1 million at a million or not 100,000amonth? At 100,000amonth then it's a CSM play and they have five accounts that matter in 90 accounts that they care about and 100 accounts they can't afford to talk to. But is that a bad thing? I don't know.
Kyle Smith [00:21:59]:
Right. That's the question.
Matt Bertuzzi [00:22:02]:
I don't know.
Kyle Smith [00:22:02]:
Yeah. So I think it's just interesting because does it push? Is this the first domino default to change other things? Do we see a slightly less role specialization and some really inventive and massive shifts in the way that AEs are comped and the way that they manage a book of business under a consumption-based pricing model.
Matt Bertuzzi [00:22:23]:
Right. Where we assume the consumption is you pay for what you used last month. Or option B is you buy 400 boxes of Tic Tacs and as you eat them, you buy more Tic Tacs.
Kyle Smith [00:22:35]:
Yes, exactly. Yeah, yeah, yeah. In the rears or pulling the cash forward is a question of how they structure the contracts. But I think it's going to be interesting either way. And I'm excited for people to adopt Agentforce and just see what the early reviews are.
Matt Bertuzzi [00:22:50]:
No, I know. I saw a huge Reddit thread where they thought that two was become one and at certain scale, 50 cents. A conversation in their internal big company modeling, they had figured out that that's actually better than agents, than human beings. Because it's not just like. That's the thing. If it was literally like a chatbot that's. You said pricing. Would you like me to show you the pricing page? It's AI. It's like if I say my monthly is too high, it needs to know that monthly means monthly spend, monthly spend means pricing. Now it goes into the logical bucket of pricing negotiation and then there's like substrate, you know, there's some stuff there.
Kyle Smith [00:23:26]:
Yeah, it needs to be pretty sophisticated to pay two bucks each for.
Matt Bertuzzi [00:23:33]:
Yes.
Kyle Smith [00:23:34]:
Yeah.
Matt Bertuzzi [00:23:35]:
But the logic is sound. There's a lot of stuff that we consume. Like, I mean, email marketing is the easy one, its users. Zapier is a good example. It's your number of zaps and your number of whatever the other consumption thing is. And you can't exceed. Once you exceed either, you go up a tier. But what if I just wanted to buy a million zaps and I don't want to ever have to worry about users and, no, just give me a million zaps. That's better for me, harder for them.
Kyle Smith [00:24:01]:
True.
Matt Bertuzzi [00:24:02]:
Yeah.
Kyle Smith [00:24:03]:
Cool. Well, we'll continue to watch it. I know it's not new, but it seems like it might be making an even stronger push over the next couple of years. So we'll keep an eye on it, see what the impacts are going to start to be on sales reps and think about especially incentivizing and comping people appropriately under a completely new model.
Matt Bertuzzi [00:24:23]:
Love it.
Kyle Smith [00:24:24]:
Cool. All right, thanks, Matt. Thanks for listening to this episode of Market Mastery brought to you by The Bridge Group. If you're a revenue leader in the B2B sales space or know someone who is, connect with me on LinkedIn. Don't forget to subscribe to stay updated on future episodes.