A Guide to Transitioning to Usage-Based Pricing Models: Four Pricing Models and Five Key Challenges for CFOs

Many companies in the technology industry are gradually shifting toward consumption-based pricing models, often referred to as "pay-as-you-go." This trend is driven by multiple customer benefits—most notably, the model establishes a clear link between the amount customers pay and their actual usage or the value they receive. Additionally, its flexibility allows customers to purchase only what they need, without over-provisioning resources "just in case." For suppliers, this model also offers numerous advantages—it is easier to sell and naturally aligns with a customer-success-oriented service philosophy, helping to enhance customer lifetime value and revenue.

Four Main Pricing Models

There are currently four main consumption-based pricing models, each varying in the level of customer commitment. Understanding these four models is a prerequisite for grasping the various challenges and transformation requirements.

1. No-contract model.This is a pure pay-as-you-go model where customers pay based on actual consumption without making any commitments. Customers typically only need a credit card to start using the supplier's solution. Companies that do not need to lock in customers with minimum commitments, especially those targeting the small and medium-sized business (SMB) market, often adopt this model.
2. No-commitment contracts.These contracts do not include a monetary commitment but contain certain contractual obligations, typically related to pricing and contract duration. Some companies are able to estimate the contract value at the time of signing, but most find it difficult. These contracts are very common in "revenue-sharing" models (where the supplier takes a percentage of the customer's revenue), often seen in fintech, e-commerce, and digital media/ad-tech industries.
3. Hybrid contracts with and without commitments(Also known as "minimum plus elasticity"). The contract includes a committed spend and a non-committed spend. Some companies can estimate the value of the non-committed portion upfront, but most find it difficult to predict accurately. These contracts are typically used in hybrid scenarios that involve committed hardware/software solutions requiring shipping and deployment, along with consumption-based components.
4. Committed contracts(Also known as "fund pools"). The contract includes a committed spend over a defined period (e.g., one year), but customers pay based on actual usage. In this model, unused funds are charged at the end of the contract period; however, some suppliers allow unused funds to be rolled over to the next contract period. Many enterprise-level technology solutions use committed contracts to lock in customers, offer volume discounts, help customers set budget expectations, and enhance revenue predictability.

It is common for companies to adopt multiple pricing models for different products, market segments, or use cases. For example, tech companies like AWS, GCP, and Snowflake offer no-contract options for customers who choose self-service or trial solutions. However, to obtain volume discounts, these companies require customers to commit to a certain level of spend.

Challenges and Transformation

Despite the growing trend of consumption-based pricing, implementing these new models still faces several key challenges:

• Revenue cannibalization.Many companies hope to migrate their subscription or perpetual license businesses to consumption-based pricing, but this does not always generate incremental business. In fact, business volume may shrink because customers only purchase what they need and no longer over-provision "just in case." Financial plans must accommodate this reality.
• New coverage models.Shifting to consumption-based pricing profoundly impacts customer engagement models, requiring companies to focus on driving ongoing consumption. Essentially, adoption, expansion, and renewal actions in the customer journey tend to become synchronized and dynamic. Therefore, companies must reassess the role division, execution methods, and deployment strategies of Account Executives (AEs) and Customer Success Managers (CSMs).
• Reduced revenue predictability.Many companies (depending on the specific product) cannot always predict customer usage. Therefore, this model almost inevitably increases the difficulty of revenue forecasting and quota setting. Even with minimum commitment contracts or committed fund pool contracts, this challenge persists due to a lack of insight into usage absorption.
• New tracking systems and processes.Tracking and reporting for consumption-based pricing models are more complex. Companies need to be able to track granular usage data and model usage patterns to support invoicing, internal sales performance attribution, and forecasting efforts.
• Pay-for-performance compensation plans.Designing simple sales compensation plans to reward "points of influence" is challenging because there are multiple influence points—such as winning the customer or activating the customer, as well as driving ongoing consumption. Notably, some solutions can grow naturally without AE or CSM intervention. The most difficult part of the transformation is guiding AEs, who are accustomed to selling committed contracts and rarely involved in post-adoption promotion, to shift their focus toward driving ongoing consumption and be incentivized accordingly.

Migrating to Consumption-Based Pricing Models

Migrating to a consumption-based pricing model signifies a major shift in a company's go-to-market approach. To address the challenges above, companies must reassess and update their product/pricing strategies, customer engagement strategies and coverage models, sales compensation and quotas, as well as reporting/systems and tools. This is no easy task. Companies need to mobilize the entire executive team and multiple specialized workstreams to manage workflows with numerous interdependencies.

Transformation Guide

To successfully transition to a new consumption-based pricing model, companies should consider the following go-to-market elements, covering planning and investment, sales strategy, sales compensation, and reporting, systems, and tools.

Planning and Investment

• Develop a comprehensive change management and readiness plan with a holistic perspective, identifying key dependencies and challenges.
• Recognize that pricing model migration may lead to a short-term increase in costs relative to revenue. Test different performance scenarios against key financial metrics (such as impact on recognized revenue and costs, E/R ratio, SG&A, etc.).
• Consider investments in tools, resources, and training to enable sales and service personnel to effectively perform their roles within consumption-based offerings.

Sales Strategy and Coverage

• Determine which market segments/customers are suitable for specific consumption-based products and pricing. Also consider product preferences and whether to prioritize consumption-based or subscription-based (or vice versa).
• Prepare example use cases to show customers potential outcomes (such as total cost of ownership, cash flow impact, etc.) and comparisons with traditional pricing.
• Assess the impact on all customer-facing roles, with a focus on sales, service, customer success, and support departments. How do the day-to-day activities of incumbents in each role need to change? What is the impact on required skills and capabilities? Role and behavior changes may increase or decrease the number of people needed in each role.

Sales Compensation

• Align sales compensation plans with sales roles and, where possible, tie incentives to multiple influence events. For signing contracts or onboarding new no-contract customers, pay based on contract value (such as ACV, TCV), estimated contract value, or contract/activation signing bonuses. If sales are responsible for and can influence usage, pay based on consumption revenue. Finally, avoid "annuity-style" payments (i.e., ongoing recurring revenue that occurs without sales influence), especially when sales cannot influence subsequent consumption.
• Ensure sales compensation plans are aligned with the company's consumption-based pricing objectives. Reassess the practice of paying 1:1 for consumption-based versus subscription/perpetual license, as the latter is typically preferred by sales, thereby disadvantaging consumption-based initiatives.

Reporting, Systems, and Tools

• Develop the key metrics, management dashboards, and heuristics needed to manage a consumption-based business.
• Ensure that primary sales and service tools (such as CRM, CPQ, SPM, customer success platforms, etc.) can meet the needs of consumption-based pricing.

Higher Valuation

Many technology companies intend to migrate cloud subscriptions, term subscriptions, perpetual software licenses, and even hardware sales to consumption-based pricing models to capture their benefits. However, this pricing model is not suitable for all companies or solutions. It is best suited for companies that can accurately and easily break down their services into small, measurable units. Before transitioning to a consumption-based pricing model, companies should fully understand its benefits, challenges, and the go-to-market changes required to achieve this significant transformation.