July 9 by Michael Carrell
The world of B2B business has changed forever. As companies of all sizes have adopted subscription and blended business models as a way to differentiate their offerings and increase ease of business, the revenue lifecycle has fundamentally changed.
Customer relationships now extend far past the original point of sale all the way through to fulfilment and renewal, activities like billing may happen on the customer’s schedule, and the diverse blend of offers — plus dynamic changes to what has been subscribed — makes revenue recognition more complex. This is forces businesses to be more agile and flexible than ever before.
For most companies, success requires a whole new approach to fulfillment, billing, revenue recognition and renewals. Here’s an overview of how each area has changed, and what considerations drive success in the subscription age.
Fulfillment Must Be Agile and Responsive
In a transactional world, finalized orders and contracts are sent to Operations for fulfillment and provisioning. Depending on the industry, this can be a very complex coordination of activities — including custom design and configuration, the scheduling of manufacturing processes, software provisioning, equipment installation, and the scheduling of services teams.
In the age of subscriptions, additional complexity is introduced to the process as businesses must respond to the changing needs of the customer. If (and when) customers need to move, add, change, or delete items from their orders after placing them, or amend orders after partial delivery of assets has occurred, businesses need to be able to rise to the occasion. The same agility is needed when customers want to change how many seats of software they need mid contract cycle, upgrade their plan from silver to gold, add more training classes or amend their professional services contract with change orders.
All of these activities change the performance obligations, and keep fulfillment teams on their toes. It takes a centralized, flexible, and agile approach to ensure you’re always delivering the right product, to the right customer, at the right time.
Billing Must Become Simpler — In The Face of Rising Complexity
In addition to fulfilling the order, the customer needs to be billed and pay. In a world of near limitless monetization options, this can be a tricky enterprise. For example, products may be billed at the time of shipment, software products may be invoiced based on the number of users or usage—like the number of gigabytes used or the amount of processed transactions—and services may get billed upon varying sets of criteria—like job completion, percentage completed, or the achievement of certain milestones.
When you sell through one model, billing can be simple. But when you have to manage multiple billing models, or coordinate invoicing for multiple and changing product orders, it can be a challenge to manage these activities in a way that doesn’t confuse the customer, or introduce errors. Remember, if the customer can’t understand the bill they won’t pay.
Another consideration for billing is the payment methods you accept. While it was formerly unheard of for B2B businesses to accept credit card payments, or endure the hassle and expense to become Payment Card Industry (PCI) compliant, in a subscription world, flexibility and a seamless user experience matters.
Today, “customer-friendly billing” means accepting payments in the method most convenient for the customers, including Automated Clearing House (ACH) and credit cards. And customers may need multiple payment methods attached to the account or split payment responsibilities across multiple payees. Plus if a payment is missed, it’s important to be able to initiate dunning, the process of asking for payment of a past due bill, in a customer-friendly way.
Correct revenue recognition has always relied on tight coordination and documentation about what is shipped when, when bills are sent to the customer for payment, and when payment is received and recorded by Accounting.
Today, this process is more difficult because Finance often has to generate revenue schedules for a mix of products, services, and subscriptions. These are called multi-element arrangements. It’s much more difficult to create a revenue schedule for a physical product with a one-time revenue recognition while you’re also trying to recognize revenue for products that have monthly revenue recognition across 12 months. Additionally, new regulations — like ASC 606 and IFRS 15 — have forced businesses to complete a thorough assessment of the new standards and how they may impact business.
Rather than spending the end of the quarter in a conference room trying to reconcile stacks of contracts, orders and invoices, proper insight into the entire revenue lifecycle allows Finance to simply verify if services have been rendered or if products have been delivered. This allows them to close the period, recognize revenue, and update the revenue forecast in a timely manner.
Assuming the customer is happy with their products and services, the relationship will grow over time, and there will be re-orders and renewals. The subscription business model can actually be incredibly useful for businesses that want to drive customer loyalty, and lower the total cost of acquisition through a long-term relationship.
But if you work with complex product and service offerings, there may be a number of departments involved in maintaining the customer relationship, and a variety of disparate data that needs to be reconciled to ensure renewals happen without a delay. This complexity could be introduced by subscriptions that started on different dates that need to be co-termed, change orders that influence the original contract renewal value, new users that were added to a subscription service, credits that need to be applied to a renewal payment, and expiring pricing discounts.
Depending on the level of complexity, some deals may be able to be renewed automatically, while other aspects may need to be handled by a sales rep. But no matter who is managing the renewal, it’s near impossible to manage a renewal without visibility into the original deal—and all the subsequent customer activities.
Successfully Managing The Modern Revenue Lifecycle Requires A New Approach
In the subscription age, the revenue lifecycle has only become more complex. That’s one reason why Gartner’s recent report, New Revenue Recognition Rules Will Impact Finance, Business and Technology predicts that by 2022, 70% of mid-to-large enterprise businesses will be using an automated revenue management solution to support complex billing and revenue recognition compliance.