Infusing technology into the Revenue Lifecycle
Revenue is the most important metric for any company. In the current world, Enterprise/Consumer Startup companies lack the right business processes and tools, which would help them maximize revenue. When we dissect everything right from Sales to Revenue Recognition under a technical lens we find insights to build a revenue function with the best tools and with an overlay of efficient business processes.
Lets start with Sales. Sales answers the question, If you build it, Will they come? This article by Peter Thiel explains how important Sales are in the context of both B2C and B2B start-ups. Even though Enterprise and Consumer start-ups differ in their models, acquisition channels and Go-to market strategies, Sales is the ultimate driver for revenue. Hence, revenue automation should be an enabler for Sales and Operations.
We are living in a subscription economy today. This means that most of the software/services are distributed/licensed on a subscription basis. This Subscription business model is a boon to getting more revenue if business processes are correctly aligned. Hence, during and after sales, the operations team should design business processes, which would make collecting revenue easier and more palatable to Finance.
Revenue recognition is important because Analysts, markets and stakeholders decide the fate of the company based on those numbers. For a start-up, the final revenue numbers distill the success of each product line.
Across all the steps above, business processes should be woven using technology and tools to make the entire process seamless. Each function should be complete in itself about taking the right input and giving out the right output consumable for the next step. Lets dive deeper into each of these functions.
A marriage of correct data and technology is a key enabler for Sales.
Data should tell you what sells and what the market is ripe for. This can be from various sources like revenue recognition, product usage and market analysis. That should be the basis of the product catalog. The catalog should also reflect products which help to structure different types of deals. The product catalog, once built, needs to be on a revisit cadence based on data and market trends. Data should also enable creation of product bundles, which lead to more selling. The more you remove frcition from purchasing by ensuring your pricing and packaging meets customers’ needs, the more revenue you build.
Currently, SAAS start-ups use anything from Excel to Zuora and even Oracle for subscription and revenue management. Regardless of what tools you use, it is necessary to keep the end goal in mind, which is revenue. Sometimes during the selling process data should also enable Sales to understand whether the Customer would need PS (Professional Services) or Premier Support. Fundamentally, whatever you use, it has to be build/configured with a single notion that the technology fades in the background and makes it as easy as possible to close any kind of deal, thus enabling your customers to easily consume your product and to grow your install base. Building quotes should be easy with up to date products and pricing. Once the quotes are build and finalized, Sales should disappear and go back to what they do best, selling. Billing and executing quotes into invoices and subscriptions should be seamless including calculation of all the metrics like Total Contract Value(TCV), Annual Run Rate (ARR) and others. Most enterprises miss the critical next step which is predicting and building out renewal automation. It is a key aspect of renewal strategy and minimizing churn.
If you have worked with Okta, it would be evident to you that our team here has the ability to structure any kind of deal. Great Sales and Finance teams with SAAS business experience are the key. I am not going to get into the details of deal structuring but it is fair to say that our technical infrastructure is one huge driver into the process.
It’s imperative that your technological stack for business enables you to take advantage of the Subscription Model.
In a yearly software licensing model, which was used in the past, software was renewed every year. Payments were also year over year. This model had its own merits for revenue recognition. In the subscription economy, product catalogs reflect monthly costs. They are usually in units as ‘per user per month’ or ‘Logins per month’ and so on. Hence, in this scenario payments can happen month over month, quaterly or even yearly depending on the customer. Start-ups and enterprises should have flexibility contractually as well as technically for accepting payments to cater to all kinds of customers.
A typical subscription month over month model with unit charges is shown above. Usually the month over month charge is greater than the cost incurred for the month in a traditional (year over year) business.
If you stack the subscription revenue from month over month onto a single transaction like the traditional revenue model, your revenue would be higher per customer than for a traditional yearly model as indicated below.
It is because usually, subscription businesses charge more monthly, hence projecting that collectively over the year the revenue is higher per customer than a traditional business. Even though companies get more revenue for the year, they do not get cash upfront. However, once you reach critical mass in a subscription business and as revenue keeps coming in, the business skyrockets. The fundamental nature of the subscription model causes the start-ups to take a long time to grow. The delta is usually the money start-ups go out to raise. Once they have good cash flow and they are able to minimize churn, they have a snowball effect. This is the beauty of the subscription model in general. This entails you to bill month over month which means you work hard to keep the customer. A great product on the other hand gives you the upside to bill significantly more month over month with a huge potential of upsells and cross-sells.
Sometimes flexibility in terms of subscriptions can make the product stickier.
Imagine a consumer subscription business that bills the customer monthly. If the customer is going away for a few months, it makes no sense for him to use certain services. The business processes should be flexible enough to turn off his subscription and turn it back on when he wishes to come back. This should happen with no notion of a new user joining the system but in the context of an old user who is coming back or temporarily off. These flexible terms help keep the customer long term. Traditional yearly model had an advantage to get revenue upfront for the year. Doing those same yearly/long term deals in the form of subscriptions can be a huge win for revenue. If there are customers who are having rapid growth and would need more licenses as they grow, there should be a provision to do a long term step-up deal. Total revenue from a customer is offset by Customer Acquisition Cost (CAC) required to get the customer on board. Long term deals get the customer locked in which promises a positive cash flow in the future. These are some creative ways in which companies can use the Subscription model. In terms of any start-up using the subscription model who have figured out their CAC, it should be evident that step-up and long term deals will boost the Life-Time Value (LTV). LTV is a prediction of the net profit attributed to the entire future relationship with a customer. The technology should not be cumbersome to manually build a step up deal or a long term deal but rather work as if it happens naturally akin to the deal structure.
Post Sales and Subscriptions, revenue aggregation, metrics and reporting are the data sources for enabling the business.
Aggregating all of the revenue data for FP&A has to be flawless. The correct picture of the business is painted based on these numbers. Reporting and data aggregation from various sources including online and telesales should all be carefully funneled into FP&A. Across all of the different systems used for different processes, micro and macro level metrics should be reportable based on the conventions followed by the company.
Most start-ups put the final revenue back into the business to enable growth. The data from aggregation also feeds in, to enable Sales. This is the lifecycle of Revenue which includes Sales, Operations and finally reaching revenue aggregation.
I have learned a lot with building systems which handle revenue in the last few months. If there are questions on these topics please ping me at vimarshkarbhari@gmail.com. We use Salesforce, Zuora and Netsuite @Okta. Jake Randall has been the key to building most of what I have mentioned above @Okta.
