What is revenue management: definition, best practices, and common challenges
What is revenue management software?
Simply put, revenue management is order-to-cash. It is everything that occurs after a quote is accepted, an online order is placed, or a contract is signed, until your company collects and recognizes the revenue. Revenue management involves taking the agreed-upon products and services and managing the orders, billing & invoicing, and revenue recognition.
Who cares about revenue management?
Revenue management is a critical part of accurately and efficiently realizing revenue, and, while many revenue management tasks are carried out by finance, the outcomes of revenue management impact a variety of departments—from sales and marketing, to product, operations, and legal.
When you’re doing it right, revenue management enables you to manage different revenue models — products, services and subscriptions — for different lines of business and your recurring revenue streams, even as the customer relationship changes over time. This in turn, enables you to be more consistent across your channels, more customer-friendly, and more efficient.
How revenue management goes from order-to-cash
Let’s walk through the typical revenue management process to illustrate all the order-to-cash processes that need to take place once your customer signs the contract.
Once an order is created, the data within the contract must be sent to operations for fulfillment and provisioning. Fulfillment isn’t necessarily just packing something up and shipping it to a customer. Depending on the industry, fulfillment can be a very complex coordination of activities, including custom design and configuration, scheduling manufacturing processes, software provisioning, equipment installation, and scheduling of services teams. If customers need to move, add, change, delete items from their orders after placing them, fulfillment becomes even harder to manage.
Simultaneously, contractual information about the billing schedules is sent to accounting. Just like fulfillment, billing can get complicated as well. Products generally get invoiced upon shipment or installation. But services may get billed upon finishing the job, completing a certain percent of the work or hitting certain milestones. And if you sell digital goods subscriptions, these may be invoiced based on the number of users or usage data, like number of time-units used or transactions processed. And if a customer has multiple orders or changes between billing cycles, invoices need to be coordinated so your customers can clearly see what they've purchased. At this point, the invoices are sent by finance to the customer for payment, and eventually, payment is received and recorded by Accounting.
While you’re figuring out how to fulfill orders and invoice your customers, Finance needs to figure out revenue schedules that are determine by when revenue is recognizable based on when products are delivered, services rendered or subscriptions are used.
Based on the revenue schedules set in place, revenue is recognized, and the customer is secured until it’s time to renew. GAAP compliant financial reports can be provided to the board and Wall Street.
If you work with complex product and service offerings, the product catalog of what you offer customers, and how you price it, can grow beyond control if there is not an elegant way to define the product and variations as parameters. With complex product and service offerings, the number of departments involved in a sale can increase as well as the number of change orders that occur over time, making visibility into the contract and the assets owned much more difficult. Effective revenue management is far more difficult without solid configure price quote and contract lifecycle management solutions in place.
Three key processes that comprise revenue management
Revenue management activities cover a wide scope, but there are three main processes you need to consider.
Order management: entering, processing and orchestrating orders
Once a customer has signed a contract, order management is the process of coordinating, scheduling, building, shipping, and installing the acquired products and services for your customers. Onsite enterprise resource planning (ERP) systems handle building and shipping, and order management stays in sync with this status.
Order management is based on the order information found inside your contracts or items agreed upon in the Quote. It’s an advantage when your Order Management solution is integrated with a contract management solution and a configure price quote (CPQ) solution. Order information can also come from items in the cart when purchased through an eCommerce web store. These items then turn into assets. Order management historically has been managed in an ERP solution, but because of the importance of catching on-the-fly change to orders, coordination between multiple systems, and the need for order management to tie into front-end tools—like contract management or CPQ tools—there is a shift to manage this in a dedicated revenue management solution that includes order management, billing and invoicing, and revenue recognition capabilities.
Effective order management recognizes that no business stands still and customers change their minds. It is important to catch and manage the impact of any moves, adds, changes, or deletes to an order. To do it right, changes to fulfillment instructions have to be able to be validated against the contract, and the fulfillment team needs full visibility into current inventory and resources to effectively manage when the order can be filled.
Billing management: automatically creating and managing invoices
While order management guarantees products reach your customer, billing management ensures the proper invoice with accurate information and billing terms is sent to the customer on time.
While the order is being processed, order information (available in the contract, quote, or shopping cart), moves to your finance team so they can generate billing schedules based on the order. Since many companies are now selling a bundle of products, services and subscriptions, it’s critical that invoices clearly explain the fees, line by line if necessary. Traditionally billing information lived in the ERP system, but in order to provide flexibility to the sales team and enable newer charge models, billing needs to be managed in the front office. So if there are any changes, swaps, deletes, and additions to the order you’ll be able to manage those complexities as they happen and process invoices that both you and your customer can agree on.
At the end of the day, the goal for effective billing is to generate an accurate and easy-to-understand invoice. If the customer isn’t able to understand the bill they won’t pay. If they feel the invoice is different from what they agreed upon, they’ll need to get it resolved before paying. But if the invoice is clear and accurate, they’re more likely to pay quickly, and have a positive impression of your company.
Revenue recognition: reporting revenue accurately based on what’s delivered
Revenue recognition is one of the most important aspects of revenue management because it’s so closely linked to a company’s valuation.
Providing GAAP compliant reports is an absolute requirement for public companies and provides credibility for private companies looking for investors. Errors can be costly in specific penalties to the company or the loss of faith by investors.
Accounting standards boards like Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) agree upon standards for accounting called Generally Accepted Accounting Principles (GAAP). These guidelines regulate the way revenue can be recognized. To keep up with changes in business operations, these standards are ever-evolving. In December 2017, ASC 606 and IFRS15 will update and unify across US and International accounting standards practices how to recognize revenue in contract with customers.
Revenue recognition can be a challenge, but it’s much easier when finance can automatically generate the appropriate revenue schedules for products, services, and subscriptions based on your contracts and agreements. For example, a revenue schedule for a physical product can be automatically set-up for a one-time revenue recognition in month one, while subscriptions will automatically be set-up for monthly revenue recognition across 12 months.
Rather than spending the end of the quarter in a conference room trying to reconcile stacks of contracts, orders and invoices, finance can just verify if obligations have been fulfilled, (services have been rendered or products delivered,) and then see how those impact the overall revenue forecast. finance will also appreciate an automatic and easy way to set revenue recognition rules based on products, services, and subscriptions and build those rules into the price lists, as well as complex bundling set-ups. Imagine the time and effort saved if any changes to assets owned (e.g. your customer upgrades half of their named users from silver subscriptions to the gold subscription), automatically propagate to scheduled invoices and are reflected in the revised revenue recognition forecast.
Nine business challenges affecting revenue management systems
- Billing and invoicing errors produce billing disputes creating unhappy customers. Inaccurate invoices mean missed revenue, a.k.a. revenue leakage.
- Manual processes and manually updated spreadsheets. Sometimes the task of billing and invoicing customers takes the entire month, and the process starts again the next day.
- Inability to generate invoices for blended offers, like software, hardware, and professional services to install and support
- Some companies are unable to invoice based on usage/consumption
- SKU proliferation, as the product catalog grows
- Limited ability to handle order changes. Some organizations needs to cancel entire orders and re-enter a new order to handle order changes.
- Inability to handle changes, and then co-term billing
- Lack of visibility into anticipated revenue
- Managing multiple point solutions such as multiple billing systems found in enterprises that grow through acquisitions.
Systemic problem: silos, just say no!
Eliminate siloed business processes by including a fully integrated revenue management solution as part of your quote-to-cash system.
While “revenue management” may sound like an unfamiliar topic to sales execs, sales ops, legal execs, and the IT department, in the context of quote-to-cash, it is critical for supporting a diversity of business models, eliminating billing errors, and being easy to do business. This is especially important for enterprise business reliant on recurring revenue.
Though unfamiliar to revenue management, these non-finance stakeholders care about happy customers, and benefit from elimination of siloed and inflexible processes.
By having all your data about the customer, a detailed history of the products and services they’ve ordered, what they’ve paid for those products and services, and what revenue you’re expecting in the future, you have complete visibility into your customer making it easier to delight that customer and expand customer lifetime value to your company. With a complete quote-to-cash solution on one platform, you can track contract details from contract signing to order fulfillment all while maintaining an accurate record of the value the company has earned from the deal.
When it comes to revenue management, many companies assume Enterprise Resource Planning (ERP) systems will take care of everything. However, even though it may store financial data, a monolithic and inflexible ERP system is not well suited to handle revenue management for a recurring revenue business. While ERP systems, financial systems, and operational systems help you execute processes and track transactions efficiently, the lack of flexibility in these systems can make it difficult for your customers and partners to do business with you. Rigid systems can’t accommodate changing business models like offering new bundles of products and services. It can take extensive customization and/or integration to accommodate these types of sales and product strategy changes you need to compete in the 21st century. Even worse, having a separate customer relationship management system (CRM) and ERP system often means there’s no single view of the customer or partner.
This means if you try to rely on your CRM and/or your ERP system for revenue management business decisions you will have a hard time answering the following questions:
- What products and services has this customer purchased? Which products and services do they have installed?
- Which service do we need to deliver with which products? How much should we charge?
- How much does the customer currently owe?
- What is the financial impact of an upgrade, add-on or renewal?
Forward-looking companies use revenue management to bring data out of their ERP systems so they can better coordinate this information across legal, sales, customer support, order administration and finance to provide a more streamlined and effective quote-to-cash process. And by complementing existing ERP reports with a quote-to-cash system you can gain for example, new insights into receivables or new metrics surrounding a subscription business like ARR, MRR, and churn.
And, you now have one system of truth for all your financial forecasting and reporting.