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B2B Contracts are Not Subscriptions (and you shouldn't treat them as such)

It's been a big decade for subscriptions, with over 80% of emerging SaaS companies incorporating subscription models into their customer offerings (Gartner).

However, over the years subscription popularity has slowly led to mix-ups and misconceptions within the tech sector.

The terms 'SaaS' and 'subscription' are now frequently conflated, and the processes of 'subscription management' and 'contract management' have often been treated the same way. But they are not the same. Far from it. So we're here to get things straight. 

What is a subscription? 

The easiest way to think about subscriptions is by looking at your own.
For example, 'Apple Music', 'Netflix' and 'Amazon Prime' are all great subscription services - a monthly fee is charged for the use of the service.

Now try and think back on how your buying process looked like.
It was pretty easy right? 

You choose your monthly plan, create an account, enter your billing information - and boom! You're done. 

B2B subscription services are not too far off. Take for example 'Dropbox', 'Slack' or 'MailChimp'. These are all subscription-based B2B services, with clear plans and monthly rates. 

The buying and onboarding process for these companies involves little-to-no human interaction, and looks the same across all customers. The plans are there. You just choose one and hit the road. 

What about billing you ask?

Here too, the answer is simple.
Customer subscriptions are set up for recurring payments, meaning the customer will be charged at fixed intervals until they cancel their subscription.

Unlike B2B contracts, where renewals are negotiated and discussed, subscriptions are perpetual, non-negotiable contracts with no end date, and no real renewal process.

This makes subscription billing pretty straight forward, with no variables and no surprises. Subscription services can automatically collect the same amount each month (or year, depending on the subscription) without any customer interaction.

What is a B2B contract?

In the sales-led B2B world, contracts are more complex than standard self-serve subscription agreements.

For one, B2B offerings usually include multiple products with hybrid pricing models that incorporate both SaaS license and usage-based pricing. In addition, each product has its own commercials, timeline and payment terms. B2B contracts are also more complex in terms of delivery and installation, as well as after-sales service and support.

That's not all. B2B customers expect their contract terms to fit their company's budget, stage, and specific needs, so almost all Sales-Led B2B contracts are negotiation-based. Each customer wants a contract tailored to their company's specific needs, making each contract one-of-a-kind. We like to think of sales-led B2B contracts like snowflakes - no two are alike. 

What about billing you ask?

Here is where things get even more complicated.
Not only do B2B contracts include multiple products, complex pricing structures and unique terms, but also have varying billing and revenue recognition logic which makes them difficult to manage.

When setting up the billing process for those contracts, you need to consider each contract's unique billing terms. If you're just starting out with a few customers, it's still manageable, but imagine what happens when you have dozens or hundreds of these "snowflake" contracts. 

B2B Contract Management

While signing contracts with customers is the job of the sales department, once they hit their 'Closed Won' goal, managing the billing process for those contracts is solely up to the finance team. Ultimately, it's their job to ensure each customer is charged according to their own specific contract terms. Unfortunately, it's easier said than done.

Managing B2B contacts requires a platform that can handle their complexity.

This means a few things: 
  1. Logic flexibility

    A great contract management tool adapts to your changing needs. This means having the ability to add multiple products and services to one contract, mix hybrid pricing structures, offer different timelines for each product, and incorporate bespoke terms and conditions.

    You want your platform to twist and bend to fit your specific needs, no matter how unique, complex and non-traditional they are.

    You should also pay attention to your contractual events, like upsells, downsells, renewals, cancellations, pauses, and more. Unlike subscriptions, which renew automatically until the customer hits the 'cancel' button, in B2B contracts you need full flexibility to change the contract terms at any given moment.

    Having this type of flexibility did not exist in the market up till now. In fact, subscription management' systems are built to fit the classic subscription model, but not much more. Excuse our French, but you can’t force feed a B2B contract into a subscription logic.

    Like the title states - your B2B contracts are not subscription agreements, and you shouldn't treat them as such.

Received's Contract Creator

  1. Visibility

    Another highly important capability that's become a must-have in the last few months is contract visibility. Your contract management tool needs to deep dive into contract metrics - the products you're selling, cash inflows, recognized and deferred revenue per product, upcoming and past invoices, and more.

    Full visibility is the backbone of contract management. It allows you to understand each contract's LTV, identify potential sources of revenue and make informed decisions based on accurate real-time data. It also helps to ensure that you're meeting contractual obligations and that revenue is recognized correctly.

    Basically, to have a proactive and efficient contract management process, you need to understand what you're giving, and what you're getting in return.

Received's Contract Overview

  1. Contract-Native Revenue Recognition

    Last but not least is revenue recognition. We know having RevRec built into your contract is unusual, but it shouldn't be. Why? One, because it allows you to define a different RevRec method, cycle and period per product, which provides better flexibility and accuracy.

    In addition, with usage products rolling into most B2B offerings, contract-native revenue recognition allows you to define revenue recognition logic for a price variable that has yet been determined. As an example, if a sales order includes an installation given for free, a monthly license, paid quarterly, and API-based usage in tiers - all these events will require different cash and revenue logic. One might need to allocate prices between license and installation under 606, and recognize usage on a daily basis.

    Having your revenue recognition perfectly aligned with each customer's contract terms allows this type of usage-based revenue recognition that currently companies need to build on top of their NetSuite.

    Having contract-native revenue recognition also provides you with enhanced visibility into each product's value. With the right revenue recognition happening in real time, you can easily tell how much each product makes you per revenue cycle.

Received’s Contract-Native Revenue Recognition

To sum up, B2B contracts are not subscriptions! Each B2B contract is a snowflake, with complexities and unique characteristics that demand a specialized approach that goes beyond the capabilities of standard subscription management. These contracts are distinct and tailored to the customer's specific needs.

To effectively manage B2B contracts, you need a platform that 1) has flexibility to include multiple products and hybrid pricing structures, 2) handles complex and bespoke billing & revenue recognition logic per product, and 3) provides full visibility at every stage.

Speaking to Finance leaders we heard, to our surprise, CFOs and VP Finance leaders wondering ‘how come B2B billing hasn’t been solved?’. They said they have many frustrations with slapping their B2B use cases on top of subscription logic. We believe a system built for B2B has great Contract Management, and so much more.

Talk to us to find out more.