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The ‘revenue spaghetti’ is a real problem for B2B Software mid-market companies. It is the core billing and accounts receivable problem that Finance leaders are tackling as a mid-market company grows. What is it and why is it so bad?
Let’s start with the definition - the revenue spaghetti is not a real pasta dish, sorry to disappoint. It is a nickname we gave to the billing and A/R complexity that B2B mid market companies experience as they grow.
There is a basic logic to any billing, cash flow and revenue event: a) Product - what are the products and services I am selling, what are the SKUs, what are the quantities; b) Price - the agreed monetary value for those products and services: and c) Time - what is the timeline logic of these events and the way they financially affect my business . Of course, billing, cash flow and revenue events are their own separate worlds, but they are fundamentally driven by the same business events, and cannot be viewed as mutually exclusive.
The revenue spaghetti is where the above logic begins to be so complex, that it hurts billing processes, so much so, that it ends up negatively impacting operations and finances. There are three root causes for the revenue spaghetti that we identified:
SKUs and Channels - as a company grows, it adds products and services, and also distribution channels. This creates a complexity of pricing and contract schemes.
Complex Pricing - can come in many shapes and forms. Much of the pricing complexity we see in the market is a result of usage pricing, which brings with it a world of tiers, minimums, overages and other logics.
Bespoke Contracts - in a Sales-Led go-to-market motion, contracts are negotiated, which makes them unique. The negotiation element changes the products, pricing and timeline of each contract. We say that in B2B sales each contract is a snowflake - you can’t find one that is identical to the other.
So what then? What is the damage? Well, companies operations and finances are hurt by this revenue spaghetti problem. The inherent issue is that this complexity is very hard to automate since it has very little repeatlessness. Some companies think that they are such an edge case, that no system could possibly meet their needs, so they default to building in house.
When you’re billing and A/R is not automated it can hurt your business in many ways. We saw it all. Late invoices, inefficient collections, lots of manual work, lack of clarity of revenue and cash flow sources. More than that, it hurts business agility - before we started Received, many CEOs told us ‘our billing system is our business model bottleneck’. How crazy is that?
Working with many B2B Software companies, we want to share some learnings on how the smartest CFOs tackle the spaghetti problem.
The 3 Layer Cake - think about your complex billing stack as 3 layers of a cake - pricing, contracts and invoices. These layers overlap and have an interdependency, but are not the same thing.
Pricing is how you make money. There will be a finite number of pricing models, maybe a handful of pricing schemes. Contracts is how you make money with a Customer. Now, options bloat and permutations exponentially grow. A contract logic takes your pricing logic, changes it, and adds events and stipulation on top of that. Invoices are you asking for money from your Customers. A specific moment in time where all that logic translates into a cash event.
We think about it in this way - if you have the pricing and contract logic in place, invoices are automatically calculated and created. Separating the layers, and creating logic to each layer, empowers you to be smarter about your cash flow and revenue.
Man vs Robot - the best CFOs know that human judgment is irreplaceable. Sales-Led B2B Billing demands surgeon-level precision on the Pricing and Contract level. This means that in B2B not everything is meant or can be automated. The way to think about the CFO Office tech is that it should make Finance teams smarter and faster.
We think about it in this way - let the machine do everything a machine can do, and give Finance teams great systems to set the logic and manage the flow. Gartner calls it Autonomous Finance. B2B billing and A/R, pricing and contracts are impossible to fully automate, but you can automate a fair amount.
For example, after you configure the pricing and contracts logic, the usage data flow, the machine should create the invoices automatically. Another good example is great integrations with Salesforce and NetSuite, they should be set up in a way that the data flows between the systems, but also allows human intervention, such as blocking garbage data coming in from Salesforce (we see that a lot).
The IT Stockholm Syndrome - the new CFOs are system architects. They use scalable systems that integrate with their CRM and ERP, creating data integrity and consistency. The number of systems that are available today and that are still being built for Finance teams are increasing. The connectivity that these systems allow with the CRM, ERP, PSP, HRIS and other organizational systems is fantastic. In a way, we are on our way to fight data discrepancy and consistency in the organization.
The old way of creating that connection for the mid market company used to be IT integration services, that would connect your Salesforce and NetSuite, for example. These are expensive services that require a lot of time and attention by the Finance and IT teams, all the while leaving it with rigid logics.
Want to change or grow out of your old configuration? No problem, you’re looking at another 6 month project that costs in the tens of thousands of dollars, not to mention the internal resources to manage the project. Avoid the toxic dependency on IT services that leave you stuck with rigid logics and high recurring IT costs, and switch to systems thinking.
Get a billing platform that is built for B2B complexity