Revenue recognition is a big topic, especially if you are a technology company. The accounting standards are complex when determining what is revenue, when it can be recognized, and even how it is allocated among the line items in a single sales transaction. Multi-element arrangements – sales of multiple related items in the same sales process – are a significant topic all on their own. Revenue management experts teach courses and do free online seminars to keep the public updated – including free webinars hosted by Tensoft. Tensoft also provides revenue management software to support the complexities included in the accounting standards that dictate revenue recognition.
Our experience has shown us that understanding revenue recognition is really only half the needed solution for our customers. The other half of the solution requires understanding the business process that generates revenue, in other words, the go-to-market model used by your company. There is a process, driven by sales and/or marketing in your organization, which finds interested folks and turns them into customers. This model matters – for productivity in your company, for capturing the right data in the best system, and for generating the full sales transaction efficiently to the revenue management engine.
eCommerce-based subscription sales are one significant category for go-to-market models. These types of sales are often heavily based on marketing efforts and lighter sales efforts. Usually the goal is for the company eCommerce site to support the sales transaction, and to support most of the customer business relationship. You may have team members providing support or deployment services, but the goal is usually efficient business transactions through the eCommerce site.
The go-to-market analysis in this scenario would typically include a greater level of customer management detail in the eCommerce platform and a consolidated or streamlined level of detail in the ERP system. For example, individual customers are often maintained in the eCommerce platform, while they are not maintained in the ERP system. The ERP system may focus instead on the customer’s payment method – consolidating customers by merchant banking option of credit card name or PayPal.
However, revenue management may be done at the detail or the summary level. The summary level would be different from the ERP transaction summary – with a need to know item/SKU level (or revenue element level) detail. The detail level is clearer; however transaction volume — without a need for transaction level clarity — may push for appropriately segmented summarized daily information.
The revenue challenges for this model can include multi-element arrangements (setup fees or setup processes required as part of the subscription), usage-based revenue combined with or separate from amortization based revenue, or ongoing events that impact revenue timing or recognition periods. (Examples include go-live events, activation requirements, prepaid expiration periods, or a customer service-generated period of performance changes).
Revenue recognition in an eCommerce subscription model is best served by the support of a revenue engine designed to work with the business model, that can capture the right transaction at the right level, and that supports a living revenue document or agreement model that understands that revenue recognition is not a static one-time event.
For more information about Tensoft’s products and services, please contact us. If you’d like to comment on this article, I encourage you to Tweet, post to Facebook or blog about it!