Customers Are at the Core of Profitability

Since the introduction of CRM and ERP systems over a decade ago, revenue strategies have become increasingly elaborate. As companies strive to motivate their customers to increase purchases, they have adopted a broad array of pricing strategies, including discounts, price tiers, product bundling, and life cycle-based prices, as well as a wide range of incentives built from revenue calculations like promotions and rebates.

Companies using these strategies to maximize revenue are beginning to realize that their success has created a new challenge. The complexity of these strategies and the purchasing growth they have driven have strained the organization's ability to determine pricing, negotiate beneficial customer agreements, calculate incentive terms, and track customer compliance with agreed upon terms. Spreadsheets, offline databases, and homegrown point solutions no longer suffice to help sales operations and finance groups ensure that customers are paying the right price and receiving the right incentives. Companies are finding that they can no longer verify and enforce adherence to their own revenue strategy. This inability to track and ensure customer compliance with contract terms creates a real risk of leaving significant revenue on the table.

It is important to note that customer-centric approaches to revenue strategies assume ongoing customer relationships. Customer-centric companies offer better terms to customers in exchange for ongoing buying commitments and higher purchasing levels. Since customer relationships drive revenue strategy, should a company turn to its CRM system to execute its revenue strategy when it has outgrown spreadsheets and offline databases?

CRM systems, designed to capture, store, and manage customer information, evolved from two sources: sales force automation and call center solutions. The systems that originated in sales force automation focused on the sales process--on knowing what it takes to advance an opportunity through the sales funnel. The systems that began as customer call-center solutions focused on products or services purchased--on tracking the people with whom the company interacts and the nature of these interactions.

While CRM suites have broadened significantly from their roots as point solutions for sales and service organizations, they remain incapable of executing the financial terms of a customer agreement. The automation and successful execution of a company's revenue strategy clearly requires a different focus.

Revenue execution

What is required to manage the complexities of executing a revenue strategy? There are four primary steps required in the revenue execution process: pricing strategy, pricing and contract management, compliance, and settlement. Enterprise software solutions are emerging to address every step in this process.

1. Pricing strategy
In this first step companies determine all the pricing methods and promotional and incentive programs they wish to make available to customers. Frequently they offer different pricing methods and programs for each product line and market segment. An effective pricing-strategy software application should be equipped to handle the management of multiple pricing models and promotional programs, the setting of price floors and negotiation bands to provide the sales force negotiating flexibility, and the dynamic segmentation of customers and products. Traditionally the pricing strategy step is managed centrally and owned within marketing.

2. Pricing and contract management
In the second step, pricing and contract management, a company's pricing strategy is applied to actual customer offers and long-term customer contracts. This step usually occurs in sales or sales operations where offers are created based on guidelines set by marketing. For offers based on standard company pricing and promotions, internal approval can be automatic or streamlined, but for non-standard offers, internal approval is necessarily more complicated. Because approval of one-off offers can include multiple members of the sales, marketing, finance, and legal departments, obtaining the necessary approvals can be a time-consuming process. Appropriate software can facilitate and expedite the approval process by determining what exceptions need additional approvals and automatically forwarding them to the required approvers.

Once a customer offer is accepted, the terms of the contract or agreement should immediately be reflected in the company's ERP system, requiring input of the price for each product sold, typically by a manual, error-prone process. A pricing and contract management system should automate the input of new pricing into the ERP system, immediately enabling correct pricing on new invoices. For customers with multiple contracts in place, the pricing and contract management system should have the ability to resolve pricing ambiguity and automatically quote the correct price.

3. Compliance
Perhaps the most important aspect to a revenue execution system is the ability to record customer commitments. Discounts and other concessions in the selling process are often associated with customer commitments, such as promises to purchase specific volume or dollar amounts.

The ability to record these commitments and to track customer performance against them is an important tool for account management, providing insight into the effectiveness of a company's revenue strategy. Yet without a revenue execution system a typical company will only investigate customer compliance to contract terms annually at contract renewal. If companies had ready access to compliance information they could use it to ensure customer compliance to negotiated terms.

4. Settlement
The fourth step in the revenue execution process involves the calculation and payment of incentives and fees due to customers or channel partners based on purchase history. Incentive rebates, for example, can be offered to customers who reach a given purchase threshold, which, along with its associated rebate, must be negotiated into the contract. The actual incentive payment is based on orders placed against the contract once that threshold has been reached. With a software product for settlements (such as rebates), the incentive terms can be recorded, purchase information can be pulled automatically from the ERP system, and the payment calculated on a regular basis. Without such a system administrators must manually manage this cumbersome process.

Relying on manual business processes in executing a revenue strategy results in revenue leakage, increased operating expenses, decreased customer profitability, and degraded customer satisfaction. Companies seeking competitive advantage through complex pricing strategies require equally complex technology. Smart companies that explore revenue execution solutions to manage their contracts and pricing will discover that they can increase revenue and margins while lowering operating costs, improving existing customer relationships, and gaining visibility into the overall revenue impact of complicated deals.

Zack Rinat is founder and CEO of Model N. Prior to founding Model N Rinat cofounded NetDynamics, an enterprise software company in the application server market. Rinat served as president and CEO of NetDynamics until its acquisition by Sun Microsystems in 1998, and subsequently served as vice president and general manager of Sun's NetDynamics business unit. Previously he held senior management positions in operations, marketing, and engineering at Silicon Graphics Inc. (now SGI) and Advanced Technology Israel. He received a BS in computer science from the Technion (Israel Institute of Technology), and an MBA from the Harvard Graduate School of Business Administration.

Chief Marketing Officer Jamie Schein brings to Model N more than 15 years of experience in strategic marketing, product marketing and management, and alliance management for enterprise software companies. For two years prior to joining Model N, Schein consulted to emerging companies in the areas of corporate, marketing, and product strategy. Prior to that she held executive positions with Vantive Corp. Schein joined Vantive from Silicon Graphics Inc. (now SGI). She began her career as a management consultant for The Berwick Group in Boston and Arthur Young & Company (now Ernst & Young) in San Francisco. Schein earned a BA magna cum laude from Harvard University and an MBA from the Stanford University Graduate School of Business.

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