How CPQ supports complex contract modifications and drives NPS
Recently, we explored how CPQ (Price, Configure, Quote) has changed to support modern businesses. We concluded that all CPQ solutions are not created equal and that startups with recurring revenue models should consider the ability for their CPQ to:
- Support usage based and hybrid pricing models
- Support multiple products on a single contract
- Automate quote-to-cash
- Integrate deeply and natively in their CRM
- Support complex midterm changes
With the popularity of complex hybrid pricing models and of PLG (product-led growth) go-to-market motions, contract expansions, upgrades, and midterm changes are more common than ever — and more complex. When you get them wrong, invoicing is challenging or error-prone, revenue recognition is fleeting, churn metrics are off, and your customers are unhappy.
What are contract modifications and why are they important?
Retention is the foundation of Modern Business and it relies heavily on customer satisfaction.
According to the Subscribed Institute, a think tank dedicated to Modern Business, existing subscribers in recurring revenue businesses generate an average of 76% of a company’s annual recurring revenue (ARR). On top of this, a 5% improvement in customer retention can lead to a 25% improvement in profit.
What does this have to do with contract modifications and CPQ? A lot, actually.
To retain customers, you must first acquire them. Product comparisons aside, customers prefer to work with vendors who are responsive and flexible enough to provide optimal deal terms for their needs.
For example, instead of buying 100 seats today (easy for most CPQs), a prospect may negotiate 50 seats upfront with a ramp to 75 seats at 6 months and 100 at 9 months.
Sellers need the flexibility to negotiate and finance needs the tools to invoice and recognize revenue accurately, while provisioning and customer communications should also follow the contract terms. The best CPQ solutions are built to support both simple and sophisticated deal structures.
Upgrades, downgrades, and contract modifications
Imagine your customers are on a hybrid contract, including a flat monthly fee and a prepaid drawdown for usage. They are happy and growing, but have now crossed into expensive overage midyear, so they want to add 20 more seats.
Here is what your CPQ must do to support this use case:
- Find the latest version of the existing contract
- Amend the existing contract by:
1) Exposing contract data
2) Exposing billing and payments data
- Backdate the amendment to before the overage occurred
- Move usage to amended contract according to terms resulting in no overage fee
- Calculate the new monthly flat fee with additional seats
- Calculate the flat fee proration to true up the initial and amended contract
- Co-term the amendment with the original contract
- Calculate usage fees due in the first invoice
- Enable revenue recognition
How can you handle midterm contract changes?
Companies lacking the technology to modify contracts use manual workarounds to handle contract changes including:
- Kill and rebill: This involves canceling the existing contract and starting a new modified contract. This workaround is a multi-step manual process that is complex for finance to implement and it complicates revenue recognition. It creates inaccurate churn metrics and can also confuse the customer. For sellers or account management to handle contract upgrades, they need a CPQ solution that is purpose-built to handle changes in subscriber relationships.
- Multiple contracts: Adding a second contract representing the contract modifications may be a simpler internal effort, but it yields a poor customer experience. The customer relationship is now complicated, with multiple contracts and multiple invoices.
With the technology that was built to handle subscription, hybrid, and usage-based Modern Business contracts, companies can modify complex contracts out-of-the box.
Take Zoom Communications — they accommodate an average of five subscription changes per customer per month. These changes could be converting a free trial to a paid version, upgrading from a personal to an enterprise plan, adding or removing seats, or purchasing additional products. Zoom is flexible enough to allow customers to easily change their subscriptions and their growth speaks for itself.
How contract modifications impact churn metrics
Churn metrics are crucial for any business with recurring revenue. However, these metrics can be inaccurate if contract modifications are not correctly reflected in the data. For example, if a customer downgrades or cancels their subscription, but the contract is not properly modified, the churn metrics will be incorrect.
This can lead to wrong conclusions about customer behavior and ultimately impact business decisions.
Using the “kill and rebill” workaround or managing multiple contracts for the same customer can further complicate the accuracy of churn metrics. These workarounds can create redundancies and inconsistencies in the data, which can lead to false positives or negative churn results.
Using CPQ for contract modifications
Customers who want to make changes to their contracts don’t want to go through a long and complicated process. They want a simple and efficient way to make changes to their subscriptions.
One way to do this is by providing self-service options that allow customers to make changes to their plans online, which can save time and energy for both the customer and the provider — if your technology supports changes on the back end.
For larger contracts, customers typically prefer to talk to their sales representatives or account managers. A dedicated point of contact offers personalized support that can help build stronger relationships with customers.
In order to support customer changes efficiently, reps need access to real-time data and tools that allow them to make changes quickly and easily. Zuora CPQ is a great example of a tool that consolidates and surfaces all the relevant information, including current contract details, available products and services, and real-time billing data such as unpaid invoices.
With this information at their fingertips, reps can quickly and easily amend contracts with real-time proration and future invoice amounts, without having to involve finance. This not only saves time and streamlines the process, but it also provides customers with greater transparency and clarity around their subscriptions.
Contract modifications are crucial for modern businesses with recurring revenue, and when done properly, they can have a positive impact on various aspects of the business and improve customer satisfaction. Happy customers lead to increased retention and loyalty, which can drive growth. And with an integrated CPQ, reps are empowered to make changes quickly and efficiently, which can further improve customer satisfaction and drive sales.
Ronak Majmudar – Head of Zuora for Startups