While "quote-to-cash" has been a common industry term and software category for quite some time, "quote-to-revenue" is the hot new term that more and more software companies are embracing. Seen as the next step in the quote-to-cash evolution, quote-to-revenue encompasses all of quote-to-cash but takes it a step further, beyond just collecting cash from customers to actually recognizing that revenue in your books.
In this article, we discuss quote-to-revenue in detail, covering the business processes that it encompasses, why it's beneficial for companies to consider quote-to-revenue solutions, and more.
What is quote-to-revenue?
Quote-to-revenue (QTR or Q2R) refers to the business processes that start at quoting, or generating a sales proposal for a prospect, go through contract signature, order fulfillment, subscription management, billing and invoicing, collecting payment, all the way to recognizing revenue. The QTR process includes many departments and functions within a company, including sales, operations, and finance.
To keep modern SaaS deals running smoothly, many enterprise companies have adopted tools to assist with the quoting, billing, and revenue recognition processes. While some choose point solutions to tackle each part of the QTR process, others have opted to go with a full QTR solution, which can handle everything from building a sales quote to recognizing revenue, all in a single, unified platform.
What's the difference between quote-to-cash and quote-to-revenue?
Quote-to-revenue describes the business process that includes quote-to-cash, but goes one step further into revenue recognition. Revenue recognition is a generally accepted accounting principle (GAAP) that governs how and when a company recognizes revenue from the sale of goods or services. It determines when revenue is recorded in financial statements and impacts the timing and amount of revenue recognized.
Why is quote-to-revenue important for SaaS companies?
Quote-to-revenue has become increasingly important for SaaS companies as automation and software tools have become commonplace in managing these business processes, more regulation and standards have impacted SaaS billing and accounting, and SaaS pricing models and structures have evolved.
The traditional quote-to-cash tools that the software industry relied on have become inadequate in handling the speed and complexity of modern SaaS deals. With almost countless contract combinations involving diverse products, terms, entitlements, and billing schedules, complications often arise in deal flexibility, billing capabilities, and accounting practices. This challenge is amplified in the case of SaaS revenue recognition, particularly when contracts are modified during their term and market conditions rapidly change.
SaaS businesses commonly offer a range of subscription plans and pricing models, such as monthly recurring services, a subscription with multi-year ramp contracts, or a prepaid subscription with drawdown. However, billing and revenue recognition for these complex pricing models and deal structures can be prone to errors and present challenges. It requires a delicate balance to ensure timely, complete, and accurate revenue recognition while complying with ASC 606 guidelines.
As SaaS companies continue to focus on achieving breakneck growth trajectories, the ability to get quote-to-revenue business processes right has become a critical factor for success. Particularly for those businesses aiming to go public, having your QTR ducks in order is of paramount importance. Without a sound quote-to-revenue process in place, SaaS businesses can struggle to scale efficiently and produce the financial reporting required of public companies.
What is the quote-to-revenue process?
For SaaS companies, the QTR process is specifically tailored to the unique characteristics of the SaaS business model, and it involves the following three steps:
In a typical quote-to-revenue system, everything starts with the sales quote. SaaS companies build quotes that outline the pricing, subscription tiers, usage limits, contract duration, and subscription terms for their software services. Once the quote is approved, a subscription contract is created. And once the contract has been signed by both parties, the billing system takes over.
Many SaaS companies adopt a CPQ (configure, price, quote) to make the sales process faster and easier to audit. Through rules-based logic, an adaptive CPQ solution allows you to specify permissible product and pricing configurations. As a result, customers are quoted the correct amount for their subscription and sales reps can have peace of mind that the appropriate product configurations and pricing rules are applied to each order.
After a contract is signed for a SaaS offering, the customer's subscription will be managed and billed on a recurring basis according to their contract terms. This process is typically handled by a subscription billing system, which can store the customer's billing information and generate invoices at predefined time intervals (e.g., monthly, quarterly, annually, etc.). In addition to these recurring subscription fees, invoices may include any one-time setup fees, customization charges, or additional services purchased by the customer.
As customers pay for a SaaS company's services, these payments need to be recognized as revenue in the company's general ledger. The way this revenue is recognized, however, must follow the latest accounting standards, such as ASC 606. ASC 606 provides a comprehensive framework for revenue recognition, which is particularly important in SaaS since customers can pay upfront, at varying intervals (e.g., monthly, quarterly, annually, etc.), or as services are used, and changes can be made to a subscription on the fly (e.g., upgrades, downgrades, added seats, etc.). A revenue recognition software system can help automate revenue recognition and maintain compliance to modern accounting standards.
What are the challenges in quote-to-revenue?
While there are many challenges that arise from managing quote-to-revenue business processes, one of the primary obstacles that SaaS companies face has to do with the software and automation behind QTR. Many SaaS companies have had to settle with purchasing separate CPQ, billing, and revenue recognition systems, often from multiple vendors. While these tools can deliver the functionality the sales and finance teams need, they often function in silos, giving rise to a variety of challenges outlined below.
Implementing a single piece of software is one thing. Implementing three separate software systems and making them work together is quite another. If quoting, billing, and revenue recognition systems are not flexible, it can take months or even years for them to be installed, configured, customized, and tested, which requires a significant amount of work and resources to get up and running. The complexities can lead to long delays and slow time-to-value, which is a lose-lose situation that hinders growth for any company.
Many SaaS companies pay for three different quoting, billing, and revenue recognition systems, likely from three different vendors. This means added time and resources needed for implementing three systems and having them talk to each other. The integration piece may require a substantial amount of custom work, not to mention the ongoing maintenance that's needed to keep everything running.
Inflexible to Changes
While custom integrations can move data from one system to another, they are often built as a point-in-time fix and break with any changes, including rolling out a new product or an update to pricing. When a change is made the upstream CPQ, the billing system inevitably needs to be updated so it generates the correct invoice for the customer, as well any custom integrations in between. What may seem like a minor change can quickly turn an automated process into an inefficient workstream that requires manual review and reconciliation.
Using one system to generate quotes and a different system to generate invoices is the number one cause of reconciliations. Furthermore, if data from the CPQ doesn’t flow cleanly to billing or revenue recognition systems, finance teams will have to spend hours cross-referencing records to understand why numbers don’t match up. Unfortunately, many SaaS businesses may not be aware of these discrepancies until after the invoice is generated, which can be months after a deal is closed.
No Single Source of Truth
Establishing a single source of truth can be incredibly difficult when quoting, billing, and revenue recognition systems are siloed and unsynchronized. To add to the complexity, these systems are often deployed and managed by different departments, resulting in data silos. Data copied and re-generated across systems becomes muddy and unreliable.
What is a quote-to-revenue platform?
Rather than purchasing separate systems for each functional area of the QTR process (i.e., CPQ, billing, and revenue recognition), some companies opt to purchase a quote-to-revenue solution that covers all of QTR and is built on a singular, unified platform. It's important to note that while some vendors have quote-to-revenue platforms that patch together solutions they may have acquired or added on, this may not have the same benefits as a QTR platform that has been built from the ground up as a unified solution. We outline the many benefits of a unified quote-to-revenue platform below.
A unified QTR platform means just one implementation and no integration work between CPQ, billing, and revenue recognition systems. With a single platform, implementation time is cut significantly, meaning less disruption of business processes, fewer resources committed to getting up and running, and much lower complexity in configuration and maintenance. And the faster a company can get a new piece of software live, the faster the business can focus its attention on driving growth.
Lower Operating Costs
Leveraging a unified quote-to-revenue system dramatically reduces maintenance costs and the need for additional headcount and integration work. Not only that, but with singular systems, there should be no need for any reconciliations between what exists on a quote versus what is actually billed to the customers. Additionally, any changes made to pricing or product catalogs can easily flow through the entire system, rather than needing to address each part of the QTR process individually. All of this means time saved and overall lower operating costs.
An integrated quote-to-revenue system should ensure that what is quoted is exactly what is invoiced. Typically, this is achieved by using the same object for the quote and invoice in the system's core architecture. By using this model, a unified QTR platform can eliminate any need for reconciliations, enabling a business to close books much faster.
Single Source of Truth
Establishing a single source of truth, particularly for metrics around revenue, is incredibly important for any SaaS operation. Without a clear understanding of growth metrics, it's nearly impossible to make sound and informed decisions for the business. With a unified quote-to-revenue platform, there should be no debate around what data to rely on. With quotes and invoices going out to customers and payments coming in and being recognized all within one system, it's clear that the QTR platform should provide accurate and reliable metrics to serve as the source of truth.
What is the difference between quote-to-revenue and CPQ?
Quote-to-revenue refers to the business processes that start at quoting, or generating a sales proposal for a prospect, go through contract signature, order fulfillment, subscription management, billing and invoicing, collecting payment, all the way to recognizing revenue.
CPQ, or configure, price, quote, typically refers to a software system that addresses the beginning part of the quote-to-revenue process. CPQ software covers the three-step process a company undergoes in order to calculate complex product or service configurations for its customers, involving:
- Configure: Customizing a solution or product to meet the needs of a prospect
- Price: Determining the price a prospect will be charged for the solution or product
- Quote: Generating and approving a quote or proposal to send to the prospect for signature