Technical debt is a commonly understood term within the software industry, whereas short term velocity gains are knowingly accepted in exchange for an ongoing “cost” in maintenance. This type of debt compounds just like your mortgage and becomes drastically more expensive over time if not dealt with.
I would like to propose that what I call “Monetization Debt” follows a similar theory and causes various expenses to the business that also compound over time. While the age-old story says that 80% of your customers will fit within your existing product catalog, 20% of them will require some level of personalization. This is a reasonably easy problem to solve early in your trajectory but becomes much more difficult to solve once you’ve found the recipe for scale in your market. This would be analogous to how difficult it would be to change the brakes on your car on the highway vs. before you leave the dealership. We will first look at the obvious costs related to the wasted Finance team effort and then get into the real costs that come from customer frustration. We won’t go beyond that within this article, but there are many other costs here from getting invoices out on time, understanding how your customers are really using your services, and not to mention the compliance headaches if you are a public firm.
For the purposes of this article, I have chosen to put together a mathematical model based on a hyper-scale business whereas monthly sales velocity is growing at 6% month over month. I realize that metric may seem like a pipe dream to most early-stage subscription businesses, but I can tell you we have seen many digital first businesses that have eclipsed this mythical target. In order to align this use case with the masses, I have assumed that rather than follow the old 80/20 rule, we will look at an example following a 90/10 spread between accounts that buy straight from the product catalog and ones that require some level of personalization.
- ARR per new account ~25 k
- 1 in 10 new deals require customization forcing a manual process within finance
- The business is closing 20 deals per month to start
- Sales velocity is growing at 6% month over month
- Each of these accounts consumes 30 minutes of effort to manually find, calculate, and invoice the correct data (assuming no errors were made)
- Billing staff annual loaded cost of $100 k / year
- 5% of manually billed accounts have errors
- 5% of accounts billed erroneously churn
At the beginning of this journey things feel good, we sold 20 deals this month and 2 of them required some manual love from the Finance team, no big deal. 1 hour wasted effort, little chance of errors in billing accuracy.
One year later; the Sales team is rocking and the product market fit is going to plan. We sold 38 new deals this month, everyone is celebrating, right? Well by now, the finance team is onboarding 4 more manually billed accounts per month, and managing a cumulative total of 38. Feeling a little pain in Finance, with just shy of 3 days manual billing effort required per month; Customer success is starting to put additional pressure on Finance because 2 customers are refusing to pay every month because they were billed incorrectly, 60% chance of churning a customer due to billing). Let’s not forget that misbilling the same account more than once creates a sense of mistrust on all future invoices, and some will churn. At this stage, things are still manageable and the business is delivering on its compliance requirements with a few bandaids.
Another year down the road is where the picture starts to shift… By now Sales is closing 81 deals per month, but 8 of them each month now require manual treatment. Every month now we have to process 110 manual billing accounts, which takes about 8 days of effort per month. Finance is now struggling to get the bill cycles processed in a timely manner and the CFO is starting to wonder why they can’t get the invoices out to customers, a process that has been core to Finance for years. On top of this, Customer Success is now fielding 5-6 inquiries per month from frustrated customers that don’t understand how we can’t get their billing right for what they perceive to be a simple problem, we churned 2 customers this year because of billing.
36 months from the start of this journey the pain is very real. We are now managing 255 manual accounts, burning 18-19 days a month of effort, misbilling 12-13 accounts per month and most departments are now feeling the pressure of not connecting all their critical data together. This year we lost 5 accounts to billing churn.
By now, I am sure you get the idea that this is a painful issue that requires a technical solution that is not going to detract from Sales velocity. Based on the assumed cost of Billing personnel this chart shows that over six years this cost balloons to almost $1.3 Million. Because Monetization Debt follows the same principles as compound interest as you can see in the graph above this issue will continue to exponentially increase in its severity over time.
Now, what about the customers that receive incorrect invoices? What delays does that cause to their payment cycle? What confidence in your ability to accurately invoice is lost, and what is the real cost to increased billing disputes over time? These are just a few of the things you should consider with regards to Customer Experience. If we follow the assumptions above and model out over 6 years following the first graph, the realizations are scary…
Imagine what other investments are being made in your business that resolves exponential churn issues? By the end of year 6, we are now churning $136 k of ARR every month because of customer frustration with the billing experience.
In closing, this issue isn’t rocket science to solve, but it is easiest to solve early in your growth trajectory. What is the antidote for Monetization Debt? A Quote to Cash process that allows personalization of the product catalog by account, and most importantly a Mediation/Data Management strategy allowing for ultimate flexibility for accounts that want to just pay for what they use.
I hope you found this insightful, and by all means if you have any questions on my example or want to poke holes in my argument… Please just direct message me, I’m sure it would be an interesting discussion.