At our Revenue Table Talk on March 14th, Senior Director of Product Management Nikki Wong shared some common use cases for Zuora Revenue variable considerations. She also shared a Revenue Tool Tip on stage validation which is reviewing the data before we process it to avoid it being “stuck in stage”.
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Revenue Tool Tip: Stage Validation
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While data is being processed in Zuora Revenue, the system will validate the data based on the set of rules. If the transaction fails to pass the rules, it will be “stuck in stage”, where Zuora Revenue will stop processing the translation with Error Code populated.
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Seeded Validation Rules: Zuora has a preset 7 set of rules to ensure customers’ data is processible.
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Customizable Rules: End Users can set their rules based on their business scenarios or data cleanliness to help smooth out revenue accounting operations by preventing incorrect data to flow into Zuora Revenue.
A best practice is to review to ensure you understand the rules in your system, this may help you to understand why the transaction is stuck in stage or if additional rules should be added.
Variable Consideration
Zuora Revenue can automatically create variable consideration (VC) estimates when a sales order line is collected and this estimate is the system applied VC. Alternatively, uploading VC estimates or actuals to Zuora Revenue by file upload allows Zuora Revenue to perform different VC-related operations based on the uploaded file, such as updating VC estimates, clearing VC actuals, or canceling final actuals.
Most users handle their VC needs by either deeming it immaterial and only record upon payout or receipt, through manual Excel calculations with JE, or by using Zuora Revenue VC feature.
Additionally the most commonly used VC scenarios are
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Reseller Rebate
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Net Accounting
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Collectibility
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Consumption
In this article, we will walk through use cases of the 4 scenarios and how the data should flow within the systems.
Use Case 1: Reseller Rebate
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Business Scenario:
Company A is selling a subset of their product through Company B. Company B is only act as the reseller and will get 5% rebate for $0-$1M sales and 7% rebate for above $1M
Company A owns the support and maintenance of the product for the term of the contract with the end customers.
Company A estimated that Company B will sell about $1.2M of product, therefore accruing 5.5% rebate on each transaction executed by Company B.
Company A also set the policy that any under or over accrued amount will be adjusted upon rebate payout with direct hit to Contra Rev. No true up required in Zuora Revenue required.
Use Case 2: Net Accounting
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Business Scenario:
Company A is selling a subset of their product through Company B. Company B is only act as the sales agent.
Company A owns the support and maintenance of the product for the term of the contract with the end customers.
Company B deemed that they can only recognize net revenue, which is the agent fee paid. Hence, required to reduce the revenue.
Use Case 3: Collectibility
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Business Scenario:
Company A is estimating 30% collection issue for their customers in Ukraine. Therefore, they use VC to increase the reserve for customers located in the area.
Since this is an estimate, Company A will revisit this on a quarterly basis to adjust the accrual percentage.
Use Case 4: Consumption Accrual
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Business Scenario:
Software Company A deemed their SaaS product is a standready POB with a specified transaction counts. Once the transaction counts is fully delivered, addition usage becomes overage. Overage is invoice to customer as incurs.
Since overage is frequent and upsell is not a common practice with the signed terms, to avoid back end loaded revenue, the company applied variable consideration guidance under ASC606 and accrue estimated overage usage. They calculated the estimate using a company defined estimation methodology, and will revisit every quarter till end of terms.
Automation Benefits
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As mentioned above, some organizations perform manual calculations using Excel, but there are several benefits for VC automation:
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Predictable Revenue Reporting: Positive Variable Consideration aligns with revenue recognition. This helps reduce sudden up and down on the revenue stream. (i.e. Consumption use case)
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Increase accuracy on FP&A modeling: Variable Consideration aligns with revenue recognition, allows FP&A team to easily model and provide maximized strategy on any Reseller Program or Consumption Revenue
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Predictable Revenue Reporting: Negative Variable Consideration will align revenue recognition. Ensure reduction of revenue is not hit immediately. (i.e. Rebate, Net Accounting)
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Flexibility to create Policy: Zuora Variable Considerations allows end users to design policy with flexibility to support operations. (i.e. VC update through SO, VC updating estimates through Mass Action or Manual Action, VC expiration by defined date criteria)
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Increase visibility on other teams impacting revenue: Variable Consideration may be applied to non-revenue areas but still impact revenue reporting. (i.e. Collectibilty)
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Include / exclude for SSP allocation / analysis: Zuora Variable Considerations allows companies to include or exclude the VC amount in transaction price for SSP allocation and/or performing of SSP Analysis using the SSP Analyzer.
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