The great thing about CRMs is that there is always more than one way to solve a problem. The awful thing about CRMs is that there is always more than one way to solve a problem.
That wasn't a typo.
The flexibility CRMs allow us is a double-edged sword. The only constant in business is change, so it's hard to future-proof – especially if you're inexperienced and don't know the potholes waiting for you around the corner.
There isn't one way to account for cancellations and downgrades in your CRM, but there are common traps. We will outline the considerations you should take into account before implementing a solution and look at two solutions in some depth.
If you're in an early-stage organization, you can guide your product development and finance teams down a path most conducive to scaling products like yours. You can only do that if you ask some questions – and even then, the answers may change three to four years later.
Is your pricing model complicated? Does your executive team throw out novel ideals like "value-first pricing"? Does your CFO or product manager have visions of usage-based pricing? Do you sell a combination of physical and software products?
If the answer to any of these questions is "yes," it's time to talk to experts in the CPQ world about how to future-proof your product setup. Getting creative with custom objects is a big red flag. There's also a risk of painting yourself in a corner because of how your product is engineered.
In general, it's best to use standard objects. Figure out how to leverage products to minimize price books and products. For goodness' sake, don't create a line item per license bundle count or create a new line item for each renewal year.
In other words, keep it simple and ask an expert.
Most integrated solutions rely on standard configuration to figure out things like commissions. Carefully think through how changing opportunities will impact your commission system.
If someone cancels or downgrades six months after the initial contract is signed and you don't calculate clawbacks, how will a changed opportunity impact how your commission system reports historical commission payouts?
If you do anticipate implementing clawbacks, does your commission system have specific requirements to handle these automatically? Or are you locked in after commissions are paid and have to handle one-off adjustments like clawbacks manually?
Sometimes, companies want to understand an adjusted historical sales amount per salesperson. More often than not, they want to see how a salesperson was paid out.
If you don't have clawbacks, you'll need to calculate sales by salesperson without cancellations and downgrades. Even if you avoid clawbacks, you likely still will have to calculate the loss of quota credit.
If you adjust historical opportunities, it makes it difficult to report on past opportunity amounts.
If your integrations (including your product) allow for negative opportunity values and some redundancies in opportunity product line items, entering a negative dollar amount may be a viable option. Here's an example:
Customer A orders a product for $50,000 over a period of 12 months. Six months into their contract, they decide to downgrade to a lower tier. Due to this change, the billing amount for the last 6 months was $25,000. Going forward, their prorated amount for the remaining 6 months will be $19,000. Your leadership team has agreed to downgrade them if they agree to a 24-month term, so the total revenue associated with the deal will be $76,000.
The MRR for your customer was $4,167. Now it's $3,167.
Here's how it works in your CRM:
When you first sold to this customer, you closed an opportunity for $50,000 and processed an associated order. Your original opportunity for $50,000 will remain unchanged. You will need to process an adjustment to the order to decrease the Order total to $25,000 and add end dates for the old order line items so it doesn't look like your customer has multiple products running concurrently for the next six months.
This will not change your opportunity amount. So if you run a report without taking the next step, your opportunity totals will not reflect reality.
This is why you'll book a negative opportunity with a type of "Downgrade" or "Adjustment" with a value of -$25,000. This is simply for the sake of aligning your opportunity reports with your accounting system and order totals.
Then, you'll book a new opportunity with the new line items for the new term for $76,000 and process a new associated order as you normally would.
Pros:
Cons:
While we know companies that run the following process, we don't recommend it unless your product development team has painted you into this corner. It's difficult to track when changes take place without specific customizations to your opportunity object.
Let's use the same scenario as we did in Solution 1. To recap:
Customer A orders a product over a term of 12 months for $50,000. Six months into their contract, they decide to downgrade to a lower tier. Due to this change, the billing amount for the last 6 months was $25,000. Going forward, their prorated amount for the remaining 6 months will be $19,000. Your leadership team has agreed to downgrade them if they agree to a 24-month term, so the total revenue associated with the deal will be $76,000.
The MRR for your customer was $4,167. Now it's $3,167.
Here's how it works in the CRM:
When you first sold to this customer, you closed an opportunity for $50,000. Your original opportunity will need to be updated to reflect $25,000 and a term of 6 months. You'll also need to ensure that product lines are set to end on the date the downgrade takes place.
Then, you'll book a new opportunity with the new line items for the new term for $76,000.
Pros:
Cons:
If your organization wants to keep opportunity reporting for their sales team separate from their financial reporting and you rely on something other than opportunity amounts to calculate your revenue, separating opportunities from order management makes a lot of sense – particularly if these orders are being handled through another department or directly through your product.
Let's use the same scenario as we did in Solution 1. To recap:
Customer A orders a product for a 12 month term for $50,000. Six months into their contract, they decide to downgrade to a lower tier. Due to this change, the billing amount for the last 6 months was $25,000. Going forward, their prorated amount for the remaining 6 months will be $19,000. Your leadership team has agreed to downgrade them if they agree to a 24-month term, so the total revenue associated with the deal will be $76,000.
The MRR for your customer was $4,167. Now it's $3,167.
Here's how it works in the CRM:
When you first sold to this customer, you closed an opportunity for $50,000. You'll adjust the associated order to $25,000 and end the contract on the date the downgrade is effective.
Then, you'll book a new opportunity with the new line items for the new term for $76,000. You'll process an associated order as normal.
Your revenue reports will need to be drawn from the order object. The opportunity report will need to be used for sales historical reporting only.
Pros:
Cons:
There isn't one way to solve this problem, and there are certainly more ways to solve for cancellations and downgrades than we outlined above. We hope, at the very least, this article prompts you to ask your business leaders some tough questions and inspires you to reach out to your peers to get advice for your specific scenario.
Every business believes they are unique and need their own solution. This is rarely the case. While the products may differ completely, the chances someone else has navigated your exact scenario and lived through the fallout are high. Learn from their mistakes instead of creating your own.
