Question

Logging mid-term upsells as pro-rated or total ARR?

  • 25 September 2023
  • 7 replies
  • 75 views
SophieHurst
Rank

Hi everyone,

I haven’t been able to find an answer (or maybe debate?!) to this question so hoping to get some ideas. 

It has become apparent that some of my CSMs are logging their mid-term upsells as the pro-rated amount in the Renewal Center, and some are logging what the full ARR would be if not upsold mid-term. 

I can think of arguments for both sides here:

FOR pro-rated: if you log it as pro-rated that's the money actually coming in, and you'll see the NRR benefit fully at renewal

AGAINST pro-rated: If you log it as pro-rated you're being penalised due to the point the customer is at in their term which isn't representative of the size of the upsell

I wonder if anyone has experience either way, or can recommend the best way to do it? 

Thanks!

Sophie

7 replies

anirbandutta
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Userlevel 7
Badge +2

Hello Sophie… welcome to GameChanger and that is a fantastic discussion to start off on our Community.

Lemme try route some experience here.

It's an opportunity for engagement
alizee
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Userlevel 6
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👀

If you don’t want to make mistakes, don’t do anything. If you want to learn, ask questions and make mistakes, except in construction because they’re the most expensive part of building.
tyler_mcnally
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Userlevel 5
Badge +3

Hi @SophieHurst 

Welcome to the Gamechanger Community at Gainsight!

 

On your question, I’m wondering how your finance/accounting department would track? 

 

Im probably misunderstanding, but it seems like you wouldnt have an accurate calculation if you logged the full amount.  Ill use a Gainsight example:

  • Customer has 10 user licenses and needs 5 more at month 6.
  • Upsell opp would be prorated and billed for 50% of the annual cost of 5 licenses
  • At the renewal date, we would renew for 15 licenses for a year

 

Does that help? 

SophieHurst
Rank

Hi @tyler_mcnally 

Thanks so much for your reply!

Finance/Accounting isn’t responsible for monitoring NRR, it’s up to me as the CS leader to calculate and report. 

The scenario you mentioned definitely looks like my ‘for pro-rated’ argument in my original post. I suppose what’s stopping me is that logging the pro-rated upsell is not representative of the actual size of the upsell. E.g. Upsell A could be worth $12000 for a full year but only be for 2 months so showing as $1000, Upsell B could be worth $6000 for a full year but be for 6 months so show as $3000, appearing like a bigger upsell. 

I hope that makes sense - maybe I’m overthinking!

tyler_mcnally
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Userlevel 5
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Hi @SophieHurst 

Love that you are stepping in to showcase the impact CS is having on NRR!!!!

Digging in a bit more… 

 

Would the expansion be cotermed with the existing contract?

Current Contract:

  • 10 licenses, 100 per license per month, 12 month duration = 12,000 annual contract value (ACV)
  • 6 months left

Expansion contract:

  • 5 licenses, 100 per license per month, 
  • If co-termed, it would be a 6 month contract = $3,000 ACV
  • If not co-termed, it would be a 12 month contract = $6,000 ACV

Long-term approach usually is to coterm - simplifies/speeds up contracting with customers and avoids a lot of complexity with financial reporting - but it’s not a big issue if that isnt the approach you take today.

 

From your description, it sounds like you do NOT co-term.  In which case, I think your non-prorated approach makes sense. Playing it back:

 

Net Retention Rate for your Fiscal Year

  • Denominator: Total Dollars customers spend with you on Day 1 of fiscal year
  • Numerator: Denominator (e.g. total current spend) - Churns - Downsells + Expansions

 

Customer A: 

  • Current Spend: $12,000, 2 months left on contract
  • Expansion: $12,000 for 12 months
  • Customer NRR = 200% (24,000 / 12,000)


Customer B:

  • Current Spend: $6,000, 6 months left on contract
  • Expansion: $6,000 for 12 months
  • Customer NRR = 200% (12,000 / 6,000)

 

It would go the opposite way with downsells - if the customer A cuts everything they bought with expansion 12 months later, there is 2 months left on the original 12,000 contract and the expansion contract goes from 12,000 to 0

 

So customer A (churning the expansion) would then have NRR (and GRR) of 50%.

 

let me know if this helps!
 

SophieHurst
Rank

Hi @tyler_mcnally 

 

Thank you for this detailed reply. We do ‘co-term’ already. 

So the challenge is for e.g.:

Customer current ACV at last renewal: $10,000

Customer buys additional allowances at month 10 of contract term: $1,000 (would be $6,000 for full year)

We log upsell as $1,000 in Renewal Center and we change the ARR in the C360 to $16,000

Customer renews at month 12 on $16,000 (ACV at last renewal + full year upsell)

Renewal Center takes ARR from C360 as ‘target’ and so appears to be no increase in ARR YoY. 

 

Thanks!

tyler_mcnally
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Userlevel 5
Badge +3

Hi @SophieHurst - 

 

Based on our discussion, I was thinking the following should happen:

  1. log an $6,000 upsell in Renewal Center - e.g. there is a closed won upsell opportunity 
  2. C360 ARR increases to $16,000
  3. Renewal opp in renewal center for 2 months later for the original 10,000 
  4. You would have two separate opportunities in renewal center reflecting the original contract and the upsell… until you co-term them

This is where co-terming becomes really valuable to reduce the complexity of these calculations. But in the meantime, my recommendation is to think about what’s most useful by audience. Some potential ideas:

  • 360 should probably reflect the total ARR across renewal and upsell contracts
  • RC should count the full value of the upsell as part of NRR calculation
  • A report that shows the total value of upsells 

 

It sounds like it would be helpful for a deeper dive on how RC/C360 are set up to show the values you want.  Either with your CSM and/or via Office hours.

 

You can find office hours schedule here: https://community.gainsight.com/meetings-office-hours-8

 

It looks like next one is planned for 10/10

 

 

 

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