Mastering Billing and Subscription Strategies for Microsoft Partners

Building Blocks of Revenue

There are generally three sources of revenue for IT and Services businesses.

Services (Labor and expertise)
Software (Digital Services)
Hardware (Physical Goods/Infrastructure)

Subscription-based services are commonplace for Microsoft Resellers in the Cloud Solutions Partner Program. Software, Azure, and even professional services can be sold on a subscription basis with a recurring or re-occurring billing model. Growth in recurring revenue comes from compounding the revenue over the years by adding new customers and retaining existing ones.

Implementing the right billing strategies and models can significantly impact the business for various reasons.

Predictability in cost and revenue
Customer Satisfaction
Cashflow Management
Labor and operational burdens
Impact on your company’s enterprise value.

The purpose of billing in a specific way is to strike a balance between achieving business objectives and creating customer satisfaction.

Business objectives will include the labor and cost of doing something a certain way, compliance and tax requirements, and data and systems to support the billing processes.

Customer Satisfaction, on the other hand, is aligned with billing accuracy and timeliness, alignment with Sales terms and expectations, providing multiple payment options by reducing friction, and being easy to do business with.

Payment terms: When is the invoice due for payment
Billing Policies: whether you invoice in

Advance at the start of the cycle (like Rent)
Arrears (Or like your electricity bill)

Payment collection methods (Credit card, bank transfer, check, wire)

Align Sales and Billing

Creating a great customer experience at scale means the Sales Motion (What is being promised and the terms) and Billing and Invoicing must align.

For Microsoft CSP partners and Microsoft Cloud customers, the change and transition to NCE (New Commerce Experience) is a clear example of a billing change’s significant impact.

The billing motion was changed to align with the purchase terms, further aligning with Microsoft’s business objectives (Predictability in Revenue).

The Three Amigos

What is promised to the customer and what is expected by the customer from a contractual standpoint. Additionally, Sales will align value by providing different pricing and go-to-market strategies.

One common way is to have differentiated or customer-aligned pricing offers that can vary by industry, size, and expertise.

Tiered-based Pricing

Services or Products are organized into tiers, enabling customers to opt for preferred features and support.

Meter-Based Subscriptions

This precise approach charges customers based on specific metrics or usage units.

Flat-Fee Monthly Subscriptions

This is relevant to Services and very typical for Managed Service Providers, however we also see this for Azure.

Prepaid Usage (Drawdown) Subscription

Customers pay upfront for services, and usage is deducted as they consume relevant to Consumption and Usage-based billing

One-Time Setup Fee with Recurring Subscription

Combining an initial setup fee with ongoing subscription charges.

Provisioning:

Provisioning is the process of enabling the services sold to customers. These could be professional services, projects, software licenses, hardware, or any act that delivers the service. Provisioning occurs wherever the service is provisioned.

Software provisioning could enable a customer to activate the service specifically for an individual user.

Provisioning for the same service can be done through different providers. It may be possible to subcontract the same service or purchase software from multiple providers. In the case of Microsoft CSP partners, the most common ways to provision Microsoft online service are directly on Partner Center (if you are a Direct Partner) or through a Distributor (if you are an Indirect Reseller).

Billing:

Collecting the revenue associated with the Sales and provisioning process. The rest of the article will cover the billing aspects and strategies in detail.

When the three amigos are not aligned, there is friction! There is a loss of revenue, complex operations, and labor impact.

Billing and Subscription Strategies

Generally, there are three types of Billing models:

Term/Contract-Based Billing (Contract for a specific Term): The customer starts a contract with a specified set of services that are provisioned and invoiced together.
Usage Billing: There is an agreement to invoice based on usage. The amounts are unknown in advance and can fluctuate over time through the changing usage model.
Retainer Billing: Billing occurs prior to any services being delivered to confirm the intent to work with the service provider. The services consumed are later reduced from the retainer.

Billing Methods

There are generally two ways to track and retain this information so you know what or how much to invoice.

Vendor Invoice-based billing: Wait for a 3rd Party to confirm amounts, like a subcontractor or a Provider. This is typically done when a system is absent and the service provider cannot confirm what needs to be invoiced. The service provider waits for a 3rd Party to confirm the amounts and then passes the items over to their customers.
System/Data-based billing: The service provider tracks or has an inventory of precisely what has been provisioned or sold and an invoice based on the data available in their systems. You do not need to wait for a 3rd Party vendor when your billing is integrated with your provisioning system. Another example of this is collecting timesheet data every week to invoice customers.

Partners who provide services understand the challenges with vendor-based billing. If you work with vendors, you can’t simply pass along the charges for services and hours. What will happen to your billing and relationship with your end customer if you implement blanket “pass-along” billing?

Customer Requirements

Customers may also request or even require specific billing details to categorize costs and manage financial reporting on their end. What is commonly seen is things like Location (or Split Billing) or even Consolidated Billing.

Location-Based Split Billing: Location-based, or Split billing, is commonly used at franchises or businesses with multiple locations or Subsidiaries. The parent company makes a purchase decision to bring all locations and businesses to one vendor. However, the vendor manages multiple locations with slightly different usages or needs. The Parent company needs invoices for individual locations to allocate costs correctly. Each franchise or location may be an independent business, and all share a common brand and marketing presence. Location-specific services may be managed centrally or by a user at each location and invoiced by location. Split Billing is very challenging to do without a system in place. Work 365’s Linked Subscription feature supports Location-Based or Split Billing.
Consolidated Billing: Companies sometimes make centralized purchases, but individual companies manage their requirements. A consolidated invoice across all entities is needed. They may have different identities but want to receive one invoice and make one payment for administrative purposes or because they have one centralized ERP shared across all locations. This term combines multiple subscriptions or service charges into a single invoice billed to one account. This is often used when a company or organization wants to manage and pay for multiple subscriptions or services under one billing account for simplicity and efficiency. Work 365 has the flexibility to support parent/child accounts and allocate services across various providers into one billing relationship.

Benefits of Consolidated Billing:

Simplified Accounting: Reduces the number of invoices and transactions that must be managed.
Cost Efficiency: Helps identify and potentially reduce redundant subscriptions or services.
Improved Cash Flow Management: With a single invoice, it is easier to keep track of due dates and payment schedules.
Enhanced Financial Oversight: Provides a comprehensive view of all subscription-related expenses across subsidiaries in one place.

Term/Contract-Based Billing (Agreement-Based Billing)

This is the cornerstone of billing relationships, which aligns both the customer-centric and sales models, providing structure and predictability beyond Microsoft’s commercial models. Direct Contract billing is not just a billing method; it’s a strategic tool that aligns with your customers and empowers Sales teams to drive revenue and growth. This is done through a contract, a set of terms, dates, and billing policies applied at the contract level. All services associated with this contract follow the same billing model.

Pros:

Customer-Centric Advantage: Tailoring billing structures to clients’ needs enhances satisfaction and loyalty.
Strategic Sales Alignment: Negotiating unique agreements presents opportunities during sales, improving conversion rates.
Enhanced Transparency: Defined terms foster trust and transparency in client interactions.
Flexibility and Customization: Address diverse budgets and requirements, positioning you as a solutions provider.
Competitive Differentiation: Offering customized billing differentiates you from competitors following rigid pricing structures.
Long-Term Relationships: Custom agreements foster enduring partnerships based on understanding and service.

Cons:

Uniformity of Rules: The main drawback is that when selling and billing against a contract, all services within the contract must have the same level of flexibility. The terms and conditions must apply across all if multiple services are purchased within a contract. The most rigid service dominates the contract terms. For example, in the case of NCE, Microsoft does not permit cancellation, even if other services permit it.

At Work 365, we champion and facilitate contract- or agreement-based billing, enabling you to harness its customer-centric benefits and integrate them seamlessly into your operations.

Consumption-based or Usage-based Subscription (for Azure)

This model charges customers based on consumption or usage. For example, for Microsoft partners, the primary use case for usage-based subscriptions is used for Azure Billing.

Nuance:

Consumption-based billing is typically done in arrears and monthly, allowing customers to pay based on actual usage.
Usually don’t have an initial quantity.
Threshold and alerts: For consumption-based subscriptions, it is essential to have alerts and notifications so that the customer is aware and avoids surprises at the time of billing.

Minimum Commitment Billing

Description

Minimum Commitment Billing, also known as Minimum Usage Billing or Minimum Spend Billing, is a billing strategy where a customer is charged either the actual usage or a pre-agreed minimum amount, whichever is higher. This model ensures that the service provider receives a guaranteed minimum revenue while still accommodating variable usage by the customer.

Use Case

An MSP might use the Minimum Commitment Billing strategy for cloud services or software-as-a-service (SaaS) offerings where usage can vary significantly monthly. For instance, an MSP providing cloud storage solutions might agree with a client on a minimum monthly fee for a set amount of storage. If the client’s usage exceeds the minimum, they are billed for the actual usage. The client is still billed the minimum fee if the usage is below the minimum. This strategy ensures that the MSP can cover their costs and maintain predictable revenue while allowing the client to scale their usage up or down as needed.

Work 365 Support:

Work 365’s advanced Azure billing feature fully supports Minimum Commitment Billing, allowing MSPs to set minimum usage thresholds and automate the billing process accordingly. The platform ensures accurate calculation and invoicing, providing both the MSP and their clients with transparency and reliability. Work 365’s flexible billing options enable MSPs to easily implement and manage minimum commitment contracts, ensuring consistent revenue streams while accommodating variable customer usage.

Retainer-Based Billing

This model, relevant to Services and Azure billing, involves customers paying a fixed monthly fee for specific services.

Nuance: Work 365 supports fixed monthly billing for Azure or the actual consumption charges – whichever is higher.

Reconciliation Based Billing

Reconciliation-based billing is billing the customer based on the invoice received from the vendor/provider. For Microsoft CSPs, billing is done once the provider invoice is received.

For Direct Partners, Microsoft provides three billing artifacts

Invoice prefixed with either D or G (also called “Dee” or “Gee” invoices)
Reconciliation file
Daily Rated Usage file.

For Indirect partners working with distribution, it would be based on the invoice data received from the Distributor.

Many finance-driven organizations that do not have a system follow the process of looking at the line items, applying a margin, and creating the customer invoice. The issue with reconciliation billing is that you have to rely on the timeliness and accuracy of the vendor’s invoices. It’s more time-consuming and can only be done in arrears. It significantly impacts cash-flow and makes it hard to align billing with sales.

Consumption-based billing for services like Azure has to be billed in arrears based on the reconciliation and reported usage from the Providers.

Data/System Driven Billing

In contrast to reconciliation-based billing, Data or system-driven billing can only be done when the provisioning data is used to generate an invoice. The idea is that the data required for billing is always readily available in a system!

The data includes:

Quantities
Pricing
Product SKUs
And changes that are made to Services and Subscriptions at all times.

A billing system integrated with a provider that has real-time or near real-time knowledge of all the services provisioned (like Work 365) provides a level of billing and invoicing flexibility that can impact customer experience and business outcomes by driving better cash flow and reduced labor efforts.

Billing in advance for services is possible when billing data is available in the system.

Billing Policies like billing in advance (at the beginning) or arrears (at the end), a cycle independent of the models, can influence commercial and business outcomes. Annual contracts are always billed in Advance. Monthly services can be billed in advance or arrears of a billing cycle.

Billing in advance reduces financial risk, while billing in arrears may be easier for finance teams to explain or manage.

The flexibility to invoice in Advance or Arrears is another simple but very important capability that aligns customer and sales expectations with a data-driven billing system.

Other commercial levers and considerations:

Proration

In the context of recurring billing, proration refers to adjusting the service charges based on the actual usage period rather than charging the full amount for the entire billing cycle. This is commonly used when a customer starts or cancels a service in the middle of a billing period or when the service plan changes.

Critical Points of Proration:

Partial Month Charges: If customers sign up for a service partway through a billing period, they are only charged for the days they used the service, not the full billing cycle.
Service Plan Changes: If a customer upgrades or downgrades their service plan mid-cycle, proration ensures they are billed appropriately for the portion of the period they used each plan.
Cancellation: If a customer cancels their subscription before the end of a billing period, proration ensures they are only billed for the time they had access to the service, potentially resulting in a partial refund.

Billing Adjustments in Microsoft CSP Billing and NCE

In the New Commerce Experience (NCE) for Microsoft CSP Billing, proration is not supported in the traditional sense. Customers commit to fixed-term subscriptions (monthly or annually), and changes like adding or reducing licenses are managed at the end of the term or with specific adjustment policies.