IoT, Billing, and Revenue Recognition

IoT, Subscription Billing, and Revenue Recognition

The Internet of Things (IoT) continues its exponential growth, with IoT Analytics estimating that the global number of connected IoT devices will grow by 16% this year, to 16.7 billion active endpoints. And, according to IDC, by 2025 these devices will have generated 73.1 (zettabytes) of data. Many companies clearly have IoT offerings that are generating data, and the most forward-thinking of these companies are analyzing this data to improve their offerings and return on investment.

Take the example of SpaceX, which deployed ground-based terminals connected to its Starlink satellites to provide connected service to remote locations around the world. One case of this was provision of service to open-ocean sailors, the ‘cruiser lifestyle’ globally. Some of these vessels had previously been without service when hundreds of miles or more from land.

The SpaceX Problem and Solution

The SpaceX ground terminals are IoT devices in that they not only provide connectivity but also send extensive telemetry information back to SpaceX defining how, where, and why the terminals are used. It was in the analysis of this data that SpaceX realized that users were exploiting the less expensive ground-based subscription to access the system on the open ocean — essentially pretending to be on-land when they were at-sea.

SpaceX quickly created a new billing tier and, with a single email, notified the entirety of this user base they would have to upgrade to a more costly ocean-mobile subscription, or their connection would be turned off. SpaceX used its IoT data to help refine its business model based on actual customer use and for more profits. We can expect scenarios like this in which companies analyze customer behavior in an IoT setting and propose new products, pricing tiers, or services.

IoT and Subscription Billing

The customer solution that SpaceX proposed used subscription billing, and IoT, by its nature, typically uses variations of subscription or usage-based billing. The technology is in place so that even the most sophisticated and intricate use scenario can be recorded, and the associated activity billed back to the subscriber

In addition to precise billing, IoT implementations give companies the benefits of recurring revenue streams, potential new sources of revenue, better customer understanding through data, and new market entry. Once drawback to IoT in terms of billing and revenue is that compliance is complicated.

IoT and Revenue Recognition

From an accounting standpoint, billing for IoT products and services should be no different than billing for other communications-related services – or the thriving software as a service (SaaS) model. The issue with both businesses is that they trigger the most complex aspects of the ASC 606 / IFRS 15 accounting standard.

To note, ASC 606 has a five-step process for revenue recognition:

  1. Identify the contract with the customer.
  2. Identify the performance obligations in the contract.
  3. Determine the overall transaction price for the contract.
  4. Allocate the transaction price to the performance obligations.
  5. Recognize revenue when performance obligations are satisfied.

The IoT service would be tied to the customer’s contract and the five steps of ASC 606 / IFRS 15 in terms of revenue recognition. Some areas that can add to the complexity include termination rights, up-front fees taken for the service, time-limited promotions or “free” services, or the ability to pause services. Each of these events could affect the revenue reporting for that client relationship.

Because IoT providers are coupling multiple performance obligations into a single contract (e.g. the hardware device, the subscription for use, and optionally a fee for support), they often fall under the allocation requirements indicated in step 4 of the guidance. Any changes to service then may trigger a contract modification or combination according to this portion of the guidance. Those subscriptions that involve usage or consumption may trigger the complex, variable consideration portion of the guidance.

For IoT service providers, the best solution would tie their billing to revenue recognition reporting and to the client contract. This model would allow the easy roll-out of complex billing, including subscription and consumption, while automating reporting of billing to an automated revenue recognition system. Both billing and revenue recognition would be connected to the customer contract so that all aspects of the contract can be addressed as well as kept on track for renewals.

SOFTRAX offers a single system to manage all forms of billing, contract renewal, and revenue recognition for IoT businesses. The SOFTRAX Revenue Management System is a powerful approach to revenue management. It is the world’s only system that combines best-in-class automation for one-time, milestone, subscription, consumption, and renewal billing and complex revenue recognition in a single solution to streamline the revenue management process.

Schedule a short demo with one of our experts to learn how the SOFTRAX Revenue Management System can work for you.

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