What it means
A B2B company sells goods, services or software to other businesses, charities or public bodies. Industrial components, accountancy services, freight, payroll software and office cleaning are all B2B, even when the end product eventually reaches a consumer.
The buying process is what really separates B2B from consumer selling. A purchase is typically evaluated by a committee that includes the user, a technical reviewer, a budget holder and often procurement or legal, and the cycle can run from weeks to well over a year.
Nobody buys on impulse, and the decision has to be justified in writing. That shapes the financial model.
Contracts are larger and often multi-year, which makes revenue more predictable, but the customer count is small enough that the top ten accounts can be most of the income. Payment is usually on credit terms rather than at the point of sale, so a B2B business carries trade receivables and has to manage the gap between invoicing and getting paid.
The numbers a B2B finance team watches follow from all of that. Average contract value, customer acquisition cost, sales cycle length, win rate, net revenue retention and customer concentration tell you more about a B2B business than footfall or basket size ever would.
Acquisition cost is high in absolute terms, but it is defensible because each customer is worth a great deal over several years. One nuance catches people out: plenty of businesses are both.
A bank selling current accounts to shoppers and treasury services to corporates runs two different cost structures, two sales motions and two sets of economics under one roof, and blending the reporting hides problems in both.
In practice
Real-world examples.
Example
An industrial valve maker sells to three large engineering contractors, which between them account for 68% of its revenue. When one contractor delays a project by six months, the maker has to arrange an overdraft to cover the gap, something a consumer business with thousands of buyers would never face from a single customer.
Example
A commercial cleaning firm wins a three-year contract with a hospital trust after a nine-month tender. The tender cost roughly $40,000 in bid work, which the firm recovers in the first five months of a contract worth $8,000 a month.
Example
A payroll software company charges annual subscriptions and invoices on 30-day terms. Because customers renew in the same month each year, the finance team can forecast cash within a narrow range, and it uses that visibility to commit to hiring a year ahead.
Formula
Calculation
Customer acquisition cost = total sales and marketing spend in a period divided by the number of new customers won in that period. Customer lifetime value = annual contract value multiplied by gross margin, multiplied by the average number of years a customer stays. A B2B software company spends $600,000 on sales and marketing in a year and signs 24 new customers, so its acquisition cost is $600,000 divided by 24, which is $25,000 per customer. Each customer pays an average contract value of $40,000 a year, the gross margin on that revenue is 75%, and the average customer stays four years. Lifetime value is $40,000 multiplied by 0.75, which is $30,000 of gross profit a year, multiplied by four years, which is $120,000. The ratio of lifetime value to acquisition cost is $120,000 divided by $25,000, which is 4.8, comfortably above the level of 3 that investors commonly treat as healthy.Case study
Seen in the real world.
Harwick Instruments is an illustrative, fictional maker of laboratory sensors used here to show B2B economics at work. It had 42 customers, and its four largest accounts produced 61% of revenue of $9,000,000.
A new finance lead mapped acquisition cost by segment and found that winning a large laboratory group cost about $180,000 in sales effort and took 14 months, while mid-sized private laboratories cost about $22,000 and closed in three months. The large accounts were still worth more over their life, but they were also the source of every cash flow shock the company had suffered.
In this fictional example Harwick kept chasing large accounts but set a rule that no single customer could exceed 15% of revenue without board approval, and funded a small inside sales team to build a wider base of mid-sized laboratories.
Watch out
Common mistakes.
- Applying consumer marketing metrics such as conversion rate on a single visit to a purchase that takes eleven months and six people to approve.
- Treating a high customer acquisition cost as a failure, when the right test is acquisition cost measured against lifetime value.
- Ignoring customer concentration until an account leaves, instead of reporting the top five customers as a percentage of revenue every month.
Questions
People also ask.
Is B2B always higher margin than consumer selling?
No, margins depend on what is being sold, though B2B software and professional services often carry high gross margins because the cost of serving one more customer is small.
Why do B2B companies have so much money tied up in receivables?
Because business customers buy on credit terms rather than paying at the till, so the cash arrives weeks after the sale is recorded.
Can one company be both B2B and B2C?
Yes, and the sensible approach is to report the two sides separately, since their acquisition costs, margins and cash cycles behave quite differently.
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