Businesses today are moving from the traditional model of one-time purchases to subscription models that build long-term relationships with their customers.
According to Manifesto Growth Architects, 70% of businesses think membership and subscription models are the future commercial model for their industries.
Software as a Service (SaaS) companies are some of the most popular subscription-based businesses. Thanks to this model, software solutions with a higher price point are now available to customers without a substantial budget.
One of the vital business processes for SaaS companies is billing and invoicing. Let’s assume your SaaS company has 300 paying customers with three different subscription plans. Now, imagine generating invoices, collecting payments, and updating financial records using spreadsheets.
This entire process would probably take your team more than a week while taking into account the different payment plans, payment schedules, and discounts. Not to mention the high risk of errors.
This is why you need a billing system.
This article takes an in-depth look into what a billing system is, important features to look for in one, and why your SaaS platform probably needs one.
What is a Billing System?
A billing system is an automated accounting tool that allows companies to invoice and charge their clients. It’s designed to organize and manage a company’s payment processing, collection processes, and revenue and expense tracking.
The tool streamlines collection processes and improves cash flow by automating, modernizing, and systemizing the bill management process.
Using an automated billing solution makes it easier for your clients to pay for your products and services. It’s suitable for entrepreneurs, small and medium-sized businesses, and large enterprises.
On top of that, it gives the business’s management in-depth insight into the company. They can tell what’s bringing in more profits, what needs reorganization, and how to put their finances in order.
Types of billing systems
Every business has unique invoicing and billing needs. The most popular types of billing systems include:
- Subscription-based – Also known as recuring billing, this is a payment model where customers are charged automatically regularly at a predetermined schedule for a product or service delivered periodically. These payments may happen weekly, monthly, or annually and may go on until the customer cancels the subscription. Examples of these include gym memberships and software subscription services.
- Usage-based – Usage-based billing is based on the customer’s consumption pattern. The provider of the service or product provides a metering system that monitors your usage and the final bill corresponds to the amount of product or service used. Common applications of usage-based pricing include utility bills, pay-as-you-go plans from telecommunication companies, and some SaaS products.
- Hybrid models – Hybrid billing helps companies charge their customers a combination of various billing models, such as subscription, one-time fees, and usage-based models. This model offers flexibility, allowing customers to choose products or services they need and when they need them. For example, the product or service provider might charge a monthly subscription fee plus one-time fees for extra services upon request.
Key Features of a Billing System
An inefficient billing system could throw your entire invoicing and billing process into disarray. But the following features could transform your billing system from just another business tool to the focal point of your financial management:
Automated invoicing and payment processing
A billing solution with automated invoicing and payment processing can save you thousands of hours of manual work and seal any loopholes in your subscription workflows. Instead of working on complex calculations, you can focus on product development, customer service, marketing, and other activities that impact your business’s bottom line.
Here are some other invoice processing functions your billing system should have:
- Consolidated invoicing – Your billing system should consolidate all purchases into one invoice for customers who make more than one purchase
- Advance invoicing – Some customers request their service providers to send them invoices in advance to help them plan their finances. Advance invoicing comes in handy for such clients.
Recurring billing and subscription management
Recurring billing and subscription management is another vital aspect of SaaS platforms. An automated billing system should be able to handle the following:
- Prorations – If a customer downgrades or upgrades their subscription plan in the middle of their billing cycle, the system should adjust the bill amount to show the plan changes. The customers should be billed only for the billable period at the end of the billing cycle.
- Grandfathering – Your business is likely to change its prices as it scales. Grandfathering allows you to keep your old customers at the old prices they signed up for and only apply the new charges to the new customers. The billing system should seamlessly integrate this.
- Calendar billing – Your customers should have the flexibility to select a billing date that suits their financial cycles. Calendar billing allows them to change their billing data and align all the upcoming subscriptions to the new billing date.
Reporting and analytics capabilities
SaaS businesses rely on crucial analytics, such as customer acquisition cost (CAC), churn rate, and monthly recurring revenue (MRR) to make informed data-based business decisions.
Your billing system can compile and visualize all these analytics for you. You should have access to real-time reporting on a single analytics dashboard.
You can then analyze your business revenue from multiple perspectives such as marketing, sales, finance, product, and retention.
For example, real-time reporting can help you spot trends in customer spending or catch cross and upselling opportunities that you’re yet to consider.
Customization options for pricing plans and discount management
Every customer has unique needs and expectations. You can accommodate their unique needs by using a billing system with customization options for pricing plans.
Customizable billing cycles help your business resonate better with your customers, which leads to improved customer satisfaction and efficient cash flow management.
Also, if you want to include discounts and coupons in your subscription plans, your billing system should enable you to add them seamlessly without interfering with your workflows. The discount should also be automatically reflected on the invoice.
Integration with third-party applications
As your business grows, your tech stack is also likely to grow. Switching from one app to another to update records can be a headache. That’s why your billing system needs to integrate with your other business tools seamlessly
It should integrate with third-party applications such as customer relationship management (CRM), enterprise resource planning (ERP), accounting & finance software, payment gateways, and even custom platforms.
This makes your system more flexible and versatile, adding richness to the features at your disposal. It also ensures information flows freely between different departments.
Why Robust Billing Software is Crucial for SaaS Platforms
Here are a few reasons why you need to implement a robust billing system for your SaaS business:
Impact on cash flow and revenue recognition
A robust billing system directly impacts a company’s cash flow by ensuring that customers’ payments are collected on time and efficiently. Automated recurring billing keeps your revenue stable by minimizing payment delays and errors.
You can also automate payment reminders using your billing system, meaning your customers are less likely to forget payments.
On top of that, accurate revenue recognition is vital for compliance with industry standards such as the Generally Accepted Accounting Principles (GAAP) and ASC 606.
Enhancing customer experience with seamless billing
A seamless, flexible billing process can boost customer experience. A robust billing system does this by reducing frustration with failed payments, billing errors, and unclear pricing.
Invoicing software features like clear invoicing, multi-currency support, and transparent billing terms make transactions more straightforward for both local and international clients. Self-service portals where customers can manage their subscription plans and payment methods also boost customer engagement and reduce their reliance on customer support.
Reducing churn through accurate billing and invoicing
Customer disputes and dissatisfaction caused by inaccurate billing and invoicing can push your customers away. If customers are regularly overcharged or incorrectly invoiced, they’re more likely to cancel their subscriptions and switch to your competitors.
A robust billing system ensures that you invoice your customers correctly, apply appropriate taxes, and factor in discounts, credits, and coupons. Automated payment reminders for expiring cards and upcoming payments can also help reduce involuntary churn.
Scalability as your SaaS platform grows
A scaling business means more complex processes. A robust billing system can handle a growing list of subscribers, new pricing models, and international transactions with minimal disruptions.
The system should adapt to new business models and integrate with other business management software in your growing tech stack.
How to Select the Best Billing System for Your SaaS Platform
With so many billing systems in the market today, choosing the right system for your SaaS platform can be an uphill task. To simplify this process, here’s our step-by-step process to help you choose the right system that specifically suits your business needs:
Assessing your business needs and growth plans
Firstly, you need to evaluate your business needs and growth plans. You just don’t want to invest in any random system. You want one that suits your needs and helps you grow.
That’s why you need to evaluate your current and future billing needs. Answering the following questions will help you know what to look for:
- What is your current monthly revenue? What’s your projected turnover in the next 6,12, 24 months?
- How many contracts and subscriptions do you expect to process in a month?
- Are you looking for a payment gateway or just a billing and invoicing tool?
- At what stages of your subscription lifecycle do you need the tool?
- Do you have international clients? Do you accept different currencies?
- What payment methods do you want to support?
- What are your priorities in terms of automation, security, and ease of use?
- How much are you willing to pay for a billing platform?
The answers to these questions will help you list priorities for your billing processes.
Evaluating compatibility with your current tech stack
Many systems will integrate with your accounting software, but not all integrations are equal.
It’s not enough for your billing system to send a receipt to the accounting tool every time a payment is made. Instead, every time a new invoice is created, the accounts receivables (A/R) balance in the accounting tool should also increase. It should also decrease to reflect a payment.
Considering customization and flexibility
No two SaaS businesses are exactly alike. Your billing system should offer customization options to help you tailor the tool based on your needs and workflows.
Assess whether the platform allows you to customize invoice templates, subscription pricing plans, and reporting dashboards.
Also, don’t forget to evaluate its flexibility. Check whether the system allows you to add more payment options (like credit cards and ACH), process online payments, offer discounts, adjust your pricing model, and accommodate different tax rules.
Understanding pricing models and cost structures
Understanding your system’s pricing structure is vital for maintaining profitability.
Some billing systems offer a pay-as-you-go model that can be suitable for startups with low transaction volumes. Others may charge a higher fee but give you access to more advanced features.
Evaluate whether the pricing model and cost structure match your budget and their long-term implications as your business grows.
Also, be wary of hidden fees, such as setup costs, support charges, or fees for extra features.
Reviewing customer support and service level agreements (SLAs)
Your billing system provider should provide adequate customer support. Check whether the provider offers reliable 24/7 customer support on various channels, such as live chat, email, and phone.
Review the SLAs to understand the guaranteed uptime, response times, protocols for handling downtimes, and who’s responsible for what. A strong SLA with a high uptime ensures that your billing system stays operational, reducing the risk of customer dissatisfaction and delayed payments.
Analyzing security and compliance features
Check whether the system is compliant with industry standards like GAAP and PCI DSS, and that it stores data securely.
Also ensure that the system has other data security measures in place, such as data encryption, tokenization, fraud detection, two-factor authentication (2FA), and role-based access controls to prevent unauthorized access.
If your SaaS business operates internationally, ensure the billing system complies with regional regulations, such as GDPR for European customers or SOC 2 for handling financial transactions.
Best Practices for Implementing a Billing System
The success of the billing system depends on the team working on the implementation. Have members from various departments in your company, such as finance, sales & marketing, IT, operations, and customer service. These team members will each offer a unique perspective on how the system should function.
You can consider hiring external experts and professionals specializing in billing systems to guide you through the process and help you avoid common pitfalls.
During the implementation, ensure proper data migration to your new system. Transfer existing customer information, subscription details, and payment data using a robust data migration strategy that includes data validation, mapping, and testing.
You can consider running both the old and new systems simultaneously during the initial implementation stages to help you spot any discrepancies before fully transitioning.
Ensure your team is well-trained in the new billing system. Have thorough training sessions and make sure the system provider has provided sufficient documentation for finance teams, customer service reps, and other system users.
Finally, regularly review how well the system supports new pricing models, additional products, and growing customer numbers. Also, work with the provider to receive regular updates and upgrades.
Conclusion
SaaS billing is more than just a financial transaction. It’s a key aspect of customer relationships. That’s why you need to implement the right billing system.
The right billing system for your SaaS platform impacts your cash flow by sealing any revenue loopholes. It also enhances the experience for your customers by providing a smooth and flexible billing process. On top of that, it reduces churn and accommodates your long-term growth.
But not all billing systems are the same. Evaluate your options carefully to find one that not only suits your current business needs but also supports your long-term growth.
