Subscription Billing

How Much Money Is Your Subscription Business Losing with a Manual Billing Process?

Matthew Boucher

It’s becoming more and more widely known that manual billing processes can be costly for a subscription business, in both tangible (read: monetary) and intangible (read: time) ways. In fact, manual number crunching and other administrative tasks cost small- to medium-sized businesses (SMBs) around the world an astonishing $600 billion.

While this figure sounds dramatic, you may be thinking, “Sure, but that loss is shared between thousands and thousands of SMBs. How big could the cost really be for one individual subscription business?”

The short answer: pretty darn big.

And the kicker is that many subscription business leaders don’t even realize they are losing money to manual billing processes until it becomes a serious issue. Nikolaas Vanderlinden, Executive Director Advisory (Risk) at EY, points out, “It is estimated that 1 to 5% of EBITA [earnings before interest, taxes, and amortization] flows unnoticed out of companies because they do not have their contract management and payment follow-up processes completely in order.”

That’s a scary thought, right? And it begs the question: exactly how much is your subscription business losing by handling its billing process manually?

Whether or not you realize it’s happening, it can be difficult to quantify exactly how much money you are losing to manual processes. So, to answer that question, we need to turn to the data.

Looking at four key revenue leak sources, I’ve calculated the losses as accurately as possible for an average mid-market SaaS subscription business with an annual recurring revenue (ARR) of $5 million.

1. Involuntary churn

One of the biggest culprits of lost revenue for subscription businesses is involuntary churn, which is when customers churn out because of failed automatic payments rather than because they didn’t like your product or service.

According to the folks at ProfitWell, close to 35% of all transactions fail. These failures can be caused by expired credit cards, insufficient funds, broken payment processes, or as fraud protection measures. Furthermore, 60% of organizations have reported losing customers due to failed payments and involuntary churn. According to a Baremetrics study, SaaS businesses in particular lose around 9% of their monthly recurring revenue.

The impact of all these losses?

The same LexisNexis study linked above reveals a tremendous global cost for 2020: $118.5 billion in labor, fees, and lost business.

Obviously, involuntary churn is bad for customer retention. But what does it have to do with manual billing processes?

When your billing department is manually crunching all the numbers, they are probably working overtime just to get invoices out on time to your customers and keep track of who’s paid and who hasn’t. In that case, they aren’t likely to be able to dedicate much time to solutions for involuntary churn, such as dunning communication, retrying failed payments, and sending proactive notices to update credit cards on file.

A modern subscription billing system can automate all of these processes and substantially reduce your rate of failed payments. At Stax Bill, it’s not uncommon for us to see a subscription based business recover between 2%-4% of recurring revenue after switching to automated collections.

For our example subscription business with a $5 million annual subscription revenue, that’s $100,000-$200,000 per year lost to manual billing processes.

2. Improper taxation

Taxation can be one of the biggest headaches for SaaS subscription businesses. According to the tax compliance experts at Avalara, “Software-as-a-service is taxed in 17 states, partially taxed in 2 states and taxed only if the provider has a server in that state in 8 states…There are about 13,000 sales tax jurisdictions in the 45 states with a general sales tax, plus Washington, D.C., and some cities and boroughs in Alaska.”

It’s no wonder mistakes are made while trying to handle the convoluted tax rules manually. These mistakes can impact your bottom line every month.

But it’s not just your bottom line that could be impacted—the IRS might audit your subscription business whether the taxation discrepancy was intentional or not.

An audit can have serious financial consequences for your business. Avalara’s experts break it down, saying, “The average audit costs a company more than $300,000, according to a report by Wakefield Research…This figure won’t account for the loss of time you’ll spend responding to an audit, however. A typical sales and use tax audit can stretch over 30-45 days or longer.”

Let’s say our example SaaS subscription business doesn’t have a good system for handling the granular taxation required by the U.S. government, and, like construction software provider CoConstruct, it’s undercharging customer taxes by about $2,000 per month, for a total of $24,000 lost in a year to manual taxation processes.

Uh oh—now the IRS comes knocking. That’s another $300,000 lost for the audit, plus a month’s revenue lost to the downtime. At $5 million per year in ARR, that’s an additional loss of more than $400,000.

No bueno.

3. Employee salaries

Next up, we have the amount of money that you lose paying salaries to billing and AR specialists, who likely spend a significant portion of each month on manual subscription billing. With a manual system, your team is likely spending at least 40 extra person-hours per month—more than a quarter of their time—on billing when they could be applying their specialized knowledge to higher-level goals like scaling the business.

And, considering that in the U.S., billing specialists make $40,000 per year on average and AR specialists make around $50,000, those 40 wasted hours per month add up quickly—that’s $9,240-$11,520 per year.

Plus, the tediousness of manually handling recurring payments can take a toll on finance teams, causing anxiety and major decision fatigue. Employees who are stressed, frustrated, and/or anxious are more likely to resign, and rehiring isn’t cheap. It costs an average of $1,500 to hire a new hourly employee, and substantially more to rehire for a salaried position—potentially as much as 100-150% of the employee’s salary.

By automating your subscription business’ billing process, you can keep employee morale high, avoid wasting copious amounts of company time, and reduce employee turnover.

4. Manual errors

Manual errors in data entry can also cause catastrophic revenue loss. The Data Warehouse Institute reports, “Upwards of $600 billion every year can be attributed to data entry errors in the supply chain, data procurement, and other vital areas, exposing organizations to compliance risks in addition to a large amount of wasted money and resources.”

Even giant companies aren’t immune. Thomas Redman wrote in the Harvard Business Review about how AT&T found that there were errors in 40% of their invoicing data, which cost them tens of millions of dollars—and the majority of these issues were caused by manual data entry errors.

Distressingly, the ‘acceptable’ rate of accuracy for data entry is only 70%. To translate this into a dollar amount, consider if your AR specialist had to spend an additional 30% of their time to find and fix mistakes. That’s about $12,000-$15,000 in salary simply to remedy errors—and it doesn’t even account for mistakes that go unnoticed. Errors that are caught too late can cause downstream revenue losses like customers churning from inaccurate invoicing.

Damage to the tune of 17% of ARR

For our example SaaS subscription business with $5 million ARR, these losses due to manual billing processes really add up:

  • Involuntary churn: $100,000-$200,000 per year
  • Improper taxation: $24,000 lost revenue + $300,000 for IRS audit + $400,000 in lost revenue during down time
  • Employee salaries: $10,000 per year in wasted person-hours + $1,500 to rehire for hourly AR Specialist position due to high turnover
  • Manual errors: $12,000-$15,000 + lost revenue from customers who churned due to inaccurate billing

This totals to over $850,000 per year, or 17% of the business’s annual recurring revenue—not to mention the intangible costs of having your ability to scale stymied, key people being tied up for weeks each month with verifying billing numbers, and unwarranted stress and anxiety for the whole billing team.

Automated billing is the revenue-saving solution

Are you willing to risk these costs to stick with your manual billing system? If not, an automated billing solution like Stax Bill can help your subscription business stanch the hemorrhage of revenue.

It does so by automating dunning communication and collections to reduce involuntary churn and handles incredibly granular taxation requirements with ease. It virtually eliminates manual errors and reduces stress and anxiety for your accounting team, which can help reduce costly employee turnover.

Now that’s a worthwhile solution.

Interested in learning more about the ROI you can expect to see from automated billing? Check this out: Here’s Exactly How Much You Can Save with Billing Automation

Written by:

Matthew Boucher
Matthew Boucher
Director of Sales, Stax Bill

Matthew Boucher is the Sales Director at Stax Bill. With a remarkable journey from military service to leadership positions in technology sales, Matthew’s tenure includes impactful roles at OCR Canada Ltd. and PiiComm, before spearheading sales strategies at Stax Bill. Known for his leadership, discipline, and team motivation, Matthew drives company success through excellence and a people-first philosophy.