You’re at the point where you know your current process of manually billing your customers is creating a lot of inefficiencies for your SaaS subscription business. It might have worked in the beginning when you were in your early start-up days, but those days are behind you.
Your business has grown and it’s time to find a more scalable billing solution. So what do you do? Build or buy?
RELATED: 6 Best Practices for SaaS Billing Subscriptions
If you have a skilled team of developers, it’s tempting to have them build a solution for you. After all, why shell out hundreds or even thousands of dollars per month on a subscription billing software when you’re able to make your own in house?
For some businesses, building custom software is a viable option. But many businesses go into the project without their eyes wide open and subsequently make mistakes that range from mildly annoying to detrimental to the entire organization.
I know it sounds dramatic, but it’s true.
Here are three of the most common mistakes businesses make when building an in-house subscription billing software.
1. Underestimating The Resources Required to Build and Maintain In-House Subscription Billing Software
Here’s an uncomfortable truth: just because you aren’t paying an external company for a software solution doesn’t mean you’re getting it for free. Even if you’re using your own resources, you still need to pay your developers for their time spent building it.
And that amount of time is probably more than you’d assume.
- The majority of the time, non-developers greatly underestimate the time it takes to design, develop, test, and deploy new software.
- A simple subscription billing software solution with basic accounting and credit card functionality will probably end up close to the $200k to $250k price range.
- Then there’s the issue of ongoing development.
Developing software isn’t a ‘do it once and you’re done’ kind of project. As it’s put into use and bugs are discovered, someone will have to spend time regularly patching them up—time that could (and should) be spent updating, enhancing, and improving your own software product.
Very quickly, these businesses realize they need as much development time to build this recurring billing system as it took them to build their initial software offering.
2. Not Building Functionally Robust Subscription Billing Software
There are two main reasons an in-house subscription billing software solution might be lacking in functionality.
- Once the business realizes how involved the software build process is, they may end up feeling forced to take shortcuts to save time or money.
- They’re simply not experts in accounting—so it becomes harder for them to build something that works holistically across all accounting functions.
And where exactly do these functionality gaps tend to appear in your system?
- It isn’t backed by a general ledger. Businesses that follow generally accepted accounting principles (GAAP) should also follow the double entry bookkeeping system. In the subscription business world, double-entry accounting is crucial for tracking monthly recurring revenue because it facilitates things like revenue recognition, distinguishing sales from collections, and handling different types of transactions—credits, refunds, write-offs, etc., to name a few.
The problem is most developers generally only understand the more basic principles of accounting. For them, it’s easier to rely exclusively on these basic principles when building their own subscription billing software, rather than learning and developing to every aspect of GAAP accounting. But for your finance team, this leads to bigger problems down the road.
- It doesn’t automate recurring tasks. Sending invoices out manually isn’t the only recurring headache your billing team faces. There are also regular manual tasks like sending out dunning communications, retrying credit cards after failed collection attempts, prorating signups that come mid-billing period…the list goes on.
These are table stakes features of any subscription billing software solution you might buy, so your in-house system should have them, too.
- It doesn’t sync with other solutions in your fintech stack. Your business probably uses a CRM of some sort. It likely also uses an ERP and a tax software, too. With so many different platforms functioning separately, any data that needs to be carried over from one system to another will need to be entered manually.
Your subscription billing software should be able to act as a bridge between all these platforms—taking data from your CRM and then pushing relevant data through to your accounting and ERP solutions—no manual work required.
In the end, these functionality gaps mean there’s a lot of money that doesn’t get charged, doesn’t get collected, and doesn’t get reported on in a homegrown system. They are usually very manual and very error prone. And that’s very bad for business.
3. Forgetting About Compliance
Remember when I mentioned some mistakes could be detrimental to a business? This is what I was referring to.
The accounting world is complex, with tons of different regulations and standards SaaS businesses must comply with—or face consequences.
- Firstly, there’s the PCI DSS (Payment Card Industry Data Security Standard)—a set of guidelines for keeping credit card data secure, set out by the major credit card brands like Visa, MasterCard, etc.
If a business is caught violating the PCI DSS, they could be punished with six-figure fines or even prevented from continuing to do business altogether. However, a 2020 study by Verizon found less than 28% of businesses worldwide were fully compliant with PCI regulations.
Even if you don’t get caught, without building your subscription billing process according to PCI standards, you’re making your business very vulnerable if it’s targeted by hackers.
- Secondly, your business needs to think about how you’re recognizing your revenue and whether your billing software enables you to comply with ASC 606, the latest standard for revenue recognition.
Because of the nature of the subscription business model, revenue recognition is a bit trickier than it is for businesses that deal in the one-time sale of physical goods. In short, these guidelines say that since the service is being delivered over time, your business must also recognize revenue over time, rather than at the time you receive payment.
Your subscription billing software should enable you to do this automatically, because if you get caught not complying—you guessed it: hefty fines.
The Benefits of Buying Your Subscription Billing Software
If your business is on the enterprise side in terms of size and has the human and financial resources available to dedicate to building and maintaining an in-house billing solution, a custom build could be the right option for you.
But most businesses just don’t have the tools or the accounting knowledge needed to do it right. Those are the businesses that should instead consider buying a cloud-based subscription billing software solution.
While it may seem to be a bigger investment up-front, the truth is subscription billing software can help your business recover enough money to pay for itself. The software helps with:
- patching up revenue leaks by automating dunning and collections, calculating proration, eliminating human errors, and more,
- reducing time spent billing by up to 80%, and
- automatically keeping you in line with PCI standards and GAAP accounting principles to help you avoid any non-compliance fines (or worse).
And, of course, your developer team doesn’t need to take responsibility for ongoing updates. This means more time to spend making your own SaaS solution sing for your customers.