Three Keys to SaaS Billing Success

By Tien Tzuo February 9, 2009

by Tien Tzuo

 

For any SaaS company, having the right billing and payment systems in place is critical to growing and scaling the business.

 

(1) A billing system must give you Pricing and Packaging flexibility.

 

At Salesforce.com, we learned early on the importance of having the right pricing & packaging strategy in order to grow you subscription business.

 

When we first started, we thought the right strategy was to keep our pricing simple. We priced our sales force automation (SFA) service at $50 per user per month, and we thought that would be the price forever.

 

The market, though, had other ideas. Many tiny companies loved the idea of an on-demand service to manage their sales force, but they told us that $50 a person was too steep a price. At the other end of the spectrum, large companies like Autodesk told us they actually wanted to pay more — but in return, they wanted more features, and stronger customer service.

 

We quickly realized that a one-size-fits-all pricing model would never work. Different companies had different needs, and different price points. That’s when we embarked on our packaging strategy that ultimately led to a Professional Edition at $65/person/month, an Enterprise Edition at $125/person/month, and a Group Edition at $995/year for 5 users.

 

Looking at other subscription companies like Netflix and Zipcar, you see the same evolution in their pricing models.

 

Netflix started off in 2000 with a simple model too — $19.95/month. Fast forward almost a decade, and Netflix now has over 9 plans hitting multiple price points. Their most popular plan is $16.99/month, labeled as the 3-DVD-at-a-time plan. But subscribers new to Netflix can dip their toe in the water with the $4.99/month 1-DVD-at-a-time plan, and heavy users can upgrade all the way to the 8-DVD-at-a-time plan for a whopping $47.99/month.

 

Similar, Zipcar started off with a $50/year membership fee for their popular car sharing service. Today, Zipcar also has renamed the original plan as the “Occasional Driving Plan”, and introduced 4 new price plans called “Extra Value Plans” for its heavy users.

 

Salesforce.com, Netflix, Zipcar — what’s behind this pattern of how all three companies price and package their services? Quite simply, different customers have different needs. Customers want choice as to how they consume your services — and how they pay.

 

(2) The right billing system allows you to offer your customers the ability to customize their service — without breaking your back office operations

 

Most companies dramatically underestimate what it takes to run a subscription business.¬†It’s no surprise actually, because we’re all so used to a transactional way of doing business.

 

In a traditional, transactional business model — such as what you find in manufacturing, distribution, or retail industries — you express interest in purchasing my products, I write up an order form, ship you the products, send you an invoice, collect payment, and the transaction is completed.

 

Not so in the subscription world.

 

In the subscription world, the first order is only the start of the relationship. Each month, I measure how much of my service you are using and, based on the price plan you are on, I compute how much I should invoice you and send you a bill. This happens month in and month out, potentially creating a huge volume of transactions for your company to process.

 

In addition, at any time, you may choose to change the service. Perhaps you have purchased a cell phone plan, and now you want to add text messaging. Perhaps you started off with 10 licenses of a SaaS application, and now want to add another 2 licenses. Or perhaps you subscribe to delivery of the New York Times, and you want to suspend delivery for 2 weeks while you are on vacation.

 

Subscriptions are a living, breathing representation of the relationship between you and your clients — and every change to the subscription must be handled by all your back end systems — from quoting, to billing, to order provisioning, and through to collections.

 

With the right infrastructure in place, offering your clients all these capabilities is a snap. But without the right systems in place, every time the client makes a request, it can wreak havoc on your operations.

 

(3) The right billing system will give you all the metrics you need to run your business

 

As you can see from the examples above, subscription businesses are truly different from traditional businesses. And that comes right down to the metrics you use to run the business.

 

For example, a popular metric used by many SaaS companies is MRR, which stands for monthly recurring revenue. Across our customer base, you can have many types of deal terms. Quarterly contracts, annual contracts, 12 month pre-payments, etc. MRR normalizes all your contracts to a common period — a month — so you can have an apples-to-apples comparison of the value of your various customers.

 

Another critical metric for recurring businesses is churn, or its opposite, renewal. But there are many ways to calculate churn. For example, for any given period, such as a quarter — what percent of the business (perhaps in terms of MRR) at the start of the period is still there at the end of the period? The part that is lost is considered the churn. For companies with longer term contracts, a renewal metric may be more appropriate. For a given period, such as a month, what percent of the business that is up for renewal actually renews — that is the renewal rate.

 

Unfortunately, traditional CRM or accounting systems don’t produce these metrics. But with the right online¬†recurring billing system, producing these metrics is a piece of cake.