A technology company Laurie Fleet worked with several years ago had some of the best computer engineers in the world, so it was a no-brainer to company finance leaders to use in-house talent to build its software-as-a-service subscription billing system. It was a project that took three years longer than expected and the system still required updating after completion.
"At the outset, they thought this was easy," says Fleet, a partner with PricewaterhouseCoopers, who consults with companies on their SaaS billing systems. "'I just have to do some calculations, slap them on a piece of paper, and send it out to my customers. How hard can billing be?'"
The company estimated an 18-month build time, but the project took five years and still only captured about 85% of the company’s pricing models. It took another three years to get the system to 100% and also incorporate flexibility to accommodate pricing models the company expected to use in the future.
"Subscriptions are a little harder in the back office than one-time sales," said Fleet during a CFO Live virtual conference session. "You have recurring pricing. You have fixed pricing. Or you have a combination of both. You can have different billing frequencies: monthly, quarterly, semi-annually, or annually. And then after customers have signed up, contracts change. You might have multiple amendments a year. And the way the relationship is ongoing, you have to manage renewals."
Subscription models on rise
Most technology companies today launch as subscription-based SaaS businesses, and most existing companies, in technology as well as other sectors, are moving to a subscription model if they haven't already made the move. The reason is a predictable revenue stream and the chance to upsell or cross sell at renewal.
Because of the variety and complexity of subscriptions, though, billing presents a challenge, especially for companies transitioning from a traditional model in which the customer relationship ends after the purchase is made.
Finance leaders have three options if they're looking to create or upgrade their billing system to accommodate a growing subscription business, Fleet said.
They can build their own, but that will likely take longer, cost more, and consume more resources than expected, or they can buy an off-the-shelf solution and use their in-house resources to customize it to their needs. But that can be just as fraught as building it on their own.
"When we were looking at the billing system [of a company that customized an off-the-shelf solution], we estimated they were spending roughly $20 million a year just to maintain that system," said Fleet. "And that was just to keep up with point-in-time requirements and not give them flexibility for whatever came up in the future."
The third option is to buy a robust off-the-shelf solution that integrates with the finance organization’s ERP and has flexibility to accommodate any pricing variant company executives might conceive in the future.
"You never know what that next new way of pricing a product is going to be," she said.
One trend she's seeing is usage-based pricing, which involves pricing that fluctuates up and down based on how much of the service the customer consumes.
"You might have started off with a simple subscription model, but now, to get even more revenue and more margin, you start adding consumption-based models to your portfolio or go-to-market offerings," she said.
Another trend is advanced subscription billing, in which subscribers pay upfront for their use of services, maybe in exchange for a better deal.
Complexity increases when you combine an advanced billing model with a consumption billing model. "Now you have a subscription model that bills in advance and a consumption model that bills in arrears," she said.
Additional complexity is added as you merge with or acquire other companies and incorporate their billing processes into your own, or move into other countries, each with its own currency, language, and billing rules.
"In Brazil, they're very specific that you invoice on paper that you have to buy from the government," she said. "They also have many reporting requirements as well."
Moving upmarket can also increase complexity, especially if you add enterprise solutions, which tend to come with greater pricing customization.
"You're going to do every acrobatic you can to get that sale," she said, "And your backend office, particularly your billing system, cannot hinder you from getting to that growth strategy."
Fleet recommends you evaluate billing systems against five criteria:
- Automation. Anything that can be done by bot should be done by bot, so finance staff can spend more time on the analytical side of the work, especially as finance teams shrink in future years, as they're expected to do.
- Agility. The system should accommodate whatever pricing model is conceived without requiring IT staff to make changes to accommodate it. "It needs a user interface that is intuitive and simple enough that [sales staff] can go in and make changes, whether that’s promotional changes or pricing changes," she said.
- Analytics. Subscription pricing uses a different set of metrics than traditional pricing, so the system should be built to isolate annual recurring revenue, average revenue per account, churn, and lifetime value, among other SaaS measures.
- End-to-end functionality. The system should integrate with your other systems, including your ERP and CRM.
- Flexibility. The system should also be customizable to accommodate all of your use cases. "The reality is, no out-of-the-box system will meet 100% of your use cases," she said.