In the realm of the ever-evolving business landscape, there’s a new kid on the block making waves: the Software-as-a-Service (SaaS) business model, which is expected to reach nearly $370 billion in 2024.
One of the driving forces behind this revenue explosion is recurring billing, which gives SaaS companies a predictable revenue stream they can count on when done correctly.
Therein lies the crux of this article. We’re going to explore the ins and outs of recurring billing as a SaaS business model, share some best practices, and look at what challenges that crop up when implementing this system and strategies you can use to overcome them.
What’s Recurring Billing?
As the name implies, “recurring” billing is the process of setting up a transaction that happens automatically over a set time interval, typically either monthly (called monthly recurring revenue or MRR) or annually (called annual recurring revenue or ARR). A simple example is something like Spotify, where you pay monthly to access unlimited music without ads.
This means that customers can continue their service and you can receive payment without needing to manually send out an invoice for the defined period.
It gives your business a structured way to systemically receive a consistent revenue stream and improve cash flow management. Plus, it helps you retain customers since they don’t have to manually renew on a regular basis.
If you go the traditional one-time payment route, that means you have to remind the customer every month (or year) to renew their subscription and then they have to see it and follow through. It adds more friction to the process, and naturally, customers will fall off.
Recurring billing is a win-win situation for both the customer and the business.
Benefits of Recurring Billing for SaaS Businesses
Although we touched on a few advantages in the above section, let’s take a look at some of the areas where recurring billing really shines for SaaS businesses.
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A Stable, Steady Revenue Stream
The biggest benefit is the stable revenue the company can rely on. This means the company can accurately forecast their revenue and potential profits, which is a huge plus for bringing on investors and driving corporate fundraisers. It also helps with setting and understanding budgets, making plans for future growth, and making the company more resilient during times of economic hardships. It gives your business peace of mind knowing what to financially expect for the upcoming months and years.
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Better Customer Retention
Recurring billing also helps SaaS businesses reduce customer churn. Typically, when someone signs up for automatic payments, they plan to use it long-term and are less likely to cancel – especially if they find value in the service. It’s all about giving the customer a seamless and effortless billing experience so you keep getting paid and they keep what they paid for in its full glory.
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It’s Flexible and Adaptable
One of the beauties of recurring billing is that you can set up plans that are flexible and adaptable to the customer’s budget and needs. If someone is cost conscious or only needs a specific feature, you can charge a lower amount. While customers who need the full suite can opt for a more premium subscription. It also gives customers more control versus what they have in a traditional setup – they can cancel, upgrade, or pause their billing when it suits them.
Best Practices in Recurring Billing
When you’re ready to implement recurring billing, here are some best practices to follow:
1. Be Transparent w/ Pricing
No one likes hidden fees or surprises when the bill comes. Keep your pricing structure clear and easy-to-understand. If you try to sneak in up-charges or something similar, you will quickly turn customers away. Also, be candid with the terms and conditions so you don’t have to deal with chargebacks and disputes.
2. Create Personalized Plans
Remember, flexibility and adaptability is one of the hallmarks of recurring billing. Find what features each customer segment wants from your service and create tailored plans to fit them. You can also give customers the option to fully customize their plans to fit their needs.
3. Offer Free or Discounted Trials
If you know you have a service that rocks, entice new customers with a free or discounted trial. It’s a tactic that’s been wildly successful (think Netflix), so there’s no need to re-invent cheese and bread.
4. Simplify the Process with Automation
Remember the key benefit of recurring billing is everything happens automatically. You can use external services, like 2Checkout Monetization Platform, to set up recurring billing and the entire process from invoicing and receiving payments occurs with minimal input from your business or the customer.
Challenges in Implementing Subscription Billing
Of course, there are some challenges that come with using recurring billing methods, which include:
Payment Failures
Sometimes, a customer might get a new debit/credit card or simply don’t have the funds when the bill is due. In this case, you can set up the billing to go through at a later date and also send a reminder to the customer that their payment failed so they can fix the issue. Also keep in mind that automatic payments can lead to higher disputes because sometimes the customer forgets they signed up. So, make the process as smooth as possible and improve the chances they will return.
Customer Churn
While it’s easy for customers to sign-up for your service and opt-in for recurring billing, the opposite is true. They can also decide to cancel at any time, or they might just try it out for the trial period. The best way to help with this is to provide automatic payment reminders and updates so the experience is more positive for everyone involved.
Securing Payments
Another big challenge in subscription billing is ensuring robust payment security. As recurring billing involves handling sensitive customer data, it’s vital to maintain high-security standards to prevent data breaches and fraud. Staying compliant with regulations like PCI DSS, while simultaneously safeguarding against evolving cyber threats, is crucial. This not only protects sensitive information but also fortifies customer trust in your service, an indispensable asset in the digital age.
Final Thoughts
With the introduction of AI and other technological advances, the realm of recurring billing will evolve too to keep with the times. From enhanced security protocols and customer demands for increased personalization to the rise of Managed Service Providers (MSPs) to streamline billing, there will be many innovations on the horizon.
One thing is certain, recurring billing represents a strategic avenue for SaaS companies to create a stable financial environment that not only keeps the money flowing but fosters a deeper customer-business relationship. So, take full advantage of everything recurring billing has to offer for your business to thrive!
About Author
Matthew McCaffer is a distinguished Director of Sales at SaaS Academy, noted for his strategic leadership in sales transformation and exceptional revenue generation within the SaaS sector. He started his career at Vector Marketing, rapidly rising through sales and managerial roles. Academically, he holds a Bachelor’s Degree in Chemistry from Lycoming College, where he also engaged in varied activities, reflecting a broad range of interests and abilities.