“The SaaS billing problem has been around for about as long as there have been SaaS companies,” said Bogomil Balkansky, partner at Sequoia Capital. “Interestingly, the issue is 20 years old but remains an operational challenge for SaaS companies.”
The root of the problem is that most current billing systems were designed before SaaS companies made subscription pricing mainstream. Traditional billing systems were designed for one-time product-based transactions, not ongoing subscriptions.
Although there are some products in the market like Zuora, Chargebee, Chargify, and Stripe, they are not good at handling new pricing structures like consumption-based pricing, take a long time to integrate, or are not accessible to businesses , according to industry sources. interviewed by Protocol.
But the birth of the invoicing software market is actually a good thing for newbie investors. Over the past few months, Metronome has raised $30 million in a round led by a16zChargebee’s subscription management software was valued at $3.5 billion and SaaSOptics and Chargify lifted a handset $150 million of Battery Ventures.
“There’s a big opportunity here in the market: when you see a lot of in-house solutions and no clear vendor of choice, what we haven’t seen yet is something we’re interested in at Sequoia,” said said partner Lauren Reeder. .
“A bit of an octopus”
Billing is important not only because it directly relates to revenue, but also because it impacts everything from product design to customer retention.
“A billing system is a bit of an octopus,” said Balkansky. “It has its tentacles in so many different places, from the product itself to virtually any major system the company has: the CRM system, the ERP system, any kind of customer-facing communication system.”
Yet the roots of modern billing challenges stem from the shift to new pricing models in software companies that trigger a host of downstream implications. Pricing decisions for software services are complicated because they must balance adding value to customers and generating revenue, while circumventing the technical limitations of the underlying billing system.
This is one of the reasons why enterprise technology companies use very different pricing structures, such as Slack’s feature-based pricing, monthly or annual subscription pricing from companies like Salesforce, or consumption-based that AWS pioneered in infrastructure technology. And each of these pricing structures has a different impact on customer growth and revenue. If a pricing model includes a free or low-cost option, it can speed up customer acquisition, but it can leave revenue on the table if the majority of customers don’t pay.
Technical challenges also vary by pricing structure. While consumption-based pricing can provide more value to customers because they only pay for what they use, it requires a powerful enough billing engine to accurately track usage data at the hourly level, and sometimes even minute by minute.
But the complications of a billing system don’t start and end with pricing. The interconnectedness of the billing system means billing can go from an accounting issue to a payment issue to a product issue in an extremely short time.
Changing pricing tiers, for example, isn’t just a billing issue. “There is an inherent complexity in terms of implementing doors in the product itself to be able to lock and unlock certain features,” according to features purchased by a customer, Balkansky said. For example, if a customer purchased the free tier of a product, they should not have access to premium features. “And so it becomes more of a product issue rather than just a billing issue.”
There are also accounting implications for these changes.
“Each of these events — pausing, suspending and resuming, changing prices — all have implications for downstream revenue recognition,” said Amy Konary, vice president of subscription management company Zuora. This is why some Zuora customers who want to offer new or different pricing models cannot; their accounting departments are not equipped to handle this change.
“They’re somewhat strangled not so much by the capacity of their systems on the billing side, but perhaps by their finance processes that need to catch up from a business model perspective,” Konary said.
A company’s data infrastructure can also be a bottleneck, especially when it comes to consumption-based billing. “The consumption billing problem is primarily a data processing or data processing problem, because you have to collect very large amounts of data about what the customer is actually using,” Balkansky said. “That basically means you need to build a fairly robust data pipeline that can collect all of its data fairly frequently and send it to a data store.”
And none of that work ends once the invoice is calculated and delivered, as a whole new set of complications arise from processing customer payments and managing everything from refunds, credits and chargebacks to expired payment methods. . To mitigate the cost of payment errors, a billing system needs mechanisms to retry a failed payment method multiple times or remind customers to update their credit card information.
Build or buy
There simply aren’t many solutions on the market that can address all of these challenges, which is why many companies choose to go in-house.
Balkansky and Reeder agree that while some billing products exist for larger enterprises using subscription pricing, the same cannot be said for consumption-based billing or those aimed at start-ups.
When it comes to consumption-based billing providers, it’s only been about a year since Balkansky saw the first companies emerge. “And so, for consumer billing companies, there was no choice but to build and maintain it yourself,” Balkansky said.
The result is that many founders are building their own low-touch billing systems with limited functionality. But this approach isn’t sustainable as businesses scale, because most startups can’t anticipate all the complexity that comes with growth.
“Usually they don’t design the billing system with all of these thoughts in mind, and at some point they get stuck,” which usually ends with the startup rebuilding the entire billing system , Balkansky said.
Growing competition and industry consolidation are telltale signs that the market could be about to take off. At Stripe, Vladi Shunturov, Head of Revenue Products, is optimistic about the market opportunity. And he put his money in his mouth: Over the past few months, Stripe bought revenue reconciliation company Recko and billflow companywho specializes in customer contact aspects of invoicing.
“If you look at enterprise software, Zuora and Stripe are the two biggest players in the business and we fight over contracts very frequently,” Shunturov said. But “because Stripe is investing very aggressively in this area, we have the ability to invest more than other billing platforms and deliver this unified stack faster,” he said.
The few other providers that exist like Zuora, which counts Zoom, Zendesk, and Microsoft as customers, have limitations. “In the broader market, people tend to go for something like a Zuora, where you need an Accenture contract to help you implement and connect to all your systems,” said Reeder of Sequoia. But this extensive implementation process is more than many startups can handle. “I think the investment to add one of the tools like Zuora is usually a six to nine month process, and for a fledgling startup that’s not really an option.”
But building an in-house billing system isn’t necessarily easier. Reeder, who worked at both Segment and Twilio, said the two companies built their own billing engines, but also had large teams of engineers to maintain them. Of course, not all companies have these resources.
“And it’s not something you can go wrong either. Invoices are very personal, they are your direct income. So it’s a high-stakes project – you can’t just have a junior engineer try to build it on their own,” she said.
In the future, the combination of data analytics, artificial intelligence and automation could solve many of the challenges facing modern billing systems, including helping businesses more accurately forecast their consumption. and testing the impact of changing pricing models on customers and suppliers. If billing software vendors can figure all this out, the complicated world of enterprise billing could become the next big SaaS market.
“I think it’s bigger than the accounting space. I think it’s bigger than the long-term ERP space,” Shunturov said.