The future of SaaS billing

There's been a sudden groundswell of billing, settlement and subscriber management offerings for the SaaS market in recent weeks. It's time for SaaS vendors to junk their rickety manual systems and automate the whole process.
Written by Phil Wainewright, Contributor

In the past few weeks, all of a sudden, I've been approached by any number of vendors wanting to tell me about their billing, settlement and subscriber management offerings to the SaaS market. I must say, it's about time. For the past ten years, SaaS vendors have struggled to manage subscriber management and billing. It wasn't a major problem in the early days, because if you had just a handful of customers then charging them what they owed wasn't yet a major headache. And of course when you're flush with VC funding, collecting your miniscule revenues never seems to be as big a problem as working out how to acquire more customers. You can always work out how to collect the money later on.

'Later on' has now arrived for a large number of SaaS vendors. Their business is scaling nicely and they can't ignore the billing question any more. Trouble is, the more they look at it the more complex they realize it is. As Ed Sullivan (pictured), CEO of SaaS billing specialist Aria Systems pointed out to me earlier this week, "Excel only has 60,000 rows — divide that by the twelve months in a year and [if you're using it to manage subscriptions] that gives you your maximum number of customers."

That's where this new crop of billing vendors comes in — a number of smart people saw there was likely to be an opportunity here and invested in developing on-demand services that promise to solve vendors' headaches with a simple, pay-as-you-go contract.

What's interesting is how the variety of billing, settlement and subscriber management solutions on offer illustrates the complexity of the problem that most people in the industry have ignored for so long. Every vendor seems to approach this from a slightly different direction, each bringing a bias that reflects their own starting point. Here's a revealing selection, every one of them offered as a service:

  • Vindicia, which already has an established customer base but launched a new marketing campaign this week after closing $5.6 million funding round, emphasizes fraud screening and chargeback handling as its differentiation. I met with CEO Gene Hoffman and VP marketing Sanjay Sarathy last week. Hoffman pointed out that anti-fraud measures that work for online retailers selling goods from a catalog are far too cautious when applied to recurring subscription relationships. "The risk is you'll turn away a good customer," he said.

  • Braintree Payment Solutions emphasizes the need for PCI compliance — particularly since recurring billing means retaining card details, thus leaving a vendor more exposed to security breach than a merchant that purges details shortly after completing a purchase. The company's founder and CEO Bryan Johnson maintains a helpful blog on the topic.
  • Zuora, whose launch I covered last month, chooses to emphasize an ability to handle traditional credit invoice processing alongside more Web-native automated systems such as credit card processing. Its founders previously worked on billing at Salesforce.com and WebEx, who had to adapt their subscription billing processes to suit the demands of enterprise software buyers.
  • LeCayla's capabilities in metering and billing at a more granular level was a key reason for its acquisition in February by SaaS hoster OpSource. Such capabilities will come into their own, OpSource believes, as providers begin billing each other for usage of API-level services.
  • Newcomer eVapt focuses on metering, with an on-demand service that tracks usage of an application and provides a foundation for flexible pricing and billing models based on customer usage.

So whether you want metering, billing, invoice handling, payment processing or fraud management, there's a solution out there for you. But hang on a moment, wouldn't you want all of those things from a single provider, rather than a patchwork of piecemeal services? Probably the most complete offering — and certainly the most mature as a provider to the SaaS market — is Aria Systems. Founder Ed Sullivan's background is in providing private-label ISP solutions to consumer and business brands and subsequently in consolidating ISP billing systems acquired by broadband provider Covad.

Most people think of an online billing system as a merchant account and some billing software, Sullivan told me in a phone interview this week, and they design it for the good usage cases, when the customer pays on time without any variations or exceptions.

"The bad usage cases — which are 25 percent of interactions with customers — aren't thought out well," he said. That leaves a sour taste when a vendor is purporting to provide a service, he added: "Your product isn't just your software, it's all these interactions you have with your customer."

Although Aria has some big accounts with online gaming providers and other consumer-facing businesses, the majority of its revenue comes from business-to-business providers, he told me: "The consumer [services] drive our volume but the dollar value comes from B2B." This week, another B2B name comes on board when enterprise software vendor Serena Software brings its on-demand project management application live. The typical transaction here starts with a quotation raised on the system, which is then activated when the customer's purchase order has been approved.

Sullivan outlined a long list of components that he believes make up a complete offering for SaaS vendors:

  • Customer acquisition
  • Service activation
  • Usage tracking/rating
  • Invoicing (including Calculation, Presentment, Collection, Remittance, Reconciliation)
  • Customer management
  • Reporting

"I think there are three buckets of customer relationship management," he added: "sales and marketing, service management, and the financial relationship." While most people lump the financial element into the general bucket of service management, SaaS providers probably have more reason than most to give it separate consideration, given how central pay-as-you-go has become to the SaaS model.

The reality of subscriber management, billing and settlement in the SaaS industry at present, though, is that most providers' systems are in a parlous state. There's a huge amount of manual processing going on, resulting in missed revenue and dissatisfied or aggrieved customers. The immediate future of SaaS billing has got to be putting in the automation that's needed not only to keep administration costs but also price and upsell more effectively. Longer term, we can expect more adoption of automated electronic payment in the business world, and if providers don't have the systems in place to handle that, they'll lose out.

Vindicia's Hoffman told me that there are VPs of marketing at some enterprises that have as many as five separate credit cards with $100,000 limits just so they can fund their Google AdWords accounts — and who resist Google's attempts to move them to net credit invoice terms because they feel more directly in control using their credit cards. Enterprise software buyers are just as resistant to moving off their established buying habits into a subscription model but electronic payment systems such as ACH (Automated Clearing House) will help the two models converge. Sullivan told me: "B2B and B2C are becoming more similar every day — consumer buying habits are coming into enterprise buying habits pretty quickly. A lot of enterprise buyers, they don't call it SaaS any more, they say, can I buy the services when I need them?"

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