Andrew
Burak
CEO at Relevant

SaaS Billing: How to Develop a Pricing Model and Improve Billing Management

#SaaS

Billing is at the core of SaaS (Software as a Service), and subscription management will inevitably become more complex as your product grows. Besides, a faulty billing strategy can prevent you from developing an optimal pricing model, this way reducing your profit.

Relevant has developed over a hundred world-class software applications. We’ve built a SaaS recommendation engine that helps clients maximize savings on deposits. So rest assured, we follow the best practices for SaaS billing, and our teams are aware of the widespread mistakes and how to fix them.

And that is why we decided to share our experience. This post sheds light on the practices that will help you develop a competitive SaaS pricing model and integrate an effective billing system. Besides, we’ll tell you about useful SaaS subscription billing solutions along the way.

Developing a SaaS pricing model 

Price can be a reason behind the project’s success or untimely demise. And it’s never easy to calculate the difference between the infrastructure costs and the money your customers will be willing to pay. 

So, how can you develop a SaaS pricing model that will help you gain momentum and grow a loyal user-base?

Correlating pricing with costs

A system for gathering and analyzing cost per tenant data is vital for choosing the right billing system for your SaaS business. That’s especially useful for services with multi-tiered, feature-packed subscriptions.

Let’s imagine that you offer four subscription plans. Analysis can show that the free tier generates the least revenue and too much infrastructure costs. At the same time, the most expensive plan has the least users, requires fewer resources to maintain, yet generates much more money.

Equipped with this data, you can start experimenting with moving certain features from the free tier to different plans. Some users will inevitably stop using your service, but it will ultimately improve your overall income.

Remember that tenant costs calculation isn’t accounting, and you shouldn’t expect your metering system to be 100% accurate. Instead, you should create a metrics collection model that simplifies the data analysis while giving enough insight.

Metering & tenant consumption

Organizations rely on metering to create a SaaS billing strategy for different tiers. Here’s what you should focus on:

  • Number of users per tier
  • Bandwidth costs (for individual users and subscription plans)
  • Storage activity (usually derived from user’s interaction with data access layers)
  • Billing information 
SaaS billing strategy

Once you see the figures, you can analyze how different features and strategies impact revenue and cost per tenant.

Calculating tenant costs in SaaS environments

Cost analysis is different for single-tenant and multi-tenant environments. Here’s what you should consider in each.

  • Single-Tenant. In this environment, every tenant has an isolated database and infrastructure. To make data capturing easier, you can create different accounts or virtual private clouds per user. That’ll give comprehensible information on how much you spend on each tenant.
  • Multi-Tenant. You’ll have to create separate strategies to measure the costs of different tenant interactions with your systems. For example, NoSQL, block, relational, and object storage require different techniques for aggregating cost data. This can include tracking CPU activity changes and the frequency of service calls.

It’s up to you to determine the optimal way to aggregate tenant costs. To make it easier, you can integrate a SaaS billing system that analyzes tenant activity.

Calculating tenant costs in SaaS environments

Common patterns for modeling pricing

Now, how do you find the right balance between revenue and value for the customer? Let’s look at the most popular SaaS pricing models for B2B (business-to-business) and B2C (business-to-customer):

  • Flat Rate. You offer all features for a standard monthly payment. This model is transparent and straightforward, which makes it easier to understand. However, a flat rate can cut off a significant chunk of potential tenants because it lacks flexibility.
  • Feature-based (tiered pricing). Your SaaS offers different feature packs at multiple price points. It’s the most popular model where your plans will appeal to several target audiences based on their needs. Besides, it gives basic-tier users more incentive to upgrade.
  • User-based (per user). You charge a single tenant for the number of users they add to the SaaS. The bigger the user-base — the more the business will pay, and the more revenue you generate per subscription.
  • Per active user. Another variation of the user-based model where tenants pay for users who actively work with your service. As a result, this model encourages more businesses to try your service without the risk of overpaying.
  • Credit-based. In this model, your users will purchase credits they can use to buy content. Credit-based pricing is an excellent option for services that don’t require continuous use. For instance, it’s a preferred model for audiobook and movie rental platforms.
  • Freemium. You offer a free version of your service with the option to try additional paid features and upgrade. This model works as a great lead-generator, designed to attract customers and convince them to buy premium plans.

There are no universal SaaS pricing model templates. You can create custom combinations by mixing models and practices that fit your business. Nonetheless, you have to be sure that the result won’t be too complicated for tenants.

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Leveraging metering data

You’ve implemented a metering model to calculate costs per tenant and developed a profitable pricing model. Now, you need to see how well it sits with your customers. 

How to analyze your pricing model?

Here are the things you should factor in to arrive at a profitable business model:

  • CAC and LTV ratio. Customer acquisition costs (CAC) refers to marketing and sales expenses divided by the number of your users. Lifetime value (LTV) is an estimate of the revenue a single user will generate over the customer lifespan. If you want to develop a productive SaaS pricing model — keep the ratio between these values greater than one.
  • Gross MRR churn rate. We recommend putting churn MRR (Monthly Recurring Revenue) losses into percentages. This will provide a better understanding of its impact on your pricing decisions. An ideal rate should be around 2.5% for small and medium-sized businesses and 1% for larger enterprises.
  • Expansion and upgrade MRR. Expansion MRR shows how much income your tenants generate through add-ons, cross-sells, and up-sells. An upgrade MRR shows revenue for upgrading tier plans. Sustainable growth in these ratios means your SaaS features are in demand and offer the possibility to increase pricing. 
SaaS pricing model

Hard caps on consumption

As your product grows in demand, you should consider getting rid of the “unlimited” plans that offer a full package of features for a relatively small price. 

Here’s the deal. You should base your pricing around value. This is the basic formula: the more features and possibilities your product provides, the more money you can ask. There’s a good chance customers who use your unlimited plans will pay much more than a hard cap you’ve put on it. How can you find out if they are willing to pay more? 

Subscription upgrades and re-engagements

Engaged and mature subscribers make a good target for promoting subscription upgrades. You can pinpoint these users based on the MRR churn rate and usage patterns for different tiers. Afterward, you can target them with specific email campaigns designed to convert them to upgrade existing plans or buy new features. Users with the lowest engagement levels, on the other hand, can become targets for re-engagement campaigns.

But here’s the deal: every interaction with a customer results in a reaction. Your marketing campaigns targeted at converting customers can have the opposite effect and lead to churn. That’s why you should consider using SaaS gamification platforms to enhance your marketing and support teams’ performance.

Experiments with pricing

What’s next? Now, you can try different pricing strategies. 

One of the most popular practices to determine value in the early days of online services was the 10-5-20 rule. This framework included continuously raising your prices by 5% and analyzing push back to test the limit of what customers were willing to pay for your app.

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Integrating with existing SaaS billing solutions

Planning is the key to choosing the right billing system for your SaaS business. You need to predict your customer’s needs and pick the more appropriate solution given your resources, budget, and client base.

But building and sustaining a subscription management system can become just as difficult as developing the app it’s made for. Do you want to avoid this process entirely and focus on other aspects of your business? 

Here’s a list of the best SaaS billing software you can buy to run effective management with minimal legwork:

  1. Chargify

Pros:

  • Easy to use
  • Advanced tracking & reporting features
  • Integrates with business apps and custom software via API
  • Responsive support service

Cons:

  • Lacks critical features (for example, there are no multiple currencies for a single product)
  • Doesn’t offer advanced filter options
  • Needlessly complicated refund process

Chargify is a SaaS subscription billing solution for B2B companies that automates quote-to-cash processes. This platform will help automate various types of payments and reverse duplicate transactions. 

All of these processes are manageable thanks to an easy-to-use dashboard. The API architecture allows adding most CRMs and financial software, as well as other custom apps.

  1. Chargebee

Pros:

  • Reliable billing automation and management features
  • In-depth metrics for usage, expenses, and revenue per customer
  • Self-service client’s portal
  • User-friendly
  • Excellent support service
  • Integrates with third-party apps

Cons:

  • Restrictions on discounts
  • Can’t filter transactions by country
  • Some advanced features are disabled during the free trial period

Chargebee is a subscription management platform for SaaS, PaaS, eCommerce businesses. This program can streamline your billing system and automate most mundane processes. On top of that, the platform offers in-depth costs and revenue metrics to help you develop an optimal SaaS pricing model.

You can set up email notifications and integrate many tools with Chargebee’s API. And, importantly, the support staff is knowledgeable and quick to answer your requests.

  1. Salesforce CPQ

Pros:

  • Packed with features for sales teams (template designs and instant quote approvals) 
  • Discounts, offers, and order management
  • Integrates with third-party tools

Cons:

  • Too complex to navigate 
  • Requires customization and setting up

Salesforce CPQ allows companies to automate ordering and leverage multi-dimensional quoting. This billing solution is more focused on sales executives who want to get fast quotes and improve the discount management process. You can also use uniform template designs to accelerate the sale process. Additionally, you can use Salesforce CPQ to track and structure data for customer lifecycles. 

  1. SaaSOptics

Pros:

  • Packed with tools for billing (subscription) management and analytics
  • Flexible and customizable
  • Designated representative for each account
  • Excellent support service
  • Integrates with most 

Cons:

  • The layout makes navigation a little difficult
  • Requires technical skills to set up and customize

SaaSOptics is a B2B-oriented subscription management platform with accurate analytical capabilities, dunning, and automated revenue recognition. It’s packed with various functions designed to save time on recurring billing. 

This is easily among the best SaaS billing solutions for those willing to master it. The company even offers a designated representative for each account and has a responsive support team to help you adjust and set up the software.

  1. Billsby

Pros:

  • Easy to set up
  • Helpful documentation
  • Automated invoices, payment processes, and dunning management
  • Strong security
  • Advanced API options

Cons:

  • Limited customization for sign-up emails
  • The support team answers only during working hours in the UK

Billsby offers one of the most straightforward SaaS subscription billing solutions. This software has a broad set of features and an easy setup process. 

Billsby’s interface is intuitive thanks to easy navigation and drop-in checkouts. Moreover, the advanced API allows integration with various business tools. 

  1. FastSpring

Pros:

  • Supports international regulations
  • Many options for customization notifications, invoices, and other types of customer interaction
  • Responsive support team
  • Fast and reliable API

Cons:

  • Slow reports section
  • Requires high technical skills to implement certain features (such as affiliation program)

FastSpring is a transparent and customizable subscription management system for SaaS businesses. It offers a wide variety of features for managing recurring payments, automated notifications, and special promotions. The platform also supports various international regulations and currencies.

You can customize everything related to transactions and visual presentation. On top of that, FastSpring can help you with integrating a subscription billing system into your SaaS app. 

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  1. Stripe Billing

Pros:

  • Multi-regional and multi-currency support
  • Separate account management for different trading areas
  • Integrates with various third-party apps via API
  • Helpful support team

Cons:

  • Complicated dispute process
  • Difficult to set up
  • Limited mobile support

Stripe Billing is a mature platform for international businesses. It’s worth considering if you’re working in multiple trading areas with different laws, fees, and currencies. 

The dashboard setting is configurable via the API. You can search for tenants and calculate their billing. Additionally, Stripe Billing offers comprehensible API documentation to make the integration with third-party apps easier.

How to upgrade a SaaS billing platform

Once your SaaS gets off the ground and money starts flowing in, you’ll have to add payment methods, invoicing options, payment recovery, and dunning management.

High-growth SaaS companies will eventually attract more international users, which means more tax laws and invoice rules. That’s when you’ll have to upgrade your SaaS billing system to keep up with the demand. 

Here’s how you can improve the user experience in your subscription management software:

  • Optimization for mobile. According to Statista’s 2020 report, mobile devices account for over 50% of worldwide traffic. This includes administrators who manage invoices and payments from smartphones. Therefore, it’s important to optimize your interface for various screen sizes.
  • Navigation. You should focus on making your app as intuitive as possible. For example, multi-tab support and view history will make navigation faster and reduce the number of clicks people make to find a specific page.
  • Advanced search. We recommend updating a SaaS subscription module with a search engine that supports filters and tags.
  • Adjustable values. With this feature, users worldwide can adjust their time, values, and currencies. Ideally, your billing app should also automate formatting based on the user’s location.
  • Drag-and-drop layout. Improve the way you manage user data with an intuitive, configurable design. The drag-and-drop functionality will allow you to quickly apply changes for groups of tenants, which is useful for companies that use tiered pricing.
  • Monitoring functions. SaaS billing solutions can monitor additional operations and processes. For instance, you can upgrade the app to monitor account upgrades, downgrades, track sign-ins, and manage email campaigns.
  • Client’s portal. Companies should focus on introducing support for customer self-service. It will allow users to manage their subscriptions more effectively and take some load off you.

Adding new functionality to subscription management software takes a lot of time and resources. However, you can hire a software development company with the relevant experience to build on top of your current billing software for the SaaS app.

Conclusion

At its core, subscription billing software addresses the following questions:

  • Who should you bill?
  • What for?
  • How much?
  • When?
  • And how to collect the payments?

However, the best SaaS billing solutions provide additional features. They can allow you to monitor everything related to tenant revenue and expenses. Finally, some platforms can help you pinpoint the value of your SaaS so you can develop an ideal pricing model.

You can upgrade your current SaaS billing solution or build it from scratch with a dedicated software developer who knows the ins and outs of billing management. Contact us if you want to learn more about billing solutions for SaaS.

Tags: cloud
Written by
Andrew Burak
CEO at Relevant
My company has helped hundreds of companies scale engineering teams and build software products from scratch. Let's connect.

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