Following on from the guest post by the CEO of Zuora, Ed Sullivan, CEO of Aria Systems, another SaaS billing provider has written another piece which adds to the body of work looking at the changes that a move to a subscription billing model brings.
Subscription billing is an art. It takes skill and once mastered, the results can be very satisfying. Much of this skill comes from practice and experience. Before I founded Aria Systems, I ran a business based on subscription revenue which taught me that billing, possibly more than any other application, required experience to set up correctly.
As a revenue model, more companies are seeing the benefit of the subscription based business. The company gets a constant revenue stream and the customer gets a superior product, something they may not have been able to afford if they’d had to pay for it outright.
Over the past six years at Aria, I’ve seen many companies move to subscription based revenue models and attempt to take care of the billing themselves. I’ve also noticed that they didn’t anticipate the large number of customer interactions unique to the recurring revenue world.
The biggest pitfall I’ve observed in subscription billing is when companies try to bill with an accounting based solution. It’s common to see companies string together a series of one-time accounting transactions that resemble a subscription billing pattern. That’s a huge mistake because billing is not accounting!
Accounting software is archaeological by nature and designed to document a history of transactions over a given time period. But it’s not designed to administer to the most important events in a subscription billing cycle.
For example, let’s say you have a customer referred to you by a commissioned reseller to be billed monthly for a usage based service. In the course of the month, they suffer a service outage and dispute their bill. How would your billing system handle this scenario? Would it be able to offer a service credit, a refund or a dollar amount credit? How would your billing system deal with the reseller’s commissions, and to make it more complicated, what would your system do if the reseller was on a multi-tiered commission level?
An automated subscription billing system can handle the exceptions detailed above because it goes through the reconciliation process before calculating the invoice. A subscription billing service should be built on five pillars: reconciliation, calculation, presentation, collections and remittance. Our system is set up to go through this process automatically every time before an invoice is presented.
An accounting package would have a great deal of difficulty stringing these events together and doing it efficiently every month or every cycle with hundreds or thousands of customers. Consider whether one of your customer service reps would be able to understand this kind of situation in your accounting system, or whether they’d be able to make changes for the customer without risk of significant error. Without an automated billing system that goes through these steps only one thing can happen: your subscription revenue business simply won’t scale.
The second most common mistake I see is companies relying too heavily on their payment methods (American Express, Visa, MasterCard, PayPal, Google Checkout, etc.) and their payment processors (Chase, Authorize.net, CyberSource). By allowing these service providers to take care of the billing, the host company is no longer in control of the relationship with their customer. The payment methods each have their own rules when there are problems such as charge-backs and customer disputes. They will contact the customer directly. Even worse, the payment processors may not be able to handle specific types of business. For example, if the host company offers a usage based service and the customer has a dispute about payment, the payment processor may contact them and try to refund the entire invoice when the customer only expected a partial refund!
When considering going into the recurring revenue business, think of your billing system as the heartbeat of your business. It’s what regulates your business by enforcing logic and maintaining a steady flow of revenue. Think carefully about how you will take care of this all important revenue stream and remember that billing is an art that takes time and dedication to master.