In an ever-changing business landscape, a new entrant is making waves: the Software-as-a-Service (SaaS) business model, which is expected to reach nearly 370 billion dollars in 2024.
One of the drivers of this revenue explosion is recurring billing, which gives SaaS companies a predictable revenue stream they can rely on when done correctly.
Therein lies the crux of this article. We’ll explore the ins and outs of recurring billing as a SaaS business model, share some best practices, and look at the challenges that arise when implementing this system and the strategies you can use to overcome them.
What is recurring billing?
As the name suggests, “recurring” billing is the process of setting up a transaction that occurs automatically over a set time interval, usually 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 for access to unlimited ad-free music.
This means that customers can continue their service and you can receive payment without having to manually send an invoice for the set period.
It gives your business a structured way to systematically receive a consistent income stream and improve cash flow management. Additionally, it helps you retain your customers since they do not need to renew manually and regularly.
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. This adds more friction to the process and, naturally, customers will fall away.
Recurring billing is a win-win situation for both the customer and the business.
Benefits of Recurring Billing for SaaS Businesses
While we touched on a few benefits in the section above, let’s take a look at some of the areas where recurring billing really shines for SaaS businesses.
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A stable and consistent income stream
The biggest advantage is the stable income the business can count on. This means the company can accurately forecast its potential revenue and profits, which is a huge advantage in attracting investors and boosting corporate fundraising. It also helps establish and understand budgets, develop plans for future growth, and make the business more resilient during difficult economic times. This gives your business peace of mind knowing what to expect financially for the months and years to come.
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Better customer loyalty
Recurring billing also helps SaaS companies 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 about providing the customer with a seamless and effortless billing experience so you continue to get paid and they keep what they paid for in all its glory.
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It’s flexible and adaptable
One of the benefits of recurring billing is that you can set up plans that are flexible and adaptable to the client’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 than they have in a traditional setup: they can cancel, upgrade, or pause their billing whenever it’s convenient for them.
Recurring Billing Best Practices
When you’re ready to implement recurring billing, here are some best practices to follow:
1. Be transparent with pricing
Nobody likes hidden fees or surprises when the bill arrives. Keep your pricing structure clear and easy to understand. If you try to introduce additional fees or something similar, you will quickly turn away customers. Also be honest with the terms and conditions so that 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. Identify the features each customer segment expects from your service and create tailored plans to meet them. You can also give customers the option to fully customize their plans to meet their needs.
3. Offer free or discounted trials
If you know your service is great, attract new customers with a free or discounted trial. It’s a tactic that has seen great success (think Netflix), so there’s no need to reinvent cheese and bread.
4. Simplify the process with automation
Remember, the main advantage of recurring billing is that everything happens automatically. You can use external services, like 2Checkout monetization platformto set up recurring billing and the entire process from invoicing to receiving payments happens with minimal input from your business or the customer.
Challenges of Implementing Subscription Billing
Of course, there are some challenges to using recurring billing methods, including:
Payment failures
Sometimes a customer may get a new debit/credit card or simply not have the funds needed when the bill is due. In this case, you can set the billing to take place at a later date and also send a reminder to the customer that their payment failed so they can resolve the issue. Also keep in mind that automatic payments can lead to bigger disputes because sometimes the customer forgets about their registration. So, make the process as smooth as possible and improve the chances of their return.
Customer churn
While it’s easy for customers to sign up for your service and opt for recurring billing, the opposite is true. They can also decide to cancel at any time, or just try it during the trial period. The best way to do this is to provide payment reminders and automatic updates so that the the experience is more positive for everyone involved.
Payment security
Another big challenge of subscription billing is ensuring strong payment security. Since recurring billing involves managing sensitive customer data, it is essential to maintain high security standards to prevent data breaches and fraud. Stay compliant with regulations like PCI DSS, while protecting against evolving cyber threats, is crucial. This not only protects sensitive information, but also builds customer trust in your service, an essential asset in the digital age.
Final Thoughts
With the introduction of AI and other technological advancements, the field of recurring billing will also evolve to keep up with the times. From improved 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 path for SaaS companies to create a stable financial environment that not only keeps money flowing, but fosters a deeper customer-business relationship. So, take full advantage of everything recurring billing has to offer to make your business thrive!
About the Author
Matthew McCaffer is a distinguished sales executive at SaaS Academy, recognized for its strategic leadership in sales transformation and exceptional revenue generation within the SaaS industry. He began his career at Vector Marketing, quickly progressing into sales and management roles. Academically, he holds a bachelor’s degree in chemistry from Lycoming College, where he also pursued varied activities, reflecting a wide range of interests and abilities.