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Software as a Service or SaaS billing, also called also called on-demand, hosted or subscription billing, is changing the way businesses and customers buy and use software and other application programs.
Up until recently, businesses and consumers purchased software or other computer applications on a one-time basis and loaded the application on a local computer or server. With SaaS billing, a business or consumer signs up to use the software or computer application online rather than installing it on a computer.
There are several ways SaaS companies can structure subscription billing models. Today, most companies use recurring billing whereby the consumer agrees to have payments debited from a credit or debit card or bank account for a specific period of time.
The recurring payments are made whether or not the customer uses the service. This locks in recurring payments for the vendor. But, it is less advantageous to the consumer if the service is not used. Recurring payments are a strong revenue model, if managed correctly. If recurring billing is not managed properly, revenue leakage will erode profit margins.
Recurring billing can be combined with volume pricing. The higher the number of users or the more service is consumed, the lower the price. Another option is to provide multiple choice of recurring billing packages whereby services can be “upgraded” depending upon set criteria.
Usage / transaction based subscription billing is another payment option. In this model, the customer is charged based on the number of times the service is used or the duration for which the service is accessed. This billing type is more popular for online entertainment than for SaaS that are used regularly in business. But, ultimately, SaaS vendors will need to meet consumer demand as entertainment subscription billing models move into the business world.
Usage based subscription billing is good for customers because there is very little commitment to the vendor. But, it is far less attractive for vendors. For example, SaaS billing based on usage will have peak and off-peak hours. The vendor will need to figure out a way to encourage usage during off-peak hours to help pay for the increased bandwidth required to run the service during prime time.
SaaS providers may also offer recurring billing models where services are bundled together. That is, subscription billing to a group of services costs less than paying for the services individually. This allows the vendor creative ways to up-sell / cross-sell products, target specific markets, and capture more business from each customer.
Some SaaS vendors may still be able to get away with charging a one-time set up fee for services. However, this depends on the uniqueness of product offering and market competition. As SaaS and cloud billing become the norm, upfront fees will be harder to justify to customers who will have a wide choice of vendors who charge nothing upfront.
With SaaS billing, the application is owned by the vendor, not the end-user. In many ways, this creates a better customer experience than outright purchase. The SaaS vendor can standardize on a single platform which makes upgrades and patches easier and decreases time-to-market for new features. The end-user knows that the vendor must maintain consumer satisfaction or risk losing customers’ recurring payments or usage-based subscription billing revenues.
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