Recurring Payments Through Subscription Billing Models
Software as a Service or SaaS billing, also called on-demand, hosted or subscription billing, is transforming the way businesses and customers buy and use software and a wide range of application programs.
Up until recently, businesses and consumers purchased software or other computer applications with a one time payment 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 as compared to installing it on a computer.
There are multiple ways in which SaaS companies can construct their subscription billing models. Today, there are many companies that use recurring billing where 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 collected whether or not the customer uses the service. This ensures the recurring payments for the vendor. But, there is no advantage to the consumer if the service is not used. Recurring payments are a strong and proven revenue model, but only if it is managed by professionals. If recurring billing is not managed properly, revenue leakage will erode profit margins.
Recurring billing can also be combined with volume pricing. The higher the number of users or the more a service is used, the lower the price. There is another option that allows provision of multiple choice of recurring billing packages whereby services can be “upgraded” depending upon previously set criteria.
Usage / transaction based subscription billing is another payment option. In this model, the customer is charged based on how many number of times the service is used or the duration for which the service is accessed. This type of billing is popular for vendors of online entertainment as compared to SaaS recurring payments 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 beneficial for customers as there is very little commitment to the vendor. But, it is far less attractive for vendors. For example, in SaaS based billing 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 a service during prime time.
SaaS providers may also offer recurring billing models where several services are bundled together for the benefit of customers. That is, subscription billing to a group of services costs less overall as compared to paying for the services individually. This gives the vendor creative ways to up-sell / cross-sell products, target specific markets, and capture more business from each customer.
Some SaaS vendors still get away with charging a one-time set up fee for services. However, this depends on the qualities of product or the service offered 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 help in standardization on a single platform which makes upgrades and patches easier and decreases makes it easy to introduce 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.
Read my latest articles on Billing Models for Recurring Payments and do check out my website for my other financial advice .
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