Billing may not be the sexiest aspect of running a business, but it’s an essential one that can make or break your success. It not only plays a vital role in revenue management, but it can also be a significant factor in both winning new customers and retaining existing ones.
Especially as companies scale, having a flexible billing solution that caters to various pricing models such as usage-based pricing, transactions, subscriptions, coupons, is becoming increasingly important.
Don’t believe us? The numbers speak for themselves. According to Open Views’ most recent usage-based pricing report, compared to the broader SaaS index, companies adopting usage-based pricing outperform their peers by a whopping 31% on revenue growth rates, with NRR being 9% higher than the overall index.
Many of the most successful software companies in the game recognize this and have implemented billing solutions that align with their pricing strategy. Popular examples include SaaS powerhouses like Zoom, which adopted usage-based billing early on to align with their product-led growth strategy, allowing them to immediately capitalize on a 30x demand during the pandemic. Or Snowflake, leading the charge in consumption-based billing for a decade now, and still holds the title for best-in-class net revenue retention at 158%. These companies prove that when it comes to billing solutions, flexibility is key to achieving success.
In this piece, we will go through the development of different billing solutions, from standard subscriptions to the modular solutions of today. We explore the benefits of using an agile billing setup and what we look for when it comes to investing in next-gen billing solutions.
As you might have figured by now, gone are the days when agile billing solutions were simply a “trendy” option for API-first companies. Today, CEOs, development teams, and commercial teams across the software spectrum realize the importance of flexible billing solutions in winning new customers and retaining existing ones. With market conditions tightening budgets for software spend, companies must explore new revenue streams and innovative billing infrastructures.
In short, it’s time to get agile or get left behind.
The advent of SaaS companies and the subscription economy has given rise to a number of legacy players, such as Chargebee, Stripe, and Paddle, that have dominated the billing space to date. While these often offer robust solutions, the underlying billing infrastructure of these players has been built on the premise that software companies bill fixed subscriptions rather than flexible billable metrics, such as API calls or compute resources consumed.
While these generic solutions may work well for less complex businesses, they fall short in covering more complex use cases for modern, growing companies. Hence, as many companies scale, lots discover their current billing system does not match the complexity of their growing organization and the corresponding requirements to the billing infrastructure anymore.
Overview of billing infrastructure
Today, many companies opt for retrofitting their existing systems in-house to incorporate more flexible functionalities, often entering a time-consuming and costly process that can impede progress and more often than not results in custom-made patch solutions that provide short-term pain relief but are not scalable. Scale-ups often employ multiple teams of engineers to not only develop these solutions but also to maintain them — a cost that can easily exceed the MUSD mark on an annual basis.
Besides the financial burden this puts on a business, in the worst case, you end up with inflexible and rigid pricing structures, which can be difficult to modify or adjust in the future. Also, building in-house requires a considerable amount of engineering resources, time, and expertise, which may not be feasible — for smaller companies or startups in particular. So why put yourself through all of that? It’s time to explore more agile billing solutions that can help you grow without the headaches and costs of building in-house.
Over the past two years, a number of companies have entered the market to allow their customers to implement a flexible billing infrastructure from the get-go — or rip and replace their existing solution. These solutions combine the subscription management we know from legacy players with usage-based billing functionalities, including usage metering.
In short, usage-based billing is a pricing model where customers are charged based on their actual usage of a product or service, rather than a fixed fee. This pricing strategy provides customers with more flexibility to adjust their usage as their needs change, while also allowing businesses to generate revenue from variable usage patterns. However, it does not stop there. Enabling their customers to drive revenue through a number of different avenues, agile billing solutions often also cover aspects such as the flexible configuration of price plans, coupons, one-time charges, or invoicing functionalities.
Common modules of flexible billing solutions
Let’s talk about the key benefits of adopting a new, usage-based approach to billing and pricing:
PLG: Usage-based billing and product-led are a match made in heaven. Billing users based on their actual usage rather than demanding a fixed fee lowers the barrier of entry for new users, while translating into immediate value as they scale and expand their usage. This aligns well with the PLG approach, which focuses on providing a seamless and value-driven user experience to drive adoption and growth.
Boosting NDR: Companies that adopt a usage-based pricing model often see significant improvements in net dollar retention (NDR) compared to their peers who only use traditional subscription-based models. It allows companies to identify upsell opportunities as customers increase their usage over time. By tracking customer usage patterns and providing targeted upgrades and pricing options, companies can improve their revenue growth and overall customer value.
Reduced churn: Usage-based billing can also help reduce churn by offering customers a more flexible and tailored billing experience. When customers have the ability to adjust their costs based on their actual usage, they are more likely to stick around and continue using the product or service rather than leave for good to cut costs.
Reduced revenue leakage: Companies can more accurately track and monitor customer usage, which reduces the risk of revenue leakage. By identifying and addressing billing discrepancies early on, companies can ensure that they are billing customers accurately and avoiding any potential revenue loss.
When it comes to flexible billing solutions, there are a variety of approaches — but they all differ in how they touch the underlying billing logic and the users they’re designed for. Which one is right for your business all depends on whether you’re looking to revolutionize your billing process from the ground up or just looking to add a few tweaks.
Challengers and legacy players in the billing space by ideal customer size
Pricing and packaging are key billing concepts that refer to the cost of a product or service and how they are bundled. For instance, a software company may offer various tiers of pricing and packaging, with basic features costing less than advanced ones. They may also provide discounts for annual subscriptions or multiple user accounts.
Companies like Kana, Stigg, or Stage make adjusting these different parameters really easy and typically integrate with established billing solutions like Stripe or Chargebee via API, allowing for features like creating pricing plans, access controls, and paywalls with no coding required. These solutions mainly cater to product and commercial teams seeking to adjust pricing strategies without affecting the underlying billing infrastructure.
Billing and metering solutions can be divided into two groups: those that focus on usage-based billing specifically by providing a metering module to add to an existing billing infrastructure, such as m3ter; and those that offer an end-to-end hybrid billing solution with a proprietary billing engine and a range of billing modules, including usage-based components. Popular examples include the open-source solution Lago as well as proprietary billing infrastructure solutions like Metronome.
These solutions are typically built around an event-based architecture and prioritize usage-based billing from the start, addressing the core limitations of traditional billing solutions like Stripe or Chargebee. However, migrating to one of these solutions incurs higher switching costs compared to simply adjusting pricing and packaging, as it involves transitioning from the current billing system, which presents its own challenges.
We at Creandum believe that agile billing solutions have the potential to be a game-changer for businesses of all sizes. We have seen a big gap in the market when it comes to reducing time to production and ongoing maintenance costs for larger customers, that today spend in the range of 6 to 7 figures for building things in-house on top of legacy solutions or on top of their payment gateway.
Long-term, there are problems that are less unique for each large business and the build-it-yourself approach shouldn’t prevail as companies are more mindful of their spending yet want to leverage the additional revenue streams that flexible billing will give you.
At the same time, pricing and packaging solutions will remain highly relevant for increasing accessibility to pricing modifications for non-technical users. There is then the need for less flexibility in the requirements of the billing options to make sure that sticking it together with your current provider doesn’t turn into 4D chess.
If you are a company building in this space and want to chat or you want to be added to the overview let us know.
Co-authored by Beata Klein and Richard Keuntje.