“The SaaS billing problem has been around for as long as there have been SaaS companies,” said Bogomil Balkansky, partner at Sequoia Capital. “It’s interesting that the problem is 20 years old but still represents an operational challenge for SaaS companies.”
The root of the problem is that most of today’s billing systems were designed for the time before SaaS companies introduced subscription-based pricing into the mainstream. Traditional billing systems were designed for one-time product-based transactions, not ongoing subscriptions.
While there are some products on the market like Zuora, Chargebee, Chargify, and Stripe, they are either not good at handling new pricing structures like consumption-based pricing, are tedious to integrate, or are not accessible to businesses by protocol, according to industry sources.
But the emergence of the accounting software market is actually a good thing for early-stage investors. In recent months, Metronome raised $30 million in a round led by a16z, Chargebee’s subscription management software was valued at $3.5 billion, and SaaSOptics and Chargify combined raised $150 million from Battery Ventures.
“There’s a huge opportunity here in the market: when you see a lot of in-house solutions and no clear vendor of choice, which we haven’t seen before, that sparks something that gets our interest at Sequoia,” said partner Lauren Reeder.
“A Little Like an Octopus”
Billing is important not only because it is directly linked to sales, but because it influences everything from product design to customer retention.
“An accounting system is a bit like an octopus,” Balkansky said. “It has its tentacles in so many different places, from the product itself to pretty much every major system that the company has: the CRM system, the ERP system, any kind of customer-facing communication system.”
However, the roots of modern billing challenges lie in the shift to new pricing models in software companies, triggering a variety of downstream impacts. Pricing decisions for software services are complicated because they must balance delivering value to customers with driving revenue while bypassing the technical limitations of the underlying billing system.
That’s one reason why enterprise tech companies use wildly different pricing structures, such as: B. Slack’s feature-based pricing, monthly or yearly subscription pricing from companies like Salesforce, or the consumption-based pricing that AWS pioneered in infrastructure technology. And each of these pricing structures has different implications for customer growth and revenue. When a pricing model includes a free or low-cost option, it can speed customer acquisition, but it can leave revenue on the table if the majority of customers aren’t paying.
The technical challenges also vary depending on the pricing structure. While consumption-based pricing can add value to customers by only paying for what they use, it requires a billing engine powerful enough to accurately track usage data at an hourly and sometimes even a minute-by-minute level.
But the complications of a billing system don’t begin and end with pricing. The interconnected nature of the billing system means that billing can go from an accounting problem to a payment problem—and then a product problem—in a staggeringly short amount of time.
Changing pricing tiers, for example, isn’t just a billing issue. “There’s an inherent complexity in terms of implementing gates in the product itself to be able to lock and unlock specific features,” depending on what features a customer has purchased, Balkansky said. For example, if a customer bought the free tier of a product, they shouldn’t have access to the premium features. “And so it becomes more of a product issue than just a billing issue.”
These changes also have an impact on accounting.
“Each and every one of these events — pausing, suspending and resuming, changing prices — all of these have a downstream impact on revenue recognition,” said Amy Konary, vice president of subscription management company Zuora. Because of this, some Zuora customers who wish to offer new or different pricing models are unable to do so; Your accounting departments are not equipped for this change.
“They’re being constrained a bit, not so much by their system capability on the billing side, but maybe by their financial processes, which need to catch up to where they’re trying to be from a business model perspective,” Konary said.
A company’s data infrastructure can also be a bottleneck, especially when it comes to usage-based billing. “The problem of consumption billing is primarily a data scramble or data processing problem because you have to collect very large amounts of data about what the customer is actually using,” said Balkansky. “Which basically means you need to build a fairly robust data pipeline that can collect all of its data and send it to a data store fairly frequently.”
And that work doesn’t end once the invoice has been calculated and delivered, as a range of new complications arise from processing customer payments and handling everything from refunds, credits and chargebacks to expired payment methods. To mitigate the cost of payment errors, a billing system needs mechanisms to try a failed payment method more than once or to remind customers to update their credit card information.
Build or buy
There simply aren’t many solutions on the market that can address all of these challenges, which is why many companies choose to work in-house.
Both Balkansky and Reeder agree that while there are some billing products for large companies with subscription-based pricing, this cannot apply to consumption-based billing or those for early-stage companies.
When it comes to consumption-based billing providers, Balkansky has only seen early companies emerge in the last year or so. “Therefore, realistically, for utility billing companies, there was no choice but to build and maintain it themselves,” Balkansky said.
The result is that many founders build their own low-touch billing systems with limited functionality. However, this approach is not sustainable as companies scale, as most startups cannot anticipate the complexities that come with growth.
“Typically, they don’t design the accounting system with all these thoughts in mind, and eventually they get stuck,” which usually results in a startup rebuilding the entire accounting system, Balkansky said.
Increasing competition and industry consolidation are telltale signs that the market may be ready to take off. At Stripe, Revenue Product Leader Vladi Shunturov is optimistic about the market opportunity. And he’s putting his money into action: In recent months, Stripe bought revenue reconciliation company Recko and Billflow, which specializes in the customer-facing aspects of billing.
“If you look at enterprise software, Zuora and Stripe are the two biggest players in this space, and we compete for deals very often,” Shunturov said. But “because Stripe is investing very aggressively in this space, we have an opportunity to outperform other billing platforms and deliver this unified stack faster,” he said.
The few other providers out there, like Zuora, which counts Zoom, Zendesk, and Microsoft as customers, have limitations. “At the larger end of the market, people tend to go for something like a Zuora, which requires you to have an Accenture contract to help you implement and connect to all of your systems,” Sequoia’s Reeder said. But this extensive implementation process is more than many startups can stomach. “I think the investment to add one of the tools like Zuora is usually a six to nine month process, and for an early stage startup that’s not really an option.”
But building an internal billing system isn’t necessarily easier. Reeder, who worked at both Segment and Twilio, said both companies have built their own billing engines but also have sizable engineering teams to maintain them. Of course, not every company has these resources.
“And it’s not something you can go wrong, either. Invoices are very personal, they are your direct income. So it’s a high-stakes project — you can’t just have a junior engineer try to build this yourself,” she said.
In the future, the combination of data analytics, artificial intelligence, and automation can solve many of the challenges facing modern billing systems, including helping businesses more accurately predict their consumption and how changing pricing models will affect customers and providers. If billing software companies can figure all of this out, the complicated world of enterprise billing could become the next big SaaS market.
“I think this is bigger than the accounting room. I think that’s bigger than the ERP space in the long run,” Shunturov said.