The software as a service (SaaS) industry is booming. The majority of SaaS businesses offer customers the use of software accessed via the internet and paid for by subscription.
This recurring income model is the reason for the success of many SaaS companies. Cash flow is guaranteed and finance teams can predict forward-looking revenue. This enables organisations to forecast more effectively and plan for business growth activities.
There are different SaaS pricing models, including tiered pricing and per user pricing, and there are various options of collecting SaaS payments from customers.
Here, we’ll discuss the pros and cons of each payment method and why it’s a business-critical decision.
The Importance of SaaS Payments
SaaS businesses thrive when their customers sign up for the long-term. To boost profitability, the aim is to increase the lifetime value (LTV) of every customer and decrease the customer churn rate.
Voluntary churn is when a customer cancels their subscription because they are unsatisfied with the service, are moving to a competitor or no longer have need of the software. Approximately 60 to 80 percent of customer churn is voluntary, and many businesses focus the majority of their efforts on retaining customers and keeping this churn rate down.
However, involuntary churn, accounting for the remaining 20 to 40 percent, is just as important to track and manage. It can occur when customers’ subscriptions are unintentionally disrupted and lapse. These customers could be absolutely delighted with their service and huge fans of the business.
So, why would their subscription be interrupted?
It’s predominantly due to issues with their chosen method of payment, for example:
- Out of date billing information, usually an expired credit card
- Lost or stolen credit cards that are cancelled
- Incorrect bank details, for example if a customer switches accounts
- Declined payments due to processing errors or customers not having sufficient funds to cover the transaction
Any of these glitches will disrupt a customer’s service and stall recurring income. It could also lead to the loss of that customer if not handled promptly and efficiently by the customer service team.
A lapsed customer might find it too much hassle to sign up again, realise they don’t want the service anymore, or use the break as an opportunity to reconsider their options and move to a competitor.
For these reasons, actively managing involuntary churn and using payment methods that help to reduce it is a critical business decision.
SaaS Payment Options
There are a few options for collecting SaaS payments on a recurring basis, each with their own advantages and disadvantages.
Invoices are a trusted method of billing for products and services. They detail the work done, or the products or services provided, and the amount due in return. They also state payment terms, internal accounting information such as Purchase Order numbers, and are generally issued after the sale. Invoices can be for one-off jobs or for recurring work.
Historically, invoices were issued on paper and either posted or handed to the buyer after a job had been completed. Now, however, invoices are generally sent via email or generated by software that automates the process.
Invoices can then be paid via bank transfer, by using a credit or debit card over the phone or in person, by cash or cheque.
Issuing invoices to customers is an option for subscription-based businesses, especially if their target audience is still reliant on paper or non-digital accounting procedures.
Pros: Many businesses operate by issuing and receiving invoices. It is popular with companies who have not yet moved all of their accounting systems online, or whose infrastructure supports paper-based audit trails and storage.
Offering the option to be invoiced monthly or annually for a subscription to a SaaS application will appeal to firms that are suspicious of online payments and prefer tangible paper. In addition, some smaller businesses and freelancers might not have business bank accounts, or business credit and debit cards and so rely on the invoicing method as their only way to pay.
Cons: The financial admin of generating, issuing and taking payment of invoices is substantial, especially if every month hundreds of invoices need to be generated for subscriptions.
As the payment of invoices isn’t automated, there is the risk of late or missing payments, incorrect payments or payments not being made at all. Customers then need to be chased for payment, which is time-consuming.
Late or missing payments can negatively impact a business due to erratic cash flow and difficulty forecasting.
One-Off Online Credit Card Payments
With the rise of ecommerce, consumers are very familiar with paying for goods and services online, often with one click. Due to stringent regulations, they trust that online payments are secure and that their personal data will be stored safely or deleted when no longer required.
Online payment forms are quick to complete with relevant personal details and credit or debit card information. Once completed and submitted, the payment is processed instantly.
SaaS companies can opt to take one-off payments for their subscription services, for example by sending customers online payment links each month.
Pros: Most people regularly pay online, trusting in cyber-security measures and in businesses to deliver products or implement services. Payment is instant and people are in full control of what they are spending and when, because nothing is automated.
Customers can change which cards they use each time they pay. They are also more aware of when their card expires. The system won’t allow them to pay with an out-of-date or cancelled card, meaning they must find another payment card immediately to be able to complete the transaction.
Cons: When trying to scale a SaaS organisation, manually sending customers links to online payment forms and checking every single transaction could prove laborious to manage.
There is also the possibility that fully functioning credit and debit cards are declined due to card security levels. Customers who have their cards rejected might become frustrated and give up altogether on the transaction – losing the business a sale and potentially a long-term, valuable client.
Direct Debit is an automated payment method where the business is authorised by the customer to collect money directly from the customer’s bank account. Direct Debit is run in the UK by Bacs and is a highly regulated and closely monitored payment method.
Consumers pay for many ongoing services using Direct Debit, from utilities bills to gym memberships.
Once the initial authorisation is granted from the customer, the business can update amounts or change payment dates provided the customer is given the correct advance notice.
SaaS Direct Debit payments are fast becoming a popular method due to the convenience, flexibility and security they offer to both business and customer.
Pros: Many people never change bank accounts, meaning involuntary churn is reduced as bank information remains the same. Direct Debits can be reattempted automatically if a customer doesn’t have the funds in their account for the first time. The automated process also immediately flags any uncollected Direct Debits.
Due to the flexibility of Direct Debit, customers can quickly upgrade or downgrade their service, or opt to pay quarterly rather than monthly. Direct Debit works well for SaaS pricing models that charge per active user, or by total monthly usage, as each month the fee will vary.
Cons: As SaaS companies offer their services online, they are often international, attracting customers from all over the world.
There are different Direct Debit schemes for different places and not all run in the same manner.
Overseeing various SaaS Direct Debit schemes could be complex to manage for companies with customers located across numerous countries and continents.
Credit Card Processors
Credit card processors offer payment management systems to businesses enabling customers to link their credit cards to their account. The credit cards are then charged on a recurring basis for subscriptions.
Many SaaS companies now use credit card processors to take recurring payments from customers by charging their credit cards rather than bank accounts.
Pros: One of the biggest reasons for involuntary churn is when credit cards expire or are cancelled. Many credit card processors enable customers to add multiple credit cards when subscribing which reduces the potential for failed transactions and so helps to decrease churn rate.
Credit card processors offer integrations with several other applications to automate and simplify business processes. They also white label their forms and payment gateways for brand consistency and to improve user experience.
Cons: For those customers who don’t add multiple credit cards, there is a higher likelihood of involuntary churn as credit cards expire every couple of years and are more likely to be cancelled.
Charging credit cards that have reached their limit also risks failed payments. Some credit cards might have high security measures that cause them to be declined, and others might not be recognised by credit card processors.
Alternative Payment Methods
Many companies offer customers alternative payment methods, for example PayPal Express Checkout or Amazon Payments. These well-known brands offer peace of mind and quick checkout processes for those signed up to use them.
Some businesses and customers are reluctant to share bank account information or bank card details online, and only trust specific providers. SaaS companies whose target audience falls into this category use recognised and trusted alternative payment methods.
Pros: Alternative payments can make international transactions effortless as they are not limited by geography. PayPal has millions of customers worldwide who frequently use their PayPal accounts to pay for goods and services online.
Cons: Transaction costs and fees can be high, so it is best to shop around to understand pricing.
And, although many customers do trust alternative payment providers, many don’t. By only offering a payment option using PayPal, for example, a business is immediately turning away potential customers who don’t have a PayPal account.
Offering More Than One Payment Option
Many businesses now offer a range of payment options to customers, understanding that each has their preferred way to pay. This could be cash, one-tap bank cards, payment using mobile phone apps, as well as the options detailed above, such as Direct Debit and invoices.
Recognising that every customer is different and giving them options makes payment convenient, friction-less and easy. International businesses will benefit from a range of payment channels as they can cater to local preferences and offer wider currency options.
Pros: The objective of businesses is to ensure there are no obstacles in the way of a customer and a sale. If customers can choose their preferred method from a selection, they are more likely to make the purchase, be happy about it and return for more. Offering choice to ensure a painless purchase boosts customer loyalty and increases profits.
Cons: Internally administering many different methods could prove time-consuming and admin heavy. It might also be cost-prohibitive due to the investment in set-up fees and ongoing transaction charges.
SaaS Payments – The Best Option
There are advantages and disadvantages to each payment option, and each needs careful consideration before implementation.
SaaS pricing models are subscription-based, and the most efficient payment methods to automatically collect recurring fees are Direct Debit and credit card processors. Both these options are designed to be secure, flexible and stress-free for both customer and company.
If reducing involuntary churn is a priority, then opt for Direct Debit. Three-quarters of customers have never switched their bank accounts, and more than half have been with their bank for over 10 years
Credit cards, however, expire every couple of years depending on the provider, and are at a higher risk of cancellation due to theft or loss. Savvy consumers shop around for the best credit card deals and switch their cards regularly. This can all contribute to involuntary churn as credit card details linked to accounts quickly become obsolete.
Reap the benefits of a recurring income model and reduce involuntary churn by outsourcing SaaS Direct Debits to a provider such as FastPay.