SaaS Pricing Models: How to Transition from Invoicing
Most businesses have experience of the frustration of chasing late and unpaid invoices. Missed payments cost you precious time and resources in chasing up, and the disruption to your cash flow can also affect your business in other ways.
In this guide, we will look at how you can transition from an invoice pricing model to a subscription-based one. You will also find this useful if you already use subscription-based billing and are looking at ways to improve your business and grow.
What are the Benefits of Subscription-Based Billing?
In contrast to invoicing, subscription-based billing will allow you to take recurring payments, automate invoicing, and dramatically reduce the time you need to dedicate to this process.
Some of the other benefits you will enjoy by embracing recurring billing include:
- You are achieving a more predictable and consistent cash flow. You will know how much cash is coming into your business, and when it is coming in. Knowing a regular cash flow figure allows you to use standard financial metrics accurately and plan for business growth, or identify if revenues fall.
- You can bill for access to your product or service upfront.
- You can be flexible with your pricing strategies and use your value metrics to justify price changes.
- You can give your customers the choice of what to pay by introducing price tiers and allow them to change levels as they wish.
- You reduce the risk of delinquent payments.
- You keep existing customers and may reduce your churn rate.
- You can integrate subscription billing software with customer relationship management (CRM) tools and other platforms to bring many of your automated campaigns together.
How to Use Subscription Based Billing Effectively
It’s easy to say that subscription-based billing is a better choice. One look at the benefits of using this method is enough to convince most people and businesses to go down this route.
However, implementing subscription-based billing takes much consideration and skill. You will only enjoy all the benefits if you get it right. Get it wrong, and you could alienate your customers and push them into the embrace of your competitors.
Let’s look at what you can do to ensure your subscription-based billing strategy is a success.
Have a Clear Focus on Your Pricing Strategy
A winning pricing strategy can make your whole business, not just your subscription billing, a success.
If You Offer Different Payment Options, Make the Subscription the Better Deal
If you're planning to transition from being invoice to subscription-based or will still offer one-off invoicing versus a recurring option, you must make the subscription offer a better deal.
The most obvious approach here is to make your subscription price lower, so customers who will buy again save cash by signing up. Don’t instantly think that you will be giving away profit margin, either. If you have issues with overdue payments and must dedicate time to chase these, the improved cash flow from subscription billing will more than make up for this.
Another way to incentivize this is to offer the same price but give added benefits or features to those customers who take a subscription.
If you’re running a SaaS business and looking to make this transition, doing it at the same time as you roll-out new developments is a great idea.
Be Aware of Your Competitors
It's never healthy for businesses to want to 100% ape what their competitors are doing. At the same time, a company with no regard for what their competitors are doing will potentially miss growth opportunities.
Competitive pricing is one of the most used pricing strategies both in SaaS and the broader business world. Read our extensive guide to competitive pricing here.
Continually Optimize and Refresh Your Offer
No matter what stage you're at as a subscription-based business, it's vital that you continually and ruthlessly look to optimize and refresh your offer.
How can you do this?
- Think about the different ways you can attract people to your product. Do you offer a free trial or freemium as a pricing tier?
- Consider how you can incentivize longer-term sign-ups. A commonly seen example is a discount for those who sign up for annual subscriptions.
- Review your pricing tiers and value metrics and consider how these meet the needs of your target customers.
- If you offer "per user" billing, look at how you can provide escalator pricing, so the cost per user reduces as customers add more users.
There are many ways you can optimize your pricing options. Stay on top of this to ensure your customers are always getting a great deal!
Choose an Effective Billing System
If you’re going to be a subscription-based business, you want to maximize the benefits you get from making this step.
Choosing capable subscription management software will take most of the work out of your hands. All you need to do is tell your provider what you want to offer, and they'll do the rest. You can automate 100% of your billing process, so you never need to do anything again, other than tweak and optimize your subscription offers.
Learn more about the benefits and features of choosing Upodi as your subscription management software here.
Optimize Your Payment Collection Methods
The best way to bill subscription customers is to collect payment via direct debit and let them choose the day they want to pay.
Doing this ensures:
- You can measure cash flow more accurately.
- You don’t confuse customers by always billing on the 1st of the month and having to charge pro-rata payments at the start and end of subscriptions.
- You will reduce churn by repeating payment attempts if a payment fails.
- You can automate a dunning process to tell customers to update payment details to keep their subscription and avoid interruptions to service.
Nurture Customer Relationships
The biggest mistake you can make as a subscription-based business is to focus solely on signing up customers, then never interacting with them as long as the recurring payments continue and cash is coming in.
It is critical to your ongoing success that you are always asking your customers what they want to see from your service. This will enable you to be proactive with how you develop your product and deliver what customers want.
How you gather customer feedback is up to you. You can include pop-up customer surveys on your website or within your SaaS platform. You can send regular customer emails asking them for feedback. You don’t need to go into detail with every survey, either. You can simply give a statement to customers and ask them to rate you out of 10.
The trick here is to recognize that your customers' needs will continue to change. What your customers need on day one of a subscription won't be what they need at the end of year five.
Make sure you keep your customers subscribed for at least that long by listening to them!
Using Metrics to Measure and Optimize Your Business
When you're a subscription-based business, you must use a variety of metrics to measure performance. Analyzing particular metrics on an ongoing basis will help you make adjustments to your overall business strategy. In turn, this will ensure you're able to retain customers, acquire new subscribers, and reduce your marketing and sales spend.
Use Upodi’s guides to learn about the different metrics you can use.
Transitioning from Invoicing to Subscription-Based Billing
Transitioning from invoicing to subscription-based billing will not automatically make your business a success.
However, if you see the move to a subscriber model as an opportunity that will require long-term hard work to succeed, you have a fantastic chance to make it a lucrative way to operate your business.