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What is SaaS Subscription Management?
SaaS subscription management refers to the tools and processes software companies use to bill and manage relationships with customers throughout the customer lifecycle. Unlike simple recurring billing, which focuses on automating regular payments, SaaS subscription management offers a nuanced approach that supports complex pricing models.
Standard functions of SaaS subscription management tools include:
- Offering trial periods
- Varying subscription levels
- Allowing customers to modify their subscriptions
- Automating monthly and annual billing processes
- Adapting to usage-based and consumption-based pricing
- Integrating with other systems like CRM, CPQ, ERP, and payment gateways
SaaS subscription management systems are designed to be automated, yet adaptable. They allow companies to send out invoices at the start of each billing cycle, set up bill runs, and process recurring customer payments without human intervention. They also track customer usage and billing history, provide customer self-service portals, and auto-generate invoices and payment reminders.
The SaaS Subscription Revenue Model Explained
The SaaS revenue model is a lot more complex than your standard subscription business model. It’s similar in the sense that customers pay a recurring fee to access subscription products. But comparable services like Netflix or Spotify typically charge a fixed monthly price, while SaaS companies use a whole host of pricing strategies.
Since software companies sell to other businesses, SaaS pricing needs to accommodate a different number of users and different requirements for every single subscription plan.
- Tiered pricing structure — At the heart of every SaaS pricing model is 2-4 flat-rate product tiers. Each tier includes different features, usage limits, and support options to support larger companies’ greater needs.
- Free trial or freemium — Most software vendors offer free trials, allowing potential customers to try the software before committing to a subscription. Some also provide a bare-bones version of the software for free to attract a wider user base and encourage upgrades.
- Usage-based pricing — The total cost of software subscriptions is determined by the usage level or the number of users. This can be particularly appealing for businesses with fluctuating needs (or those that need to add users).
- Enterprise pricing — For your largest customers, you’ll likely need a custom pricing plan that meets their specific set of needs. This could include adding features, building integrations with other systems or solutions, and providing implementation and support services.
- Microservices — Companies that offer customization or modularized software charge separately for certain product functions and add-ons. For example, DealHub offers CPQ, DealRoom, and Billing as standalone subscription products.
Automatic Renewals and Billing
Subscriptions auto-renew, providing convenience for the user and reducing churn for the provider. The automatic billing process is streamlined and often integrated with various payment gateways for ease of transaction. Automating these processes is a key feature of SaaS subscription management tools because it enables smooth and efficient operations.
Focus on Customer Retention
Since revenue from subscription pricing models depends on ongoing subscriptions, SaaS companies invest heavily in customer retention.
- Identifying at-risk customers and proactively addressing their needs
- Providing ongoing support for customer success and satisfaction
- Offering additional services, such as training or consulting
- Reaching out to customers with renewals coming up to encourage retention
- Creating a positive customer experience to increase satisfaction and loyalty
Since retention is so critical to long-term success as a SaaS vendor, expansion revenue is the most valuable type of revenue. Upsells, cross-sells, and upgrades enable SaaS businesses to achieve a net negative churn rate.
SaaS Revenue Drivers
Software companies get the lion’s share of their revenue from their subscription product. Still, other revenue-generating activities can bring in additional income and enhance the customer experience.
- Upselling and cross-selling — Offering add-ons or upgraded services to existing customers to increase their lifetime value and helps keep revenue retention above 100% (an indicator of a healthy SaaS company investors look for).
- Affiliate programs — Most SaaS companies have an affiliate program, where existing customers can earn credits or cash for referring new customers.
- Channel sales — SaaS vendors sometimes partner with resellers, white-label partners, agencies, system integrators, and marketplaces like AppExchange to expand their reach and tap into new markets.
- Professional services — Offering training, implementation, and consulting services is a residual source of one-off income for SaaS businesses.
- Software licenses — Some vendors license their software to other SaaS companies to build their products off of. This might include APIs, SDKs, code libraries, and/or UI elements.
- In-app purchases — Some SaaS products offer additional features or usage limits users can purchase within the platform. Some SaaS platforms also have their own marketplaces (e.g., Salesforce AppExchange), where they take a profit of each sale.
- API fees — You charge someone a fee whenever they want to access certain elements or data from your software.
How SaaS Subscription Models Are Managed
SaaS subscription models can be managed through various pricing strategies, each with its own benefits and considerations.
Setting SaaS prices is a lot more complex than it looks on the surface, but here are the steps that go into determining them:
- Flat-rate tiers. Flat-rate pricing is the basis of every subscription service. Subscribers pay a baseline price to access the software and its features, regardless of usage or the number of users in their organization. The same model applies for microservices.
- Per-user pricing. After a certain number of users, the customer will pay an additional monthly fee for each user. For example, “$50/month up to 5 users, plus $5/month per additional seat.”
- Full usage-based pricing. Data storage, API calls, CRM/marketing automation contacts are a few examples of usage-based metrics that can affect pricing tiers. For example, “up to 50 GB of data storage included, with additional storage calculated at $0.10/GB per month” in a pay-as-you-go model.
The third step is the most complex because it deals with variable rates instead of flat fees. That’s where SaaS subscription management tools differentiate from basic billing platforms: they track each subscriber’s usage and automatically adjust the total bill.
Software companies can either bill monthly or annually.
- Monthly billing is what most customers choose because it doesn’t require as large an upfront investment. The billing cycle starts on whichever day the customer signs up for the service.
- Annual billing is preferable for the company because it guarantees a year’s worth of money (and customer retention) upfront. To encourage it, they’ll usually knock off a month or two of the overall bill.
Beyond this, it supports usage-based and metered billing, proration (for new subscribers or upgrades/downgrades), and pricing flexibility (for different subscriber types). SaaS billing models can also offer:
- Trial periods to encourage new sign-ups without immediately committing to a fee.
- Free plans with limited features for users who don’t need the full product.
- Coupons and promo codes to help acquire new customers or reward existing ones.
- Discounts for long-term commitments.
- Payment plans and invoicing options, if the customer needs to pay through their preferred method (e.g., check, wire transfer).
SaaS subscription management software admins can configure all this by setting rules for specific subscriber groups, products, or payment methods. After that, the billing system automates the rest of the process.
Challenges SaaS Companies Face in Managing Subscription Sales and Billing
While SaaS subscription management tools can automate many aspects of the sales and billing process, companies still face glaring issues in their overall subscription management processes.
- Subscription fatigue. The average company uses 130 different apps. With so many SaaS products available, customers may feel overwhelmed by the number of subscriptions they have to manage.
- Renewal management. Keeping track of when customers’ subscriptions are up for renewal is a hassle, especially if they have multiple product subscriptions.
- Involuntary churn. In SaaS, this accounts for 20% to 40% of all customer churn. Some common causes of involuntary churn include expired credit cards, failed payment attempts, and card declines.
- Global scale. SaaS companies often have subscribers all around the world, adding complexity to tax regulations, currency conversions, and data privacy compliance. This can be especially challenging for smaller businesses without a dedicated team or software to handle these tasks.
- Integration issues. Your CRM, sales automation tools, billing software, and subscription management tools need to continuously share the same information. Otherwise, you risk data discrepancies and incorrect billing.
It’s also worth mentioning scaling your SaaS company requires you to accept dozens of different forms of payment. In the US, most SaaS buyers prefer to pay with credit cards and digital wallets. In Germany, for example, online payments like PayPal and Amazon Pay are the preferred payment method.
Best Practices for Efficient SaaS Subscription Management
The SaaS model is among the world’s most scalable business models. But one of the most common challenges in managing subscription sales and billing is maintaining a healthy customer base.
You need subscribers who are…
- always paying you on time
- happy with your product
…all the time. Otherwise, you can’t run a profitable business. Unless you follow a few simple best practices, you risk huge losses every year.
1. Implement a scalable process for subscription billing.
Failed payments are a lot harder to catch in subscription-based software companies. The complexity and sheer number of payments make it borderline impossible for a human to do it.
Subscription management software automates the whole process. So when customers pay by credit card, it normally goes through the payment gateway without a hitch.
When it doesn’t go through, though, that’s what leads to involuntary churn in the short term and lower customer lifetime value in the long run. You need subscription management and dunning processes that take care of this.
SaaS subscription management software saves time and resources by:
- Automatically retrying failed payments
- Sending out automated emails to customers if there’s a problem with their payment
- Allowing customers to update their payment info via self-service
That way, it can handle all your recurring revenue streams for you (and notify you when payments keep failing).
2. Find a balance between complexity and flexibility.
SaaS companies face complex challenges in getting the right balance between subscription plans and billing options that work for them and their customers. It’s a delicate balance between “too much” and “not enough” flexibility.
SaaS subscription management software can help you find the middle ground, giving you the ability to offer various subscription plans while also automating complex pricing calculations behind the scenes.
Still, keep the following in mind:
- You don’t have to offer everything to everyone
- Your pricing needs to be predictable and easy to understand
- Customers should be able to upgrade or downgrade their subscription packages without talking to your team
Ultimately, you need to present your offer in a way that makes sense profitability- and customer-service-wise. But it needs to make sense to your customers from a value perspective, too.
3. Pick software that seamlessly integrates with the rest of your tools.
If your subscription management software can’t integrate with the rest of your RevOps tech stack — finance, sales, marketing, and customer success tools — you face:
- Data discrepancies (e.g., a customer cancels but still receives an invoice for next month)
- Payment processing issues like chargeback fees and higher churn.
- Manual work and data entry, which leaves more room for errors
- Less control over how your subscription management system communicates with the rest of your tools
In short, picking the right software can make or break your business processes.
4. Focus on internal communication first.
If you lean too heavily on software, you’ll miss the most important element of SaaS subscription management: communication.
Internally, your teams need to be aligned. And you need a structured process for customer lifecycle management.
Externally, you need to make sure your customers know what’s happening with their subscriptions at all times. It’s a good idea to send automated emails when there’s a problem with their payment or subscription renewal date approaching.
You should also use data and analytics to look for patterns in customer behavior that could impact your revenue — at-risk customers, for example.
Benefits of SaaS Subscription Management Software
Technically, the SaaS model wouldn’t even be possible without subscription management software. You could charge customers once with a regular billing platform. But tracking all the usage and transactions over time to bill them accurately would be physically impossible, even for an entire receivables team.
Well-built SaaS subscription management software allows your business to:
- Streamline operations. Subscription software automates manual processes, saving time and resources.
- Increase revenue. By reducing involuntary churn and giving you the flexibility to offer different pricing models, it helps optimize your revenue streams.
- Improve customer satisfaction. The easier it is for customers to manage their subscriptions, the better the relationship they’ll have with your company.
- Gain valuable insights. Subscription management software provides analytics and data that can be used to improve your business strategies.
Simply put, selling a cloud-based software requires you to use tools that integrate into its infrastructure.
Essential Features of SaaS Subscription Management Platforms
Not all subscription management software is created equal. Features and capabilities can vary greatly from one platform to another.
However, there are some essential features that every SaaS subscription management platform should have:
- Automated billing
- Flexible billing and invoicing
- Dunning and retry logic
- CPQ, CRM, ERP, and finance tool integrations
- Subscription analytics and reporting
- Self-service portal for customers to manage their subscriptions and billing information
- Multi-currency and multi-language support
- Support for multiple payment methods
- Revenue recognition automation
- Regulatory compliance
By carefully considering these features and finding the right balance between complexity and flexibility, you can ensure that your SaaS subscription management software is efficient, effective, and aligned with your business goals.
People Also Ask
What is the difference between SaaS and subscription revenue?
Although SaaS businesses primarily generate revenue from their subscriptions, their revenue model is a lot more complex than the standard subscription business. In addition to their core services, they also generate revenue from add-on services, usage-based charges, affiliates, channel partners, and several other sources.
Does SaaS have to be subscription-based?
By definition, SaaS stands for Software-as-a-Service, which implies a subscription-based model. However, some SaaS companies also offer one-time payment options for their services. Ultimately, the choice of pricing model depends on the goals and needs of each individual business.
How do you generate revenue with SaaS?
SaaS businesses generate revenue primarily through subscription fees. They also generate revenue from add-on services, usage-based charges, and other revenue streams to increase their overall revenue. SaaS companies also use upselling and cross-selling techniques to drive more sales from existing customers.