SaaS billing best practices for 2022

SaaS billing best practices for 2022

You’ve come up with a solid SaaS business idea?

Nice.

Talked to a few potential customers and vetted the idea?

Great.

Built an MVP that solves a big pain point?

Cool.

  • But how do SaaS companies bill effectively?
  • Have you decided on your pricing model?
  • Are you implementing SaaS billing best practices dependent on your pricing and activation models?

  • If you don’t have the right pricing model, you won’t incentivize potential customers to get started.
  • If you don’t price your product right, potential customers will find excuses not to pay for your product.
  • If you don’t bill your customers correctly, you’ll leak revenue that should be in your bank account.

Let’s go through SaaS pricing and billing step-by-step to make sure you’re set up to build a profitable business.

How do SaaS companies bill?
@matthewpskelton

Observation: the quality of the billing experience for a SaaS product is a good predictor of the quality of the entire product.

See the tweet

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What is SaaS billing?

SaaS billing pretty much describes how software companies accept your money in exchange to access to their product.

Think about all the ways you pay for things online.

  • Often you’ll use a credit or debit card.
  • Sometimes you’ll use PayPal, Venmo or CashApp.
  • Maybe occasionally you’ll wire money or send an ACH payment.

In simple terms, these are all ways SaaS companies can bill you for their services based on how their billing and payment processor is set up.

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How is SaaS software priced?

Before we dive into SaaS billing, we need to fully discuss SaaS pricing.

Why?

Well before you can accept credit card information for new customers, you’ll need to decide the pricing strategy for your SaaS product.

The pricing model will dictate how you’ll bill your customers.

And how you’ll bill customers dictates what billing and payment infrastructure you should choose.

So…let’s talk about pricing!

Monthly vs annual subscription pricing

The first thing to know about SaaS pricing is that most SaaS founders sell subscription products.

That means instead of customers making a bigger one-time payment, they’ll pay a smaller recurring fee to continual access to the software.

This leads to SaaS companies growing not just their revenue, but their monthly recurring revenue (MRR). Simply put, this is the amount of money that SaaS company can expect to make every single month based on active customers, new customers, retained customers and churn customers.

Often SaaS businesses want to offer a monthly and annual recurring payment option.

The annual price is usually ~10x the monthly cost to use the product.

  • Monthly pricing is good for customers because it allows them to try out your product without much financial risk. It’s good for the business because it allows you to grow MRR.
  • But annual pricing also has its benefits. It’s good for customers because they can get a discounted price over the year (they’ll get 12 months of service but only pay for 10). It’s good for the business because customers pay for annual plans up-front, which means the business gets that influx of cash immediately.

The best practice here is to offer both and let customers decide which option is best for them at this time. You’ll find examples of SaaS companies that only offer monthly or annual pricing for a variety or reasons, but most start offering both options and make changes once you have enough customer data to do so.

@hey_theoo

According to Profitwell, only 1 in 5 SaaS of the companies they studied offer annual pricing. That’s a big missed opportunity. Annual pricing helps SaaS companies in a number of ways: increase cashflow, reduce churn, predictable billing, increased LTV.

See the tweet

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What pricing model should I use?

Now that you know about the basics of offering a monthly and annual subscription.

Now it’s time to talk about all the best pricing models.

  • Remember: your market dictates your model. You don’t! Choosing a pricing model because you like it or your competitor is wrong. The model you choose always needs to match what the market (your potential customers) are willing to pay for.
  • The majority of customers want to feel like they’re getting a great deal. The best way to put a number on this idea is to compare the value a customer receives to the price they pay (value/price ratio). Keep this in mind as you choose a pricing model and price point!

Flat-rate pricing

Flat-rate pricing means charging one fixed rate for a specific product or service. The subscription fee does not change based on factors like time or effort.

$100/mo for full access.

This is the simplest way to implement subscription payments.

Example: The Washington Post (get full digital access for one subscription)

Usage-based pricing

Usage-based pricing means the price is based on consumption. You’ll charge customers on a “per-use” basis.

$100 per task completed.

Example: Twilio (pay-as-you-go SMS sending based on volume)

Tier-based pricing

Tiered pricing means offering products or services at a discount based on volume purchased. The higher tier you buy at, the most the total cost but the less the cost/unit is.

  • $100 for 1 unit
  • $190 for 2 units
  • $280 for 3 units
  • etc

Example: Driftly (pay monthly subscription based on impression, price/impression becomes less expensive the higher your tier)

User-based pricing

Per-user pricing means pricing a product based on the number of users (or seats) they want with their subscription.

$400/mo ($100/mo for the founder + $100/mo for each of 3 additional team members).

Example: Slack (per person, per month pricing)

Earnings-based pricing

Earnings-based pricing means taking a percentage of your earnings through their software. This is perhaps a subset of usage-based pricing, but I think it deserves it’s own category.

$3 for every $100 you make through the platform.

Example: Stripe (2.9% + 30¢ per successful card charge)

Feature-based pricing

Feature-based pricing means offering multiple tiers, each one getting progressively more expensive as customers unlock more features.

  • $100/mo for product X
  • $200/mo for product X with feature Y
  • $300/mo for product X with features Y and Z
  • etc

Sometimes feature-based pricing means a simple add-on for specific features. They’re almost completely separate add-on products that compliment the original product.

Example: WP Buffs (different tiers include different website management features like performance optimization)

Credit-based pricing

Credit-based pricing means selling “credits” to users that they can in turn use for your product. Think buying tokens at an arcade to use on any game you want.

$100 for 1,000 credits that you can use on features X, Y or Z.

Example: Low Fruits (purchase credits to use for SEO keyword analysis)

Hybrid pricing

Hybrid pricing means taking aspects of 2+ of the pricing models above and integrating them into your pricing structure.

The majority of pricing models you see out there will likely be 2 or more of the structures you’ve read above being used together.

Example: Intercom (seats-based AND usage-based AND feature based)

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What activation model should I use?

We’ve gone through a few options when it comes to how you’ll structure your SaaS product offerings.

Now let’s talk about how to actually turn people looking at your pricing page into new users.

Freemium

Freemium means offering the basic features of your product or service for “free” and allowing users to upgrade to a “premium” version of your product to access advanced features.

  • $0 forever for the basic version
  • $100/mo for the premium version with features X, Y and Z.

Example: Zapier (free to use, upgrade to paid account for premium zaps, team accounts, etc)

@hnshah

Freemium SaaS startup roadmap:

1. Very generous free plan helps the company reach a ton of users
2. Paid Team plan to monetize
3. Free plan becomes less generous
4. Conversion to paid goes up

Result: Many competitors pop up with very generous free plan. Rinse and repeat.

See the tweet

Free trials

Free trials means allowing users to start using a premium product or service but try it free of charge for a certain time period.

$100/mo with a 14-day free trial.

Example: Driftly (all plan are monthly subscriptions but come with 14-day free trials)

Paid trials

Paid trials means allowing users to start using a premium product or service but try it at lower cost for a certain time period.

Example: HubSpot (monthly subscriptions with one-time account set-up fees)

Money-back guarantee

A money-back guarantee simply means you have a time period during which you’ll refund 100% of the initial payment if a customer isn’t satisfied with your product or service.

30-day money back guarantee for first subscription payment.

Example: Driftly (30-day money-back guarantee)

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How to choose the right SaaS pricing and activation models?

With so many pricing and activation models to choose from and so many unique kinds of businesses, this is a tough question to answer…

But two best practices will make it fairly easy to choose both, and that’s likely to work.

Swipe what’s already working

  1. See what pricing and activation models your most successful competitors are using and implement them yourself.
  2. As you get your first users and early adopters, do lots of customer interviews to see what folks think about pricing and activation.
  3. As you see patterns emerge in these comments around what people like and don’t like, adjust your pricing and activation models as needed.

This will allow you to start your SaaS business with pricing and activation models that are proven to work while uncovering weaknesses in the models of others through customer interviews.

One caveat to this plan is if you’re thinking about duplicating the pricing and activation models of a competitor that’s way out of your league financially. If you’re bootstrapping, be very careful trying to duplicate the pricing and activation models of a competitor that’s raised $200M of VC. That kind of raise means they can pour money into marketing and growth, and if you duplicate a pricing or activation model that requires that, you’ll fall on your face pretty quickly.

Keep your pricing and activation simple

You’d be amazed at how many SaaS pricing and activation models are insanely complicated and impossible to understand.

As a customer, these behemoth pricing tables and unintuitive activation strategies feel completely overwhelming.

This is a huge opportunity for you.

What’s most important when it comes to early pricing and activation is presenting options that your potential customers can fully understand in ~10 seconds.

When in doubt, go with the simplest and most minimal pricing and activation options. This will reduce the time it takes potential customers to understand how much it will cost them to move forward and how to actually get started.

Helene
@wanderinghelene

I guess the latest marketing technique for SaaS brands is to trick you into giving your time and information, only to be told the price after 15 minutes of onboarding. Normalize pricing transparency.

See the tweet

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How to choose the right SaaS price point?

Now, the hard part…

Actually choosing your pricing model and price point!

Here are a few questions that will start to lead you to some answers.

  • Remember: pricing can always change. So don’t get analysis-paralysis!
  • The biggest mistake most new SaaS founders make is to price too low. Higher pricing often makes your product seem more premium and will help you attract customers who are higher quality and less likely to churn out.

What would it cost a customer to build this themselves?

If something would cost a customer $5,000 to develop it themselves, they’ll probably rather pay you $999/year for 5 years to be able to implement it immediately.

But you wouldn’t price this at $10/mo because customers would obviously pay more because of the cost of the pain point!

Reverse-engineer your price point based on what it would cost customers to build and implement it themselves.

How much does your SaaS actually improve their metrics?

How much does it reduce churn? Improve initial usage? Help SaaS customers complete setup? Adopt new features? Reduce support tickets? Increase average revenue per customer? Improve retention?

Study this and base your price point on the actual value it provides for your customers.

Where in the market do your ideal customers live?

Are your ideal customers very price-sensitive and want the cheapest tool on the market?

Do they have bigger budgets and just want the tool on the market that will solve the problem they have regardless of price?

Are they somewhere in between?

Pricing needs to be driven by ideal buyer personas so you can attract those people with the right value/price ratio.

How are your competitors priced?

Doing some competitor analysis to see how others in the market are priced may influence the pricing model and price point you want to sell at.

Other successful businesses that have grown to a substantial sized and proved they’ve reached product-market fit clearly have a price point that customers are willing to pay.

Studying this paired with your own customer interviews may also illuminate opportunities that your competitors are missing out on.

Swipe pricing models and price points from your competitors to get started. Especially the ones that have proven success!

At what stage is your business?

People will view your business differently based on whether it’s been in business 1 month or 10 years.

But being an early-stage company isn’t all bad!

It will actually help you attract early adopters. These are the kinds of people who want to get in early, help support new companies and like living on the cutting edge to always be first to the new thing.

Building strong clout with your early customers will take you far. So to get these folks in the door, it might help to offer discounted pricing (as long as you’re not targeting up-market, premium customers).

Does the price point make sense for your bottom line?

This may be the most important factor in pricing.

Your price point has to follow the pretty basic business principle that successful businesses make more money than they spend.

Does your pricing allow you to do this? Even some back-of-the-napkin math should suggest if your subscription pricing will be long-term profitable or not.

As your SaaS business grows and matures, you can always make changes so this equation works better for you. But you don’t want to start at such a low price point that you’re not making enough profit to reinvest back into the business.

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How is SaaS software billed?

Finally!

Now that we’ve helped you pick a pricing model, price points and activation strategies, we can answer the question, “how is SaaS software billed?”

The easiest and fastest way to go about this is to sign up for the SaaS billing system and payment processor that’s the best fit for your unique business.

But before we do that…

There are a few factors to consider that will help you pick the right platform for your SaaS billing needs.

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How to choose the right SaaS billing software?

Here are a few things to keep in mind are you’re selecting a billing platform.

Some factors are more important than others but all will play some role when it comes to which software best fits your business.

  • Recurring billing. If you’re going to be offering subscription pricing, does your billing software supports it?
  • Subscription management. Do you want customers to have self-service subscription options, a customer dashboard, etc?
  • Analytics and reporting. Can you review how your billing is performing to improve its efficiency over time?
  • Payment fraud protection. Are you legally protected against payment fraud?
  • Multiple country and currency support. If you’re selling to people around the world, can your billing software accept payments from anywhere?
  • Taxes. Does your billing software take taxes into account in your home country?
  • Team accounts. If you plan to have a bigger team in the future, will you be able to add access for additional people?
  • Checkout functionality. Does that software allow you to embed checkout or have separate checkout links?
  • No-code. Are you able to implement billing software without needing to be a developer (like Driftly)?
  • Good UI/UX. Is the software easy and intuitive to use?
  • Automate payment reminders. Does your software email customers when their trial is almost over? Before their subscription payment is due?
  • Coupons. Are you able to create coupons for special customers or to simply increase sign up rates?
  • Customizable invoices. Can you add your logo and company colors to invoices?
  • Flexible pricing options & affordable fees. Is this software something you can afford now and after your business grows?

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Now that you’ve thought a bit about what you want your billing system to do, here are some popular options.

Each has different pros and cons, but all are trusted by many companies to manage the billing that executes behind their pricing and activation models.

  1. Stripe & PriceWell
  2. Paddle
  3. Chargify
@marvinoffers

Stripe payment links are a game-changer. Super easy to create special pricing bundles for higher tier customers who exceed the normal SaaS pricing.

See the tweet

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Deep analytics for your billing software

If you want to kick it up a notch when it comes to analytics, here are some add-on tools for you to check out.

Most strong billing software should come with analytics built-in so you have data around MRR, LTV, CAC, Churn, Retention, etc.

But these analytics-specific companies specialize in this area and could help you gather the data around billing and pricing you need to take a data-driven approach to level up your business.

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SaaS billing best practices

Let’s finish of this massive read with some bonus tips and tricks.

1. Complete all company and billing details in your billing software

This one is easy to overlook but could make all the difference when it comes to building trust with your customers.

When customers receive a bill, they should never think, “who is this bill from?”

That’s why you should complete your company’s entire profile in your billing software…

  1. Branding. When customers see your logo and company colors, it makes it easier for them to remember you.
  2. Descriptions. This helps customers know your company and how much they were billed when looking at things like credit card statements.
  3. Links to cancellation & refund policy. This should link to your website or documentation so that customers don’t have t contact support directly to understand these policies.
  4. Company address. Some countries require this to be provided with every invoice so make sure this information is filled out with the address you registered your business with and is included in every invoice.
When customers receive these bills, they know exactly who it’s from and what the bill is for immediately!

2. Capture credit card details and automate charges

Most SaaS companies should automate their payments this way.

  1. It’s less work for you (and far more scalable). Never send another manual invoice or send a manual follow up email again. Customers will continue to be charged regularly until they cancel their subscriptions.
  2. It’s the preferred way of being billed for many customers. Users don’t want to have to manually pay regularly either! And because this is the way most SaaS companies bill, users are used to it.

Even further automation is possible (keep reading) but the generally billing best practice that’s best for everybody is to ask for credit card details once and let customers cancel when they want to.

One notable exception to this is when working with enterprise companies or are sending a significantly large bill. If you’re billing a client for $100,000, that may require some back and forth and manual communication simply because it’s a large transaction.

3. Automate as much as possible

When it comes to billing, automation is your best friend.

There’s so much to automate:

  • Accepting credit card information at sign up
  • Reminder emails when free trials are ending
  • Reminder emails when subscription payments are coming up
  • Emails with invoices attached when subscription payments have been paid

Instead of doing all this manually, set up your billing system to do it for you.

@pippinsplugins

The Dunning feature from Baremetrics has paid for itself 3x in just two weeks. That feature alone is worth it.

See the tweet

4. Accept payment types that make sense for your target buyers

Just about every SaaS business out there should be accepting credit card purchases.

If you want to keep things simple, only accept this one type of payment.

But, there may be time when accepting other payment methods are preferable.

  • ACH payments or wire transfers directly from one bank account to another might be preferable to some larger customers who don’t want to rack up credit card fees.
  • PayPal, CashApp, Venmo, or Apple Pay might be preferable to some customers depending on what country they’re in since they might or might not have access to certain technologies.
  • Cryptocurrencies might be the preferable method of payment for some customers, especially if they’re buying something they might not want tracked back to them for personal or privacy reasons.

The more payment methods you offer, the more complex your billing and accounting becomes! Keep things here as simple as possible. Once you have a few dozen customers, analyze what kinds of automatable payment methods your best customers use and go with those. If 95% of customers use credit cards, only accept credit card payments to avoid complicating your accounting.

5. Communicate billing changes for existing customers

This is just a basic way to avoid losing the trust of your customers!

Sometimes when running a SaaS business, we need to increase the pricing for existing customers.

But as long as you give customers an appropriate heads up before updating their billing amount (and explain the reasoning behind the change in subscription amount), you’ve done what’s needed.

What’s most important when doing this is telling customers via an email (or Driftly tour step) that their pricing will be changing.

Customers should never receive a bill for an amount of money they haven’t agreed to!

6. Use customer data to drive decisions and anticipate changes

Once you have a good number of customers and the help of some strong analytics, there’s some exciting stuff you can get into.

  • At what rate are free trial users becoming paid users?
  • What about Tier 1 paid users to Tier 2 paid users?
  • How many users cancel their paid subscription every month?

Once you can measure this data and have enough customers to make it statistically significant, you can experiment within your business and make changes to improve this data over time.

7. Make sure billing analysis leads to pricing changes

Often, the data from customer billing will dictate changes needed in your pricing model, activation strategy or price point.

  • Is your sign up rate super low? Maybe your pricing model is too complicated and needs to be simplified.
  • Are you not converting enough free trials into paid users? Maybe you need to implement a Driftly product tour to bring new users to that “aha” moment faster and improve the activation journey.
  • Are your sign up rates and activation insanely high? First, celebrate! Second, you might be priced too low and it’s time to double your prices.

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What’s next?

There you have it.

You started this blog post wondering, “how do SaaS companies bill?”

Hopefully you’ve learned a thing or two. Not just about actions you can take to bill your customers effectively, but also select the right pricing models, activation strategies and price point.

If you can get each of these right, you can run one hell of a SaaS business.

You got this!

If you have any questions or want to chat about SaaS pricing or billing, don’t hesitate to ask Driftly’s co-founders on Twitter!


Implement product tours in just 5 minutes

Driftly Homepage With Tour

Use no-code product tours to nudge users towards that WOW moment. Guide your customers towards the most impactful areas of your software as they breeze through onboarding, adopt core features and become life-long power users.