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With the advent of SaaS migration taking the world by storm, it’s no surprise that many companies are asking questions about handling recurring payments better. Many accounting teams are struggling to keep up with the increased usage of subscription billing models, failing to put in place the software and best practices they need to handle the sheer volume of invoices generated by offering a variety of billing cycles.

The management of recurring payments requires a firm grounding in compliance standards, the automation of time-sensitive and repetitive tasks, and a solid understanding of revenue recognition and deferral schedules. It’s a lot to master. The complexity of introducing a new payment strategy is simply part of keeping up with evolving customer expectations.

The growth of SaaS migration and billing options across industries means that few companies can afford not to put the right tools and best practices in place. Below you’ll learn nine best practices to help you manage recurring payments.

 

The 9 best practices to help you manage recurring payments

 

1. Understand the nuances of revenue recognition for recurring billing

Modern billing models can introduce different revenue streams at varying frequencies. Some customers may pay for a year upfront, requiring you to defer the recognition of that revenue until you earn it. In contrast, others may spread the cost of their subscription over time so that you earn and recognize revenue in synch.

Flexibility is the key to success. Chances are that the more options you offer, the more users you will be able to sign up. However, it’s worth noting that introducing various options can strain the accounting department. Brief the entire team on revenue recognition for subscription billing to optimize their efforts and reduce manual labour.

 

2. Invest in security to protect sensitive customer data and payment information

With the rise of cyber-attacks, companies cannot underestimate the importance of protecting customers’ information (particularly regarding payments and billing) from any threat. Nobody is immune, so it would be remiss not to invest in security measures enabling you to collect and store billing information for recurring payments while maintaining your data integrity.

Many savvy customers will check the ratings of the payment portals and systems you implement, so be sure to consider the reputation of your partners. Partnering with established brands that customers recognize makes it easier for them to entrust their payment information to your system. Users will differ in their prioritization of this measure, but many will never sign up if the early stages of the payment cycle do not feel secure.

recurring payments and deferral account case study

 

3. Establish transparent payment processes to increase customer confidence

Have you ever signed up for a subscription service, only to find yourself wondering about a few things later? Maybe you aren’t sure about the service and want to double-check the cancellation terms, or you’re not entirely sure how refunds work, or perhaps you need to update your credit card information. Chances are the payment policies you ticked when you signed up covered all this, but you didn’t have time to read through them thoroughly.

It’s best practice to make payment terms and processes transparent on your website. The reality of today’s world is that there aren’t always enough customer agents on hand to answer all our customers’ questions. Building out knowledge bases, particularly around critical information like payments, will reduce the workload on your team by making most of the information customers require transparent. Measures like this help build customer confidence because they don’t have to suffer long wait times or engage with a defective chatbot.

4. Invest in clear communication at every stage of the billing cycle

Often, there’s a disconnect when communicating effectively with our customers concerning minor changes. With so much automation at the heart of SaaS migration best practices, it can sometimes be easy to forget the human aspect of things.

Significant shifts will occur as you hone your SaaS pricing strategies and respond to outside forces such as inflation. Every time there’s any billing or payment process change, you must invest in clearly communicating this to your user base. Inform them of tweaks regardless of how “inconsequential” you think these might be, for instance, security improvements, cancellation policy updates, new billing options, or a change of payment processor.

 

5. Reduce revenue leakage with a solid dunning strategy

Failed payments are a fact of doing business. Whether the case is expired cards or a technical error, it still impacts your bottom line. Particularly with subscriptions, it’s critical to recoup as much revenue leakage as possible to bolster monthly recurring revenue (MRR). An effective dunning strategy enables your team to protect against revenue losses more effectively.

Modern billing requires effective dunning management to boost revenue and prevent involuntary subscriber churn. Solid strategies should include pre-dunning communications strategies to remind customers that upcoming payments might fail due to expiring cards. Check out this guide to mastering dunning management for a thorough breakdown of how it prevents revenue leakage and helps bolster your subscriber base against churn.

When is pre-dunning appropriate?

 

6. Monitor subscriber churn metrics with real-time reporting

Effective reporting is a crucial component of successfully collecting recurring payments. With extensive user bases, it’s easy to lose track of subscriber churn, so companies should invest in software that automatically generates reports that reflect key churn metrics.

These numbers are essential for understanding growth and financial health and can be valuable tools for customer acquisition and retention. It’s possible but time-consuming to report on these metrics manually, although, for scaling companies, it may not be feasible to keep track this way. Are you seeing a sharp increase in churns after your free trial? Get curious and find out why. Chances are the churn rate is pointing to something your team has the power to fix.

 

7. Allow customers to choose their preferred billing frequency and day

One of the most significant improvements most companies need to make to their recurring payments is increasing the flexibility around billing frequency. Users will often be subject to different restrictions in terms of cash flow. For instance, smaller companies or individuals might struggle to pay an annual fee upfront, preferring to spread the payment over the year. More prominent companies might work with a fixed quarterly or yearly budget and choose to pay upfront.

The point is that your customers not only like but expect to choose. Offering flexible payment terms and frequencies allows customers to decide which day their payments occur. It is as much about reducing failed payments as it is about increasing customer satisfaction. It is also one of the best ways to ensure customers have enough funds available when the bill arrives.

 

8. Monitor deferred vs earned revenue to comply with GAAP accounting guidelines

Compliance with GAAP is one of the main concerns of most accountants. The introduction of ASC 606 and IFRS 15 concerning revenue recognition for recurring revenue may make some companies reluctant to take the plunge. Critical to achieving success is keeping track of earned and deferred revenue, and plenty of guidelines are available to ease your team into the transition. With transparent, auditable reporting in place, compliance doesn’t have to be complicated. Check out this guide to ASC 606 for a primer on the expectations for recurring payments.  

 

9. Master recurring payments with subscription management software

It’s almost impossible to keep pace with modern billing without implementing subscription management software. Even the most agile teams will struggle to meet month ends if they stick to older accounting processes and systems. Your software should allow customers to pause payments easily, update billing information or upgrade to a different tier of services. All this functionality must integrate with the backend to update accounts automatically without causing unnecessary confusion.

Look for solutions that speak to the nuances of frequent recurring billing. Make sure you invest in software that enables dunning, streamlined reporting, flexibility around payment frequency, and automation of time-consuming processes that slow your team down. Check out the essential features to look for in subscription management software here.

 

The complete guide to subscription management

In recent years, the hospitality industry has weathered massive disruptions. To stay afloat, businesses leapt into the subscription economy and adopted recurring billing strategies. Welcoming these innovations introduced a fundamental shift to relational business models, which allowed organizations to retain a steady stream of income even during lean months.

The hospitality industry is comprised of four different sectors: lodging, food and beverage, recreation, and travel and tourism. The most successful businesses centre on novel subscriptions that serve a specific niche within their sector and are taking full advantage of the benefits of a subscription business model, including increased customer lifetime value (LTV) and greater return on customer acquisition costs (CAC).

This blog explores the creative ways leading companies have incorporated hospitality subscription services by analyzing a modern-day example from each of the four sectors.

Interested in a specific sector of hospitality? Click on the example below to skip ahead. 

1. Lodging sector caters to digital nomads

When you think of hospitality, lodging is likely the first sector to come to mind. From hotels to vacation rentals, overnight accommodations for guests are an integral part of the industry. However, a lesser-known fact about this sector is that the pool of potential customers is expanding.

With the increasing prevalence of work-from-home options, some telecommuters have transitioned to a nomadic lifestyle. These “digital nomads” work remotely out of a new city every few weeks to months, necessitating frequent temporary accommodations. Extended stay hotels and multi-location hotel subscriptions are increasingly in demand.

Example: Inspirato luxury travel club

Inspirato is a luxury travel club and one of a few emerging companies that are designed with the digital nomad in mind. The Inspirato Pass allows customers to choose a hotel from over 100 locations and stay for up to two months, replacing nightly hotel rates, taxes, and extra fees with the subscription fee of $2,500/month. Founded in 2010, the enterprise’s estimated value is $1.1 billion and boasts over 13,000 subscribers with 18% growth in the past year alone.

Inspirato is a luxury travel club that offers multi-location extended stay hotels for a subscription fee

2. Food and beverage sector closes out the competition with pricing psychology

Often confused with the food services industry, the main components of the food and beverage sector include the preparation, transportation, and service of food or beverage to customers. These businesses tend to be some of the most successful and are frequently categorized into the overlapping industries of franchising and retail.

Hotel breakfast bars, catering companies, fast food establishments, cafes, pubs, and five-star restaurants all fit within this sector; however, paired with this ample opportunity is abundant competition. Panera’s coffee subscription is a notable success story within the food and beverage sector.

Example: Panera coffee subscription

For context, Burger King attempted to get a leg up on other fast-food giants, like McDonald’s and Starbucks, by offering a daily small, hot coffee for $5/month. Unlike its one-cent whopper strategy, this one completely backfired, and the company discontinued the service shortly after it was introduced in 2019.

So, expectations were low when Panera launched its coffee subscription service for $8.99/month one year later, in 2020. However, Panera’s subscription included hot drip coffee, iced coffee, and hot tea once every two hours with unlimited refills while customers were in the cafe.

These bold differences expertly applied principles of pricing psychology, yielding wildly successful results. In May 2022, Panera unveiled a second subscription service, the Unlimited Sip Club, that offers an expanded variety of beverages for $10.99/month.

Panera’s coffee subscription expertly used pricing psychology to achieve success

3. Recreation sector appeals to locals

The recreation sector is key to the hospitality industry. Local attractions and entertainment play a vital role in providing memorable customer experiences and contributing to the region’s culture. The most common businesses in this sector include amusement parks, museums, art exhibits, zoos, and campgrounds.

These companies rely on admission tickets, merchandise, and concessions sales to generate revenue, which can be a tricky balancing act to pull off through the wax and wane of tourists. Therefore, many of these businesses offer hybrid subscriptions to bolster their income from locals, returning visitors, or guests who want to explore multi-location establishments.

Example: Universal Orlando annual pass

Universal Orlando’s annual amusement park passes start at $23/month after down payment. These subscriptions cover admission and, depending on the tier, a benefits package that includes perks like preferred parking, merchandise and concessions discounts, and early park admission. Florida residents can also benefit from reduced rates for all tiers of annual passes.

Amusement Park Universal Orlando offers tiered annual passes with discounted rates for locals

4. Travel and tourism sector bundles the best deals

Travel and tourism allow customers to experience destinations beyond their hometowns. This sector has the most crossover with its counterparts because it encompasses the entire experience of the trip, not just the transportation to get there.

Travel agencies are one of the most well-known organizations within this sector, often taking on the logistics and reservations for everything from booking flights to choosing a hotel to scheduling business meetings. The endurance of these businesses is attributed to a fact all too familiar to frequent flyers: coordinating travel plans can quickly become an arduous task.

Example: Tripadvisor Plus membership

Hotels that partner with Tripadvisor have the opportunity to tap into new customer bases and potentially increase their bookings. For $99/month, travellers can enrol as a member with Tripadvisor Plus and gain access to an array of bundled savings on hotels, food and beverages, and experiences. According to their website, customers save on average $350 the first time they use their membership.

Tripadvisor Plus bundles the best deals for frequent flyers

Manage subscriptions seamlessly with Subscription Billing Suite

Managing a subscription service can quickly get out of hand without the proper tools in place to handle huge amounts of data, adjustments to complex pricing strategies, and data-driven reporting. Unless you invest in the appropriate technological foundation, it will be nearly impossible to meet the goals of your growth journey. A robust subscription management solution, like Subscription Billing Suite, takes care of the nitty-gritty, freeing up your team to strategize. It’s available as an embedded extension in Microsoft Dynamics 365 Finance, Business Central, and GP.

The complete guide to subscription management

The recent boom in subscription-based businesses led the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) to develop new accounting standards, ASC 606 and IFRS 15, to regulate and standardize revenue recognition.

Companies must now follow a five-step approach:
1. Identify the contracts with a customer.
2. Identify the performance obligations in the contracts.
3. Determine the transaction price.
4. Allocate the transaction price to the contract’s obligations.
5. Recognize revenue as you satisfy the relevant obligations.

It seems simple enough, but translating these accounting practices to a recurring billing model can become complicated quickly. This blog will walk you through five best practices that enable compliance with ASC 606 and IFRS 15, so you can expertly handle revenue recognition without the headache.

If you’d like an introduction to the topic or want to refresh your memory, check out our previous blog on revenue recognition for subscription billing before continuing. The following advice will help you tackle some of the more advanced aspects of accrual accounting.

Interested in a specific best practice for maintaining compliance with ASC 606 and IFRS 15? Skip ahead by clicking on the topic below. 

1. Create a deferred revenue adjustment account

One of the most important aspects of the five-step approach to revenue recognition is always to recognize revenue after satisfying the contract’s performance obligation(s). Recognizing the entire contract amount upfront before you’ve delivered the service counts as claiming unearned income.

If you claim unearned income, you could face hefty penalties for non-compliance and tricky situations if customers decide to complain, cancel their subscription, or ask for refunds. Maintaining an accurate revenue deferral schedule via an adjustment account is ideal for mitigating this risk.

What is an adjustment account?

An adjustment account is a summary account in the general ledger that records internal events rather than business transactions.

Why do you need a deferred revenue adjustment account?

Creating an adjustment account to track deferred revenue allows you to accurately recognize revenue as you fulfil the performance obligation(s) and treat unearned income as a liability.

Example: Using an adjustment account for flat-rate annual subscription 

Company A has secured an annual subscription with a client at a flat rate of $18000, and that the client will pay the total upfront. Company A cannot recognize the full $18000 until the service has been provided, so the amount must be evenly divided across the term of the contract: one year.

For the first month, Company A can only recognize $1500 and the remaining $16500 must be booked in the deferred revenue account. For each subsequent month, Company A must credit the deferred revenue account and debit the sales account $1500.

2. Allocate variable consideration using an estimate

Subscription services often implement pricing models where the quantity or price will fluctuate. Usage-based billing and bundling are particularly common pricing models that require SaaS companies to account for variable consideration.

How to estimate the value of variable consideration

To maintain compliance with ASC 606 and IFRS 15, you’ll need to record an estimate of the amount considered. At the end of each reporting period, you must revise the estimates and adjust any resulting changes to the transaction price. Detailed below are two methods commonly used for estimating the value of consideration.

Method 1: Expected value

The transaction price is determined by summing the probability-weighted amounts of a range of possible outcomes. This method is most appropriate when the reporting entity has many contracts with similar characteristics, such as when a company implements the portfolio method of aggregating customer contracts.

However, companies are not obligated to use the portfolio practical expedient. Management is responsible for making reasonable estimates and applying them to numerous similar contracts such that the aggregate value of revenue must equal the sum of the expected amounts from the individual contracts.

Method 2: Most likely amount

The transaction price is decided as the most likely amount to be received. The best use case for this method is when there are only two possible outcomes because the expected value method is likely to return a significantly different value than the possible outcomes.

Example: Estimating variable consideration for usage-based subscription pricing model 

Company B offers a support plan with three usage tiers. They charge $1000 if a customer uses under 10 hours of support, $2000 if the customer uses 10–20 hours, and $3000 if the customer uses over 20 hours of support over the contract term.

Company Y is interested in purchasing this support plan. Company B has worked with Company Y for many years and knows that they have a 10% chance of using under 10 hours, a 60% chance of using 10–20 hours, and a 30% chance of using over 20 hours. By summing the probability weighted amounts, they determine the expected value of the contract will be $2,200.

calculating estimated variable consideration using expected value method for usage-based billing

What is the constraint on variable consideration?

The value of the estimated consideration can only be included in the transaction price “to the extent that it is probable that significant reversal … will not occur” (606-10-32-11).

Determining whether the estimate must be constrained involves significant judgement and must include assessment of the likelihood and magnitude of revenue reversal. Many companies will consider this constraint while calculating the estimated variable consideration.

Recommended reading: What you need to know about ASC 606 for SaaS companies 

3. Offset bad debts on revenue recognition schedule

There are many reasons why customers are unable to pay for goods and services, even after the due date. Bankruptcy, trade disputes, and fraud are a few cases where the amount owed is irrecoverable. So, what do you do if a customer doesn’t pay?

When a customer has not paid even after repeated dunning letters, the amount is deemed uncollectible and written off as bad debt. The amount is adjusted against your monthly recognized revenue during reporting to ensure that your receivables are not overstated in the financial statements.

Example: Full write-off for unpaid subscription 

You have entered an annual contract of $24,000 with a customer for a subscription service in the month of January. Unfortunately, in May it is determined that the customer cannot pay the amount despite repeated dunning requests.

In your financial statement, you will add a credit entry that zeroes out the receivables balance and a debit entry to ensure that the irrecoverable revenue is not recognized in the income statement.

Revenue recognition for full write-off of unpaid subscription account

4. Perform routine revenue analysis

Performing routine revenue analysis will provide you with a deeper understanding of the distribution of earned and deferred revenue across different channels, allowing you to make data-driven decisions and maintain accurate accounts.

Especially in a transaction with multiple deliverables, it’s vital that you implement tools, like multiple element revenue allocation (MERA), to separately track and evaluate each revenue stream.

What is included in a typical revenue analysis?

A typical revenue analysis for a subscription business breaks down revenue sources into three channels; subscription revenue, revenue share from partnerships, and referrals. Within subscription revenue, you can further classify data based on a metered or fixed rate by subscription, customer, and plan.

Recommended reading: Calculating subscriber churn metrics for SaaS companies (with examples) 

5. Satisfy disclosure requirements

Financial statement disclosures are more rigorous under ASC 606 and IFRS 15 than under previous revenue standards. The image below outlines the different annual revenue disclosure requirements for public companies.

Required annual disclosures under ASC 606 and IFRS 15 for public entities

Why do companies need to submit disclosures?

To bring transparency and clarity to your financial statements, disclosure requirements entail gathering additional explanatory information that covers the amount, uncertainty, timing, and overall nature of cash flow associated with contracts with customers.

What are private companies exempt from disclosing?

Private companies are not obligated to provide certain disclosures, and the requirements for interim periods are significantly pared down.

It is not mandatory for private companies to disclose:  

Maintain compliance with Subscription Billing Suite

No matter which subscription pricing model you implement or how frequently your bill your customers, a robust subscription management solution can make all the difference when handling complex revenue recognition.

Keeping track of deferral schedules and appropriately handling revenue allocation can become increasingly difficult if you’re relying on manual processes. Subscription Billing Suite ensures that your accounts are accurate, and your invoices delivered on time.

 Booklet | Revenue reporting and recognition with ASC 606 and IFRS 15

 

 

SaaS product pricing is one of the essential questions presented by digital disruption. As companies migrate operations to the cloud, pricing has only grown in complexity. Regardless of industry or location, it’s challenging to effectively transform products or services into reliable recurring revenue streams that enable scalable growth.

The options are almost endless, so teams must take a nuanced approach when considering the value of what’s for sale and their go-to-market strategies. No two plans will be the same. Unlike traditional pricing methods, a competitive analysis will only get you so far, particularly in industries where SaaS pricing disrupts customer expectations. The old rules no longer apply, and pricing should differentiate you from the competition rather than match the market.

Profitability will depend on your ability to understand the value of your offering and add value where it matters most. SaaS product pricing is as much about services as software, so most companies need to rethink how they approach everything from sales incentives to market research and even customer service.

SaaS migration is a complex process that requires strategic insights and flexibility. There are no one-size-fits-all solutions. The content below explores essential factors for getting the price right, but it’s not a template. Instead, companies should use these as guidelines for a deeper conversation around product pricing.

1. Consider the pros and cons of the top 8 pricing models

One of the core tenets of effective SaaS product pricing are the SaaS pricing models. Although the finer details of your pricing strategy will come later, it’s wise to familiarize your team with the most popular strategies up front so that you can make an informed decision about which models might be effective for your products and services. Fully understanding the pros and cons of each strategy should help you decide which one suits your needs, and it can be easier to consider the many other factors involved in pricing once you’ve an idea of the kind of billing model you want to implement.

 

Rather than simply copying what your competitors offer, consider the customer first. Would they prefer monthly or annual billing? Or perhaps a mixture of both? Does it make sense to charge them based on usage and do you think you could cost-effectively run a free trial? It’s hard to really understand the implications of each of these strategies without first briefing yourself on the common pricing models, which is why we’ve included a guide to each one below. Step one should be to brief your team on the strategies that align best with your products and services, so you can start narrowing down your options and making some decisions about pricing and billing structure.

Consider these pricing model guides to help with your SaaS product pricing

2. Let perceived customer value be your north star using buyer personas

One of the core components of any effective SaaS pricing strategy is perceived customer value. It doesn’t matter what you think your services are worth if your customers don’t also see the value in what you’re offering. Even more so than in traditional models, the perceived value of your products and services must be central to any conversation around price. It should be a higher priority than your billing model, the features, and competitor pricing.

Conduct a deep dive on your target customers and build buyer personas to guide your subscription strategy decisions. At all times, you need to advocate for these personas and understand what they get when they pay for your services, i.e. what pain points do you remove and the core benefits of your product. Understanding how much customers gain in measurable value from your services will make it easier to narrow your price range to something that best fits the target personas.

3. Understand Customer Lifetime Value (LTV) and Customer Acquisition Cost (CAC)

Several churn metrics will be part of your SaaS product pricing journey, particularly as you tweak pricing over time. However, it’s wise to focus on just two in the initial phase: Customer Lifetime Value (LTV) and Customer Acquisition Cost (CAC).

Even rough estimates will influence your sales strategy, and knowing the projected value of a new customer over time will impact the amount you can spend on customer acquisition. LTV needs to be substantially higher than CAC for your pricing to be effective. As common sense might dictate, you need to make more from a customer over time than you spend on acquiring them.

Those used to more traditional sales may want to create awareness that customers often spend minimal amounts upfront for their subscriptions in the SaaS world. Sometimes revenue and acquisition costs won’t align in the first months of a new product launch, and finance teams need to focus on the long-term projected revenue. Otherwise, they risk setting too high entry-level prices to attract a substantial market share.

4. Boost conversions with SaaS pricing psychology methods

SaaS product pricing page psychology: median tier is critical to high conversions

When deciding how to price SaaS products, it’s essential to understand the role psychology will play in the customer journey. Whatever pricing you decide on, convincing customers of the value and getting them through the sales funnel will require effective implementation of UX and pricing psychology tricks. Not all these methods work for every strategy, but some combination will likely help you successfully launch your SaaS product pages.

5. Consider sales models and incentivization carefully

It’s also worth spending time considering the transformation for sales. Pricing often directly correlates to bonuses and incentivization programs in traditional pricing models, and with SaaS products, this may have to shift. People are the heart of organizations, and you need to include them in pricing conversations, particularly in departments like sales that the transition will directly impact. It’s better to have sales teams in these conversations and work together to reimagine how SaaS migration will transform roles and payment structures.

6. Understand the cost of delivering customer service from day one

Companies default to pricing based on features or product descriptions, often forgetting one of the most valuable components of their offering—people. If you intend to offer customer support and training, you need to include these services as a product feature when calculating how much you can charge. You’d be surprised how valuable the service side is over time. Chat support, knowledge bases, learning centres, and implementation managers are all resources customers will value.

Before you set the price of your product, ask yourself how you’re charging for support and maintenance. Question whether or not you’ve conveyed the value of the service side on your product pages. Excellent customer service may end up being what differentiates you from your competitors.

7.  Long-term impact of discounts should be carefully weighed

Pros of freemium pricing

It’s best to exercise caution when experimenting with freemium pricing or significant discounting. Sometimes these can be good techniques to secure market saturation or as part of a market penetration strategy. However, these strategies run the risk of creating a lower perceived value for your product and services. It can also be challenging to service a large influx of new customers if you estimate conversions inaccurately and find that more people are taking advantage of free or heavily discounted services than you intended.

Being wary of too many new customers might seem counterintuitive. Yet, if users do not receive the right quality of service or training, you may find higher than anticipated churn rates. It will be much more challenging to chase leads who’ve already trialed your service and had a bad experience. It’s much better to think about pricing from the ideal customer’s perspective (presumably someone who pays for your services and products) and limit discounts and free trials.

8. Hit the sweet spot by trialing hybrid strategies and tweaking approach

It’s relatively common in the history of companies to copy competitors. Yet, this approach lacks the strategic edge required to handle the levels of disruption industries are seeing today. It’s not that you shouldn’t take inspiration from what others have done before, but there’s wisdom in looking in unlikely places for ideas that might help you differentiate your SaaS product from all the rest. A hybrid approach to pricing allows you to mix and match between different billing models, frequencies, and psychological tactics, adopting a tailored strategy that best first your product and services.

Implementing the right SaaS product pricing

Once you’ve decided on a price or a range of prices, it’s time to determine how to implement your new strategy. You will need to build out collateral and product landing pages, but there’s also the back-end to consider. You will need the right tools to make the most of your pricing tactics and partner with a company that has experience handling more complicated pricing and billing models.

Subscription Billing Suite allows you to handle the complication of SaaS pricing models for revenue recognition and deferrals. So, whether you want to bill your customers monthly, quarterly, or annually, it may just be the solution for you. Why not find out more in the case study below.

MoxiWorks saves 80 days annually

 

As expectations continue to rise, companies will continue to undertake projects aimed at building relationships with subscribers and adding value to the user experience like creating personalized onboarding tutorials and videos, optimizing the mobile experience, and introducing advanced platform feature notifications. SaaS solutions that empower other businesses to create tailored tools and content can tap into a segment of the market that will likely yield an incredible level of interest, engagement, and revenue growth.

While evolutions in technology open the door for companies to adopt shiny new features and embrace the latest gizmos and gadgets, the beating heart of SaaS remains the loyal subscribers. From innovators to laggards, the point of all these trends and advancements is to make things easier for customers. Above all else, you must keep a clear head and advocate for innovations that will maximize subscriber retention and minimize churn.

Tips for improving subscriber retention

Partner with companies that can support your SaaS growth journey

Modern SaaS companies rely on subscription management software to offer complex pricing models and ensure that their business runs smoothly; however, it’s not always easy to determine which partners will be a good fit. It’s critical that you look for teams and consultants that understand the nuances of the SaaS landscape and prioritize subscriber retention.

Once you are connected, they’ll be able to make relevant recommendations and it will be evident whether their solutions can support your growth. Even if they can’t share the names of companies they work with, they will be able to provide relevant information based on their industry experience. Speaking with others about their experience partnering with the company should also be possible.

Questions to ask potential SaaS transformation partners

Read our recent blog to learn more about the pros and cons of SaaS migration and download our whitepaper for tips to navigate the future of the rapidly evolving SaaS industry.

Deciding whether to implement an annual or monthly billing cycle is one of the most challenging aspects of migrating to recurring revenue streams. Yet, it’s an integral part of choosing the right subscription billing strategy and cannot be ignored. You may struggle to understand which billing frequency is best. You may even find yourself asking a lot of questions. For instance, what if some customers prefer annual and some prefer monthly? Would some subscribers want a hybrid approach?

One of the most important secrets of successful pricing psychology  is giving audiences enough choice without overwhelming them with options. It’s not unusual for customers to have different preferences, and as a result, it’s best not to approach the puzzle of billing frequency with an either/or mindset.

Often, brands ignore pricing psychology and instead opt for whatever is easiest for the accounts team to implement. Worse still, some decide based solely on what their competitors offer. Although this is a standard approach, it fails to put your customer’s expectations front and centre. This risk may result in high churn rates and will not allow you to tap into the full benefits of building a subscription base.

Studies show that only one-fifth of SaaS companies let their customers choose between monthly and annual payments. A surprising number for an industry built on customer-centric innovations. Options are essential at most stages of a customer journey and never more so than when it comes to payment. After all, a well-executed strategy can increase your customer acquisitions.

Depending on your subscription billing model, bi-monthly or quarterly billing may make the most sense for your target audience. You might want to implement a strategy that breaks down the cost of monthly payments with an annual fee paid upfront (this approach requires you to understand revenue recognition best practices).

This blog explores multiple subscription billing frequencies (detailing more than just the most common conversation around monthly vs annual billing cycles). Learn the nuances of this aspect of subscription management to decide what works best for your customers.

Short on time? Skip ahead by clicking on the relevant topic below 

Defining annual, monthly, quarterly, and super-frequent billing cycles

What is a billing frequency?

Billing frequency is always equivalent to the length of a billing cycle. The period billed to the account is set out in the user contract. For instance, if users subscribe to a monthly service, their billing frequency will be monthly and reflected in the billing clause of the service contract.

What is the most common subscription billing frequency?

The most common billing frequencies are monthly and annual billing cycles. However, given the sheer range of services moving to the cloud and launching subscription strategies, there’s been an increase in frequencies. Many find that quarterly, bi-monthly, or even super-frequent billing better suits the expectations of their audience.

5 most common billing frequencies

What is an annual billing frequency?

An annual billing cycle covers the cost of an entire year of the service in a single yearly payment. In the instance of subscription billing, the customer is locked into an automated cycle, which will bill them once a year unless they cancel. Annual subscriptions are common across a wide range of billing models, for instance, it can be a particularly effective frequency for hybrid and user-based strategies.

What is a monthly billing frequency?

A monthly billing cycle breaks the annual cost down into monthly recurring payments. Generally, customers can cancel at any time as it doesn’t lock them into a year-long contract. SaaS companies with tiered and feature-based billing often use this as their core billing frequency.

What is a quarterly billing frequency?

A quarterly billing cycle breaks down the cost of the service in 90-day periods. It’s not always aligned with quarterly calendars and can depend on sign-up periods or vary according to when a company accounts for year-ends. It’s particularly effective for utility companies who engage a usage-based billing model and is equally popular with some insurance companies.

What is a bi-monthly billing frequency?

A bi-monthly billing strategy is a high-frequency approach that bills users twice a month. It can be problematic as months vary in length, meaning payment dates might not always align. It can be tricky to implement effectively.

What is a super-frequent billing cycle?

A super-frequent billing strategy may bill customers more than twice a month, and in some (unusual) cases customers might be billed daily. It’s highly variable and best suited to companies with an extremely short user lifecycle. Smaller companies often rely on super-frequent billing in the early stages as cash flow might be stagnant otherwise. However, it should be noted that this requires high levels of admin and may result in a frustrating user experience. Meal plan subscription boxes such as Hello Fresh tend to use super-frequency billing cycles.

What is meant by annual plan billed monthly?

An annual plan paid monthly means that the user commits for the entire year, but the bill is paid on a month-by-month basis. Customers are usually rewarded with an additional discount than say a typical monthly payment (where it’s easier to opt out after 2-3 months) plan because they’re contracted to a year of service.

A video explaining the differences between annual and monthly billing

 

 

A complete breakdown of annual billing cycle pros and cons

Annual billing cycle at a glance (1)

Annual billing cycle advantages

Annual Subscription Billing Disadvantages

A complete breakdown of monthly billing cycle pros and cons

monthly billing cycle at a glance

Monthly billing cycle advantages

Monthly billing cycle disadvantages

Should you choose annual or monthly billing frequency for subscription billing?

As you can see, both billing frequencies have a range of advantages and disadvantages. As a result, the final decision comes down to the type of service you offer and the market you’re targeting. It may also be wise to step outside the annual vs monthly debate and embrace one of the other billing frequencies mentioned about (i.e., super-frequent, bi-monthly, or quarterly). Even so, annual and monthly billing are the most common frequencies for a reason, and many customers will expect to be given these options at the very least (particularly when it comes to SaaS).

Many B2B companies targeting corporations will find that annual billing may be a better choice as this suits the customers they want to attract. In contrast, a B2C company or a B2B company targeting smaller businesses may want to consider the monthly billing frequency as it may be more attractive to their customers.

However, most companies won’t fall easily into these two brackets, and even within these examples, there will be notable exceptions. As a result, most SaaS companies find that a hybrid approach is best. Given the diversity of the pros and cons of each frequency, there’s no reason not to offer both. Each billing cycle frequency will appeal to a different target market. Offering a hybrid allows you to lower the barriers of entry and increase customer conversion by merely giving users more choice.

 

Complete guide to subscription management 2

 Monthly billing cycle disadvantages

Annual vs monthly billing cycles | What should you choose?

As you can see there are no easy answers when it comes to annual vs monthly billing cycles. Both billing frequencies have a range of advantages and disadvantages. As a result, the final decision comes down to the type of service you offer and the market you’re targeting.

Many B2B companies targeting corporations will find that annual billing may be a better choice as this suits the customers they want to attract. In contrast, a B2C company or a B2B company targeting smaller businesses may want to consider the monthly billing frequency as it may be more attractive to their customers.

However, most companies won’t fall easily into these two brackets, and even within these examples, there will be notable exceptions. As a result, most SaaS companies find that a hybrid approach is best. Given the diversity of the pros and cons of each frequency, there’s no reason not to offer both.

Each billing cycle frequency will appeal to a different target market. Offering a hybrid allows you to lower the barriers of entry and increase customer conversion by merely giving users more choice.

Managing revenue recognition and deferral schedules for different billing cycles

Choosing the right billing frequency is only part of the subscription management puzzle. It’s important that you fully understand best practices for revenue recognition and deferral schedules, as well as terms like dunning. One of the biggest challenges you will face will be meeting compliance standards such as ASC 606. Below is a short list of resource that will provide you with the relevant information you need to take the next steps.

1. Understanding revenue recognition for subscription billing  
3. Everything you need to know about ASC 606  
4. Master dunning to reduce recurring revenue leakage

So, what next?

Choosing the right billing frequency is only part of the pricing puzzle. Make sure you read our complete guide to the various SaaS billing models and strategies to get the full picture.

annual vs monthly billing cycles for recurring billing

Like any other form of payment, recurring billing has its own unique challenges. Subscription services lose roughly 2% of customers each month due to expired credit cards that aren’t updated. When you start to factor in failed payments caused by spending limits, insufficient funds, payment gateway glitches, or cancelled credit cards the involuntary churn rate accounts for a sizable revenue leak.

Dunning is the process of communicating with customers to recoup such losses. Despite a negative public perception, modern dunning management can contribute to a positive customer experience and significantly increase your monthly recurring revenue (MRR).

Whether you’re implementing a SaaS billing model for the first time or simply trying to ramp up your monthly or annual recurring payments, effective dunning management will be central to your success. This blog answers some of the most frequently asked questions about dunning, so you can master the process to mitigate revenue leakage and involuntary churn.

Skip ahead to a specific section on dunning management by clicking on the topic below. 

What is dunning?

It’s normal for businesses to encounter a failed payment at some point. Whether it’s due to insufficient funds, a misconfigured payment gateway, or an expired credit card, you will need a way to recoup your monthly recurring revenue (MRR). Dunning is the practice of communicating with customers to recover lost revenue from failed payments and reduce involuntary subscriber churn.

Although the term “dunning” is still used in accounting, people who work in other departments might explain the same concept using terms like “accounts receivable” or “collections process” instead. For instance, dunning management can be found under the credit and collections feature and optimized with collections process automation for Microsoft Dynamics 365 solutions.

 

What is a dunning letter?

A dunning letter, or collection letter, is the collection notice sent to customers informing them that their last payment has not gone through. Modern subscription businesses rarely contact their subscribers via paper letters, opting instead for digital communication methods like email, SMS, or app notifications.

There are many templates and programs online that can help you generate a dunning letter. Here’s a helpful guide to walk you through creating a collection letter through the accounts receivable feature in Microsoft Dynamics 365.

What is the difference between voluntary and involuntary churn?

Voluntary or active churn results from customers making the conscious decision to unsubscribe from your service. Typically, the subscription is cancelled because the service no longer fulfils the customer’s wants or needs.

Involuntary or passive churn occurs when a customer’s subscription is cancelled because something is stopping them from paying. This type of churn accounts for a sizable portion of preventable revenue leakage because the customers often don’t want to unsubscribe—they just aren’t presented with a clear option to fix their payment issue.

What is involuntary churn?

Why do SaaS companies need dunning management?

Subscriber churn is an unavoidable obstacle that every SaaS business must handle. Fortunately, effective dunning protocols can recover on average 9% of your MRR. Dunning management empowers you to proactively reach out to customers to update their payment method, prevent service disruptions, and facilitate an overall positive customer experience—reducing revenue lost through involuntary churn.

What is pre-dunning?

Pre-dunning is the practice of sending reminders to customers that an upcoming payment may fail unless they update their information. There has been an open debate about whether customers perceive this tactic as helpful or annoying.

Pre-dunning used to be a best practice, but in recent years it has started to fall by the wayside as subscription businesses have become more popular and there are more options for preventing failed payments behind the scenes. For example, some SaaS companies may communicate directly with issuing banks to automatically update customers’ credit card information.

When is pre-dunning appropriate?

When is pre-dunning appropriate?

Nevertheless, there are still a few scenarios where pre-dunning may be appropriate for your business. It has shown to be effective in the following three circumstances:

1. The customer’s credit card is going to expire

According to the Subscription Commerce Conversion Index, the average subscriber holds five different retail subscriptions. It’s safe to say that your customers may struggle to keep track of all their subscriptions and need a reminder to update their payment details. A best practice is to remind them 30 days before and, if they haven’t taken any subsequent action, 7 days before their card expires.

2. The billing cycle is bi-annual, annual, or longer

Oftentimes, the longer the duration between payments, the higher the risk of it failing. Businesses that offer billing cycles with bi-annual, annual, or longer options may benefit from pre-dunning to ensure that the customer’s payment method and details are still accurate.

3. The first payment after a free trial ends

Whether or not your business collects billing information during sign-up, it’s a good idea to establish transparency early in your relationship with the customer. A quick reminder that states when the free trial will end, the amount you will start charging, and the due date for the first payment will help avoid angry customers that simply forgot to cancel their subscription on time.

What is automated dunning management?

Manually addressing every customer’s declined or failed payments is an impossible task that would waste valuable time and resources. The only worse solution would be to not contact your customers at all. Automated dunning management (a.k.a. collections process automation) streamlines the process by performing actions like:

 

How does automated dunning management reduce involuntary churn?

In addition to saving your accounting team hours combing through accounts and drafting dunning letters, automated dunning management counteracts involuntary churn by contributing to a positive customer experience. Below covers the top three features that benefit subscribers.

How does automated dunning management reduce involuntary churn?

1. Automatic retries for failed payments

Subscription services have gained a reputation offering peak convenience, but when a payment fails, customers may become frustrated and churn for a few reasons:

Automatic retries with a customizable schedule can address all these concerns and minimize unpleasantness by reducing the frequency and degree to which the subscriber needs to get involved. Fewer barriers to paying for services means more happy customers.

2. Professional and friendly customer communication

Manually drafting dunning letters for every customer with a failed payment is not only a time-consuming process, but also is prone to error. Sending a collection notification riddled with typos or mixing up which past due invoice email to send to which subscriber can make your business look unprofessional. Automated dunning management organizes customer communications to facilitate enhance customer relations. Some solutions can even make the reminders more friendly by adding personalized touches like the customer’s or business’ name.

3. Records of state of accounts

A statement of accounts and accounts receivable aging information is indispensable for assessing the financial health of your customers. Without this data, it’s much harder to strategize feasible methods for decreasing outstanding payments and mitigating bad debt. Automated dunning management generates accurate customer aging reports that provide insights like the number of failed payments, renewed subscriptions, upgrades, and suspended accounts.

Complete guide to subscription management

Since 2019, there’s been a rapid increase in cloud adoption, with companies increasingly turning towards both using and offering SaaS solutions. Recent reports document the number of SaaS apps used by companies based on their size, showing that those with over 250 employees use over 251 apps to do business. A significant number that indicates the increased complexity of doing business requires the widespread adoption of this technology.

Number of SaaS apps a company uses based on size

The trend of SaaS migration is referred to in different ways: SaaSification and SaaSify are two common variations. But whatever you call it, the fact remains the same, companies today have little choice and those that don’t adapt, may find themselves falling behind. Although most companies prefer SaaS solutions themselves, many are slow to adopt is as a business model for their own solutions.

It’s understandable as the transition is complex and requires a great degree of planning and consideration. It involves every facet of your organization to make significant changes, and companies need to map their SaaS migration before they ever get started.  One of the first steps to creating this map is to first understand the pros and cons of the transition so that you can get buy-in at every level of your organization. Because this transformation will involve everyone from sales to development, it’s important that everyone understands what’s involved.

 

 

This blog explores the pros and cons of SaaS migration for those looking to make the transition with their products and services. Get a clear-sighted view of what to expect and the common challenges you’re likely to face. When it comes to SaaSifying your offering, preparation is key, and there’s no better preparation than knowledge.

The advantages of SaaS migration for your products and services

6 pros or advantages of SaaS migration

1. Predictable revenue makes it easier to strategically forecast income and allocate resources

One of the core reasons companies transition to SaaS is the benefits of having a more predictable monthly income. Particularly in the current economy, where disruption can destabilize organizations at the drop of a hat. Companies can create a robust payment ecosystem that makes scaling growth more predictable by implementing this business model.

One of the ways to do this is to pay close attention to churn metrics. This information helps build sustainable revenue streams, allocate resources, and forecast income more predictably. By using these, good data management, and best practices for dealing with recurring revenue streams (e.g. automating revenue recognition and deferrals), you can alleviate some of the pressure on your team.

2. Shorter sales lifecycle due to strategic pricing models and strategies

Traditionally, software development companies might spend months building relationships with prospective clients. Terms need to be negotiated, price settled on, scope and customizations defines, and implementation timeframes established. With the shift towards SaaS solutions, things have sped up considerably. Often all the information a customer needs is available on your website, with transparent pricing tiers, accessible demos, and clearly defined SaaS contracts all just a few clicks away. Many companies balk at the idea of giving this much control to the customer, but the fact remains, that if you don’t, your competitor will.

Figuring out how to operate in an economy where the customer expects to be able to make the decision without ever meeting you can be daunting; it means a sizable investment in UX and less traditional methods of sales enablement. But the advantages far outweigh any challenges here because you’re effectively enabling rapid scaling by taking a process that once took months and, in some cases, reducing it to minutes.

The complete guide to subscription management

3. Reduce the customization workload allowing you to work faster

One of the issues many software companies face is building customized solutions for certain clients. The cost of development can quickly add up, and it can limit your team’s ability to scale DevOps because they’re simply trying to keep pace with what’s been promised and reach the implementation deadlines.

With SaaS business models, you can price customizations so that customers will be happy to choose one of your standard options. It’s not that you won’t offer any customizable option; it’s just that by limiting these to higher tiers, you can charge appropriately for developing unique features. Overall, it will cut down on time spent negotiating and allows you to invest resources in better customer services and add valuable features to your core products faster.

It’s important to note that getting the balance right means knowing your audiences and building out the features and functionality that are most important to them at each level. Often companies implement a hybrid pricing strategy, combining elements of both tiered and feature-based pricing to best meet their customer’s needs. If you’re not sure where to start with market research, check out this guide to choosing the right subscription strategy for your company. It details the information you will need to price your services accordingly.

4. Remain competitive with the ability to pivot in disrupted markets

One of the biggest takeaways from the past few years of doing business is that disruption is constant. Regardless of your industry, companies need to be poised to pivot at a moment’s notice. A state which is not limited to internal operations but includes your products and services. Regardless of what you sell, you need to be able to embrace a permanent state of innovation. Whether that’s building a financial transformation backbone, embracing DaaS strategies or tweaking the tiers in your subscription-pricing strategy based on user insights. Migrating to SaaS means equipping your team with the tools they need to survive, regardless of what happens to the market.

5. Expand customer base and reduce barriers to expansion

SaaS business models allow you to position your products and services to build a broader customer base and scale your growth. Traditionally, long implementation timelines and significant upfront investments hampered the progress of software companies. By moving your offering to the cloud and allowing customers to self-serve, you can build a more transactional product that can lead to more sustainable growth.

Pricing psychology tactics allow you to grow conversions, and freemium or penetration pricing strategies can help you break into saturated markets. If you’re curious about how to market to a wider audience using these tools, check out the following guides: 4 secrets to better subscription pricing psychology.

  1. 7 principles of pricing psychology for market entry
  2. The definitive guide to freemium pricing

6. Faster implementations and feature-release cycles with SaaS migration

Prior to the introduction of SaaS solutions users had to install software updates on their own, meaning software providers often needed to assist them and maintain security for versions of the software they were trying to phase out. New releases had long implementation timelines, with some customers stubbornly remaining on older versions for months, if not years.

With SaaSification of your products, feature updates and releases can be implemented across all customers, allowing you to focus on fixing bugs and creating training tools. It’s also possible to do phased releases, rolling out a test version of certain features to trusted customers before making it available to the entire customer base.

SaaS gives you enough control to implement changes in the way that works best for your organization without introducing a cumbersome workload. Most find this flexibility allows their team more time to innovate and improve these updates because there’s no need to provide as much change-management support on the implementation side.

The disadvantages of SaaS migration for your products and services

5 cons of SaaS migration

1. Requires cultural transformation to shift to an agile mindset

SaaS migration impacts every fibre of your organization. It’s one thing to move your solutions to the cloud, and it’s another thing entirely to poise your team for what will often mean significant changes for their day-to-day workload. From the front office to back-end accounting, prime your entire team for what will inevitably be a cultural transformation. Communication will be critical and is one of the core transformation challenges companies face. Leaders need to sit with each department and troubleshoot what this transformation will mean daily, allowing for better insights into handling the shift to a more agile mindset.

Failure to manage this change can result in high customer churn rates. These can result from many things, but one of them may be customer service which needs to be adapted to meet the demands of any SaaS migration. By keeping a close eye on performance during the shift, leadership will be able to bolster operations where it’s needed the most and enable success wherever gaps appear. Check out this guide to building a comprehensive roadmap for financial transformation.

2. Transitioning sales team and sales incentives can be tricky

One of the core challenges companies face when SaaSifying their products is moving away from large upfront payments. Often these “deals” are a large part of how compensation for the sales team is structured, with bonuses and incentivization often tied to the amounts negotiated. Before transitioning, teams need to address the new approach and what it will mean for these payment structures. There will need to be a shift to upselling and renewals, so motivating your team will require incentivizing these actions.

Companies can devalue renewals, but often they require just as much work (if not more!) than landing a new client. Leaders should resist the urge to discount such efforts and take the time to develop new ways to engage their sales department and ensure they’re motivated to hit targets. It’s also essential to work with the team closely to help them manage the upheaval. For instance, those who’ve established workflows for several years may find the change daunting and stressful. Often, it’s just a matter of preparing them adequately and making sure they understand there’s plenty of support to help them succeed.

3. Requires a recurring billing system to handle revenue recognition

Moving away from upfront sums means that those migrating to SaaS business models need to be aware of the changes to billing and will require robust recurring billing processes to handle what may be quite a large influx of new customers. Ignoring this back-end detail can result in accounts teams being swamped by end-of-month and unable to invoice customers in time. Setting up recurring billing to automate many of these processes will be central to SaaSification success.

Management also needs to be mindful of operational expenses and keep track of churn metrics to tweak their offering until they’ve maximized monthly recurring revenue. These types of considerations are our bread and butter, so here’s a list of resources we recommend diving into for a better understanding:

  1. Revenue recognition for subscription billing
  2. The pros and cons of monthly vs annual billing cycles
  3. What you need to know about ASC 606 for SaaS

MoxiWorks saves 80 days annually

4. Data security policies need to be watertight before go-live

One of the biggest challenges facing companies in recent times is security. With SaaS products and services, there’s often a substantial amount of data collection. Teams require a briefing on data regulations for all regions (as they can differ, for example, GDPR in Europe is quite different from privacy policies in North America) and your data protection guidelines and policies.

Critical data must be protected in every eventuality, and the safeguarding of sensitive information is paramount to any software company’s ability to grow. For instance, security is one of the core considerations scrutinized in any merger and acquisition process. Highly regulated industries such as finance or healthcare may require a considerable investment in securing your data. Failure to do so may result in crippling fines and data breaches. There’s also the requirement that you invest in robust tools to protect sensitive data, which can vary based on industry.

Further reading: 5 steps to reduce and address security risk in mergers and acquisitions

5. Trouble integrating with other software will impact long-term scalability

Most companies tend to use various SaaS providers, and they often look for solutions that integrate easily with their existing tools. It can be challenging for you to scale the use of your products and services if they don’t easily integrate. One of the easiest ways to increase accessibility is to join open data initiatives, publishing well-documented APIs that allow companies to integrate your SaaS tools.

It’s also worth considering what kinds of files your systems export. Ensure there are plenty of commonly compatible formats such as Excel, CSV, etc. Development teams working on SaaS solutions need to keep integration front and center when introducing new features. Even novel features will go ignored if not easily integrated into project flows.

Check out our complete guide to subscription management

The software as a service (SaaS) subscription business model continues to grow in popularity, but many companies still struggle to understand what they’re signing onto when they subscribe. A SaaS contract, specifically a cloud service agreement, is not the same as a licensing agreement and doesn’t adhere to a standardized format across organizations, making this type of document particularly difficult to decipher.

Nevertheless, learning the basics of a SaaS contract will position your company to score a better deal as you’ll be able to meaningfully negotiate the nitty-gritty. This blog will help you develop a general understanding of SaaS contracts by answering some commonly asked questions and clarifying key clauses.

Interested in a specific aspect of SaaS contracts? Click on the topic below to skip ahead.  

  1. Scope of permitted use
  2. Limitation of liability
  3. Data ownership and security
  4. Customer service and support
  5. Subscription plan, model, and pricing
  6. Term, termination, and renewal
  7. Service Level Agreement (SLA)

What is a SaaS contract?

SaaS is a software distribution model where users access cloud-hosted applications through the internet in exchange for a recurring fee. Typically, the software provider offers different features and degrees of functionality through a few pricing tiers. To support this subscription model, vendors need specific contracts.

A SaaS contract is an agreement between the application developers and users that defines how the application is to be accessed and used. Many providers have a ‘terms of service’ or ‘terms and conditions’ page that fulfils the role of a simplified SaaS contract.

How is a SaaS contract different from a perpetual licensing agreement?

Under a perpetual licensing agreement, a company will deliver and physically install software and relevant hardware. Customers are granted rights to copy and use the software, which also serves to protect the vendor’s copyrights, patents, and intellectual property rights.

A SaaS contract permits users to access the software through the cloud and customers can only use the software in line with the terms of their subscription. In brief, a perpetual license agreement leads to a singular payment and full ownership of the software whereas a SaaS contract permits use of the software as long as the customer pays for the service.

Differences between SaaS contracts and licensing agreements

Why do companies need a SaaS contract?

SaaS contracts document the exact software access clients receive for the term of their subscription. They are essential for cloud application providers to minimize the risk of lawsuits and penalties. Terms, limits, and liability waivers establish the relationship between the vendor and users so that both parties know exactly what is expected. SaaS contracts can protect vendors’ interests by limiting liability in a data breach or prohibiting specific user activities, like sharing the software with other people or using it to commit illegal actions. It’s not uncommon for providers to have unique SaaS contracts tailored to each of their individual, small business, and enterprise-grade tiers.

What is included in a typical SaaS contract?

SaaS contracts need to strike a balance between the provider’s responsibilities and the users’ expectations to properly establish legal accountability by both parties. Without proper foresight, the process of creating, managing, negotiating, and maintaining an organization’s contracts can be a headache-inducing legal quagmire. However, a firm understanding of the layout and key clauses in a typical SaaS contract will help prepare your team to tackle the challenge.

A typical SaaS contract includes the following sections:

1. Introduction

2. Definitions

3. SaaS services

4. Customer responsibilities

5. Payment

6. Term and termination

7. Warranties

8. Limitations of liability

9. Indemnification

10. Confidentiality

11. Other general provisions

12. Exhibits

 

What are the key clauses in SaaS contracts?

A SaaS contract may look easy to manage in theory, but it can become a painful process in practice, especially if you do it manually. Each contract may contain distinct terms and specific clauses dependent on relevant information like your company’s industry or the products and services you offer. Nevertheless, you can set your organization up for success by learning about the following key clauses found in virtually every cloud service agreement.

Jump to a specific clause by clicking below: 

  1. Scope of permitted use
  2. Limitation of liability
  3. Data ownership and security
  4. Customer service and support
  5. Subscription plan, model, and pricing
  6. Term, termination, and renewal
  7. Service Level Agreement (SLA)

 

1. Scope of Permitted Use

One of the most important aspects to understand about SaaS contracts is that any licensing is for the services—not the software. As such, most SaaS contracts don’t include end-user licence agreements (EULA). To make this clear to all parties, you’ll often see “scope of permitted use” or “scope of licensed access and use” clauses in place of a “scope of licence” clause.

The scope of permitted use defines and limits the rights transferred to the subscribers. SaaS contract permitted use provisions usually include most or all the following:

 

SaaS contracts often also include a “prohibited uses” clause in the SaaS services section or a separate acceptable use policy, outlining actions that would cause the user to forfeit their access. Behaviours typically included in this clause include using the software to conduct illegal activities, spam or harass other customers, and install viruses. It is the responsibility of the subscriber to ensure that the scope is sufficient to support the intended current and future use of the SaaS service.

 

2. Limitation of liability

A “limitation of liability” clause outlines under what circumstances the SaaS provider is liable to pay damages to the customer(s) and the maximum amount of damages owed. Most SaaS contracts include limitation provisions to protect the vendor from the impact of events beyond the developers’ control. Power outages and bandwidth overloads are common occurrences that can make it impossible for an application to function correctly. The specifics of these clauses often differ between SaaS vendors to capture risks associated with their unique solutions, but SaaS contract limitation provisions usually include most or all the following:

3. Data ownership and security

Cloud-based applications host an enormous amount of provider- and user-generated data, so SaaS contracts must have clauses to establish who owns the data uploaded to the platform and each party’s data security responsibilities.

SaaS vendors that handle personally identifiable information (PII) or protected health information (PHI), particularly those operating within the healthcare or finance industries, must ensure that their data ownership and security clauses are watertight. While data ownership clauses state who owns data uploaded to the service, data security provisions usually include most or all the following:

 

Additionally, SaaS vendors must create a Privacy Policy compliant with privacy laws in the regions where their software is used. For example, SaaS vendors operating in the EU must write a policy that complies with GDPR. Privacy Policies typically cover:

 

4. Customer service and support

Customer service and support clauses state how the SaaS vendor will offer support for their services and any additional guarantees related to expected service. Customer service and support provisions usually include most or all the following:

 

5. Subscription plan, model, and pricing

These clauses document the exact subscription plan, model, and pricing the customer has chosen. This is another section that is frequently negotiated during B2B deals. Vendors can work with customers to optimize their SaaS plan, lowering customer acquisition costs (CAC) and increasing customer lifetime value (LTV) through higher prices and better retention rates. Subscription plan, model, and pricing provisions usually include most or all the following:

 

Top 8 SaaS pricing models

6. Term, termination, and renewal

Term, termination, and renewal are three clauses that establish the term of the agreement and the processes to terminate or renew the account. Many SaaS vendors have evergreen renewals in place that require the subscriber to terminate their contract before a specified date, or else the agreement will automatically renew. These clauses are generally presented as:

 

7. Service Level Agreement (SLA)

A Service Level Agreement (SLA) can be a stand-alone document or a section of a comprehensive SaaS contract, either way it’s a critical component of any cloud service agreement. An SLA designates minimum performance standards, usually with a focus on service availability. A comprehensive SLA may raise customer expectations, but it can also be a selling point. Quick response times and high availability are valuable metrics for potential subscribers. SaaS SLAs usually include most or all the following:

 

Introducing Subscription Billing Suite

Accurately managing and maintaining SaaS contracts is nearly impossible without automating at least some parts of the process. Modern companies need readily available insights into KPIs and subscription plan details. A comprehensive subscription management solution, like Subscription Billing Suite, can not only handle recurring billing, invoicing, and recognition, but also supports flexible pricing structures, real-time reporting, and regulatory compliance. It’s available as an embedded extension in Microsoft Dynamics 365 Finance and Operations, Business Central, and Dynamics GP.

Complete guide to subscription management 2

As technology continues to advance at an exponential rate, retailers are feeling pressure from their customers to stay informed and keep their systems updated. Given that traditional lease structures, like a rent-to-own model, can’t accommodate the rapid evolution of technology some retailers are turning to new solutions and embracing financial transformation.

Device as a service (DaaS) enables retailers to access the latest hardware and software on a subscription basis while the provider covers life cycle management of the devices. This blog will answer frequently asked questions about DaaS to help retailers gain a clearer understanding of why this subscription model is becoming a popular alternative to traditional leasing practices.

Interested in a particular aspect of DaaS? Skip ahead by clicking on the question below.

What is Device as a Service (DaaS)?

Device as a Service (DaaS), less commonly PC as a service (PCaaS), is a fractional ownership subscription business model where buyers can pay a recurring fee in exchange for hardware, software, and lifecycle management.

DaaS originally meant Desktop as a Service where virtual desktop infrastructure (VDI) is hosted and maintained in the cloud by a service provider in return for a fixed monthly fee. Although, that definition is starting to fizzle out because VDI can be included in a DaaS contract. For the remainder of this blog, DaaS will refer to Device as a Service.

What is the difference between DaaS and SaaS?

Software as a Service (SaaS) and DaaS both allow retailers to have access to technological infrastructure on a subscription basis; however, SaaS only provides select software whereas DaaS offers hardware and device life cycle management as well. Therefore, SaaS can be accessed entirely through the cloud while DaaS can be partially offered via the cloud.

What is a DaaS contract?

A DaaS contract is similar to a licensing agreement and details how the customer can and cannot use the devices and software for the duration of their subscription. Providers often offer multiple subscription tiers at different price points that include additional features like enhanced security, or advanced customer support. The contract identifies which tier the customer chose, their rights and responsibilities, and the subscription fee. DaaS agreements are all unique and dependent on the provider.

DaaS providers cover device lifecycle management

How is a DaaS contract different from an operating lease?

At first glance, DaaS seems like a $1 buyout or fair market value (FMV) operating lease; however, there are some key differences that distinguish it as a subscription business model. Unlike a lease agreement, DaaS contracts demonstrate the following components:

 

The as-a-service rental-retail model demonstrates a relational approach to fractional ownership. Effective DaaS strategies focus on developing strong customer retention initiatives while budgeting for higher customer acquisition costs to support a growing, loyal customer base. Subscription services forgo traditional models that are primarily concerned with making the sale and then moving on to another prospect. Instead, they require sustained contact with customers through a variety of touchpoints to deliver the highest standard of customer service and increase the likelihood of contract renewals.

What is an example of a DaaS solution?

DaaS is an emerging model that’s been adopted by a few vendors. Microsoft currently offers a few DaaS initiatives. Surface as a service is customizable a bundle subscription that can include Windows 10, Office 365, and Teams on its Surface Book complete with a Protection Plan for retailers and consumers to purchase through a paid subscription service.

Microsoft Surface as a Service is a customizable bundle subscription

Why do retailers switch from operating leases to DaaS?

The as-a-service business model is alluring to many brands for its low barrier to entry, accessibility, and scalability. By switching from an operating lease to DaaS, retailers can decrease downtime, liability, and overhead. Any IT expenses related to devices count as operating expenses rather than capital expenses, which makes them tax deductible.

What are the benefits of DaaS?

 

Key benefits of adopting DaaS

How does DaaS enable retailers to adopt new technology?

As technology continues to rapidly evolve, so too does business and consumer expectations. Traditional rentals and equipment leases can be rigid, with many limiting clauses that lock brands into specific technologies and timeframes. DaaS allows brands to only pay for the use of equipment and provides them with the option to upgrade to the newest improved devices for a similar monthly fee. The end-user has consistent access to the latest features and capabilities and can maintain top notch technology without spending a fortune.

As well, when vendors announce that a hardware or software has reached its end of life, retailers no longer need to scramble to restructure their IT infrastructure. The costs and responsibility of secure device disposal fall to the technology provider, reducing common pitfalls that may otherwise jeopardize a company’s bottom line.

Why is DaaS a cost-effective solution to technological infrastructure?

Technological resources don’t have to be an accounting black box. DaaS is a cost-effective solution with no upfront capital investment, maintenance and management fully covered by the technology provider, and usually lower monthly fees given the customer is not following a rent-to-own model. Additionally, since it’s a subscription service, brands can more accurately predict monthly cash flow and categorize device-related IT expenses as operating expenditures (OPEX) instead of capital expenditures (CAPEX).

CAPEX are all costs for development, design, or delivery of non-consumable aspects of a product or system. OPEX are all recurring costs for a product, system, or company. Therefore, purchasing a PC would count as CAPEX, but the subscription fee for a DaaS solution would be classified as OPEX. Unlike CAPEX, OPEX are tax deductible.

The simplicity of a generally standardized per device per month pricing model is beneficial when finance teams budget and forecast projected growth within a company. Customers can independently calculate the costs and effects of expanding or rotating in new devices at any point in their growth journey, ensuring that they can secure the best deals.

How can DaaS benefit internal IT teams?

There is a considerable opportunity cost for brands when internal IT teams are required to perform the routine work of configuring and managing end-user devices. Given that DaaS providers are fully responsible for the device management lifecycle, IT staff no longer need to be weighed down with tasks like procurement, provisioning, support, or maintenance. Instead, freeing them/allowing them to focus on big picture projects that drive business productivity.

What CIOs are saying about the state of IT

How does DaaS enable fast deployment and iterative testing cycles?

Traditional leasing agreements can waste a significant amount of time and money if it turns out that the newly installed hardware is less than optimal for everyday use. DaaS allows teams to test out new technologies in low quantities with minimal overhead before the business adopts them. Since it’s easy to scale up or down with a subscription pricing model, teams can readily analyze performance data and adjust their testing cycles if the initial device is not up to standards.

Brands can also benefit from zero touch deployment, which is a high-volume deployment strategy whereby the provider delivers the devices fully configured and ready for use. Your internal IT team won’t have to be involved. If a new employee joins your company, you can order a new device and have it shipped to a location of your choice. The employee can then login and start working immediately.

How does DaaS support enhanced security and device recovery?

Things happen—employees may accidentally spill coffee on their computer or leave their phone behind on a bus. Mistakes like these can waste hours getting your employees set up again to complete their work, not to mention the resources spent containing potential security breaches. Some businesses stock lockers full of extra equipment to try to mitigate this risk, which is an inefficient use of resources.

DaaS eases these pain points with efficient service replacement and enhanced security protocols. Trusted providers work with manufacturers to procure devices that have been vetted for security controls at each junction along the supply chain. An end-to-end DaaS engagement can include unified endpoint management tools that permit brands advanced cloud-based security capabilities like remotely locking or wiping devices.

Introducing Subscription Billing Suite

A successful DaaS business model relies on handling large volumes of data, forecasting informed by real-time analytics, and the ability to seamlessly update existing contracts. Without the proper infrastructure in place to support your growth journey, your company will likely be overwhelmed and unable to scale appropriately. A robust subscription management solution, like Subscription Billing Suite, can not only manage recurring billing, invoicing, and recognition challenges, but also supports flexible pricing structures, real-time reporting, and regulatory compliance. It’s available as an embedded extension in Microsoft Dynamics 365 Finance and Operations, Business Central, and GP.

The complete guide to subscription management