Recurring Billing Guide for SaaS Companies in 2023
Recurring billing is a foundational element of SaaS. While the concept seems simple, implementing a recurring billing workflow is easier said than done. Here’s what you need to know about the benefits (and challenges) of setting up your billing processes for recurring subscriptions.
There’s one simple concept behind the fact that SaaS businesses grew 300% more from 2012 to 2018 than traditional companies in the S&P 500 — recurring billing.
Recurring billing unlocks a level of predictability in SaaS revenue growth that is largely unmatched by other business models. And it unlocks critical growth metrics like net dollar retention that clearly show your ability to build momentum as a business.
But SaaS billing isn’t without its challenges. The growth potential of the subscription model is balanced by the complexity of managing recurring billing. While ARR growth might get all the attention, you need to get the basics of recurring billing right if you want to build the right foundation for a high-growth organization.
Table of Contents
What Is Recurring Billing?
Recurring billing is the model subscription businesses use to charge customers for services at regular intervals over the agreed upon contract length or until the customer cancels the subscription.
Billing schedules can vary depending on your specific business model. Some product-led SaaS companies may charge on a month-to-month whereas those selling enterprise contracts could charge annually or quarterly.
The Mechanics of Recurring Billing
The mechanics of a recurring billing process seem simple on the surface, but are quite complex when you get into the real-world execution of each step.
Specific logistical steps of the billing process will depend on your pricing model — whether it’s usage-based, per seat, or set according to different pricing tiers. However, no matter what pricing model your SaaS business uses, the mechanics of recurring billing include the following steps.
- Set billing and payment terms upfront. Either in a contract or in the terms of service for a month-to-month agreement, you have to agree upon the cadence of recurring billing. Will you charge customers each month? Upfront for a certain period of time? At varied amounts based on usage? The first step of any billing process for a customer is to put these rules in place.
- Deliver invoices according to terms. Consistently deliver invoices according to those payment terms, automating the process as much as possible to ensure accuracy.
- Collect payments from customers. Either by automatically charging a customer’s credit card or invoicing on something like net-30 or net-60 terms, collect payment for service. Give customers as many options for payment as you can, including credit card, ACH transfers, or physical checks.
- Send dunning emails as necessary. Use dunning emails to remind customers of upcoming payment due dates, guide them through payment steps, and notify them of failed credit card charges when necessary. This is generally applicable to companies that automatically charge a credit card rather than send traditional invoices to customers.
- Monitor AR aging schedules for potential issues. For businesses sending traditional invoices, AR aging charts show how long invoices have been outstanding. Use these reports to identify delinquent accounts so your accounting or collections team can send email reminders, call points of contact, or (if necessary) suspend service.
Benefits of Recurring Billing for SaaS Businesses
While the massive amount of investment money flowing into SaaS businesses may seem like reason enough to adopt a recurring billing model, there are three underlying drivers of the rush to build and invest in software subscription businesses.
- Greater top-line predictability. In the startup world, top-line revenue growth is what makes or breaks the business. You can get there making one-time sales like in an ecommerce model. But there’s no “guarantee” that high-volume sales this month will translate to another solid month. Recurring billing schedules give you a longer line of sight on your revenue growth trajectory. That can make it easier to plan for your business and it also makes you a more attractive investment for VCs.
- Smoother experience for customers. In some cases, you can create a recurring billing process so smooth that customers can take a “set it and forget it” approach to your product. Customers get uninterrupted service without the hassle of managing invoices or working with AR departments. And you get more stable cash flow.
- More opportunities for upselling and cross-selling. Companies that offer one-time sales have to fight for repeat purchases. But a recurring billing model lets you focus on customer success and retention instead. The built-in stickiness of recurring subscriptions gives you chances to increase contract values by selling more seats or adding new products to the customer’s account depending on what your business model looks like.
The Challenges of a Recurring Billing Model
The concept of recurring billing seems simple enough on the surface, but it’s loaded with complexity that you need to be ready to address. As one consultant puts it, the subscription model makes that harder than it’s worth. With subscriptions:
“You have recurring pricing. You have fixed pricing. Or you have a combination of both. You can have different billing frequencies: monthly, quarterly, semi-annually, or annually. And then after customers have signed up, contracts change. You might have multiple amendments a year. And the way the relationship is ongoing, you have to manage renewals.”
All of these moving pieces result in a few key challenges. The right SaaS billing software can help you automate some of the logistical challenges — communicating upcoming payment due dates, dealing with failed payments, etc. But other challenges are more complex.
Defining Recurring Revenue
If you’re a product-led or B2C SaaS business treating your billing system as the source of truth for revenue data, defining MRR will be a major challenge to overcome. While software can automate the complexity of recurring billing logistics, it typically can’t give you an easy way to measure MRR accurately. Instead, you get a black box with high-level outputs for invoiced and collected payments.
When pulling SaaS billing data and defining MRR, make sure you can answer a few key questions:
- For historical invoices, do we want to include failed, canceled, refunded, and/or credited payments in MRR?
- Which transactions are one-time payments versus truly recurring subscription payments?
- Will we include discounts in MRR? Which types of discounts?
- How do we handle cancelations in terms of MRR reporting?
Mosaic Co-Founder Brian Campbell dug into this challenge in an episode of The Role Forward. Listen in for more information about making sense of SaaS billing data.
Adapting to Customer Contract Changes
The same flexibility of payment terms and service agreements that make subscription models so valuable also makes recurring billing processes more complicated. Think of a per-seat pricing model as an example.
A customer that starts the month with a subscription for 10 user seats may end the month with 20 users. But they could add seats one at a time, 10 different times throughout the month depending on new employee start dates. This customer would have 11 different invoices for one month, leaving you with a large volume of data if you extend the premise across many accounts.
Constant changes to customer contracts and high volumes of data are a recipe for billing mistakes. Ensuring you have proper visibility into your billing data and a billing system that can adapt to ever-changing contracts is critical to keeping up.
Navigating Global Taxes and Regulatory Compliance
The problem of SaaS taxation is a complicated one — much more complicated than we can cover in this one small section. Suffice to say that managing ongoing customer subscriptions across many different states and countries will give you a wide array of different tax laws to comply with. A tool like Anrok can help you automate SaaS sales tax compliance so you can ensure your recurring billing process scales into new markets without issue.
Investing in Necessary Infrastructure and Technology
Brian Weisberg, CFO of Tidelift, has noted his history of buyer’s remorse with SaaS billing systems. If you have a similar sentiment, you might be tempted to build out a homegrown solution instead. While this is possible, it takes a massive investment of both time and money to get right — and even then, you might be stuck spending tens of thousands of dollars to maintain a system that can’t adapt to your current needs.
You’re better off finding the right SaaS billing software for your unique business model and augmenting its value with more robust planning and reporting software. Early-stage companies just starting to report on billing data might be able to get by with basic subscription management tools like ChartMogul or Profitwell that sit on top of a Stripe or Chargebee implementation.
But as you build out a finance function and need to get more granular insights, you’ll need a Strategic Finance Platform like Mosaic to integrate all your billing data with the financial and operational data from the rest of your org.
Recurring Billing and Mosaic
The more you treat your billing system as a source of truth for revenue, the more important it becomes to be able to understand billing data at the most granular level.
Tools like Stripe and Chargebee are great for helping you build out the logistics of a recurring billing process. But they don’t give you much understanding of your billing data beyond a simple overview of revenue billed and collected.
Mosaic integrates directly with the most popular SaaS billing software — Stripe, Chargebee, Ordway, and Maxio/SaaSOptics — to go beyond the basic reporting those tools provide. Our approach to standardizing billing data gives you complete control over how you define MRR, creating the foundation for more insightful analysis and more accurate planning.
Want to learn more about how our platform helps SaaS companies make sense of their billing data? Request a personalized demo and start down the path of making your finance function more strategic.
Recurring Billing FAQs
How do you transition from a one-time payment model to a recurring billing model?
The key to transitioning from one-time payments to recurring billing is to implement some sort of subscription model for your product. This could take the form of tiered pricing, usage-based pricing, per-seat pricing, or any other variation of subscription-based billing. Conduct customer research to determine an appropriate model and price point and start forecasting how the subscription model will impact revenue growth and cash flow.