Global software-as-a-service (SaaS) industry revenue is projected to reach US$339 billion in 2024. For SaaS businesses, subscription billing is key to consistent revenue collection while offering customers flexibility and choice.

In this article, we'll explain what SaaS billing is, how it works and the different types of SaaS billing. We'll also look at the ways in which SaaS billing management solutions, such as Stripe Billing and Invoicing, can streamline billing for SaaS businesses.

What's in this article?

• What is SaaS billing?
  
• How does SaaS billing work?
  
• Types of SaaS billing
  
• SaaS billing features
  
• SaaS billing management best practices
  
• Stripe Billing and Invoicing for SaaS billing
  

What is SaaS billing?

SaaS billing is the specialised process used for charging customers who subscribe to software-as-a-service applications. Unlike traditional software models that involve one-off purchases and perpetual licensing, SaaS operates on a subscription basis. Billing is a recurring process, often structured around monthly or annual cycles. Charges can include the software's base subscription fee and additional costs for extra features, data storage or premium services.

How does SaaS billing work?

SaaS billing is an interconnected system with multiple touchpoints. Here's how it works:

• Customer initiates service
  The SaaS billing process begins when a customer creates an online account with a business and subscribes to a service.

• Billing structure
  When a customer creates a new account, the billing system triggers various actions based on their interaction with the service. For example, if a customer upgrades to a more expensive service tier or adds additional users to their account, the system automatically recalculates the upcoming invoice to reflect these changes. Similarly, downgrades or cancellations will adjust the billing requirements in real time. Typically, automated billing algorithms oversee these operations, executing them with minimal manual intervention.

• Payment processing
  The system verifies and authenticates billing details, applies charges and generates receipts. For credit-based or invoiced customers, payment gateways complete these processes. In cases of failed payments, dunning management sends reminders to customers and reattempts charges.

• Compliance and security
  Compliance with financial regulations is integral to SaaS billing. For example, encryption protocols safeguard customer data, while standards such as the Payment Card Industry Data Security Standard (PCI DSS) guarantee data security.

• Self-service account functionality
  After initiating a subscription, customers generally receive immediate confirmation along with details of their billing cycle. During the subscription period, they can access a self-service portal to review their usage, update payment information or adjust their subscription details.

• Invoicing and billing
  When a billing period closes, customers receive invoices with itemised lists of charges. These invoices often incorporate visual elements, such as graphs or charts, to help customers interpret their usage metrics – a feature that's especially useful for businesses that need to allocate costs internally.

Below, we'll look at different ways in which businesses can structure and manage SaaS billing.

Types of SaaS billing

SaaS billing models fall into several main categories, each with distinct functionalities, advantages and disadvantages.

• Flat-rate billing
  This is the simplest form of billing, in which customers pay a fixed fee for access to the service. Typically, flat-rate billing is associated with straightforward services that don't require complex feature sets or multiple user tiers.

  • Advantages: Simplicity and predictability make it easy for customers to understand what they're paying for.
    
  • Disadvantages: The one-size-fits-all model may not adequately serve the needs of all customers, especially those that require specialised services.
    

• Per-user billing
  In this model, customers pay based on the number of users they have on the platform. This is most common in business-to-business (B2B) services, where each team member in an organisation may need an account.

  • Advantages: Scalability is built into the pricing model, and it correlates directly with a company's growth.
    
  • Disadvantages: Costs can escalate quickly as the organisation grows, causing some customers to look for more cost-effective solutions.
    

• Tiered billing
  Here, the SaaS provider offers different pricing tiers, each with its own set of features. Businesses often use this model to support customers of different sizes and needs.

  • Advantages: Flexibility for customers to choose a tier that suits their specific needs.
    
  • Disadvantages: Those at lower tiers may find themselves quickly outgrowing their feature set, and upgrading can be costly.
    

• Usage-based billing
  Customers are charged based on how much of a particular service they use. Usage-based billing is common in industries such as cloud computing, where costs are based on storage or data usage.

  • Advantages: Customers only pay for what they use, making this model financially efficient.
    
  • Disadvantages: For some organisations, costs that change from one billing cycle to another can make budgeting difficult.
    

• Freemium
  In this model, basic services are free, and customers have the option to pay for advanced features or capabilities. Often seen in business-to-consumer (B2C) SaaS products, the point of this model is to get users dedicated before upselling to them.

  • Advantages: The low entry barrier encourages wide adoption.
    
  • Disadvantages: Conversion rates from free to paid users can be low, affecting revenue.
    

• Hybrid
  This model combines various elements of the other billing models. A SaaS company might offer a flat rate for the basic service and then charge extra based on usage or additional features.

  • Advantages: It's customisable and can meet a broad range of customer needs.
    
  • Disadvantages: Complexity can make it difficult for customers to understand what they're paying for.
    

Each billing model comes with trade-offs and is suited to specific types of services and customer needs. SaaS companies should choose the billing model that's most closely aligned with their service offerings and target audience.

SaaS billing features

• Account management
  This feature provides a centralised location, where businesses and customers can control different aspects of their interaction. For customers, it means the ability to update personal information, review usage or adjust service levels. For businesses, it serves as a repository for customer data, payment history and service tier details – enabling quick decision-making and targeted communication.

• Automated invoicing
  This automates the billing process by generating invoices based on usage metrics or fixed time intervals. It removes the manual steps involved in calculating costs, issuing invoices and tracking payments. For customers, it offers the convenience of automated billing with itemised charges.

• Payment gateways
  These are the integrated systems that handle transactions. They accept a wide variety of payment methods such as credit cards, bank transfers and digital wallets. Payment gateways make it easy for businesses to centralise payment collection and reconcile accounts, while giving customers the flexibility to pay the way they want.

• Rate and plan management
  This is the administrative dashboard or interface that allows businesses to set up and manage multiple pricing plans or tiers. It makes it easy for businesses to introduce new pricing strategies. Customers can select the plan that best suits their needs.

• Tax calculation
  This feature automatically calculates and adds the relevant taxes to customer invoices, which saves businesses the headache of determining the applicable taxes manually.

• Currency conversion
  For SaaS companies that operate in multiple countries, this feature automatically converts prices into the customer's local currency. This helps customers understand costs, while enabling businesses to operate globally – without having to constantly update currency rates.

• Dunning management
  Dunning management handles failed or late payments by automating the process of notifying customers and retrying payment collection. For businesses, this improves revenue recovery; meanwhile for customers, it provides opportunities to resolve payment issues.

• Reporting and analytics
  This feature offers valuable insights into customer behaviour, revenue trends and churn rates. Businesses can use this data to target marketing efforts and inform strategy adjustments.

• Compliance management
  This feature ensures that all payment processing and data storage complies with local laws and international standards around data security and financial transactions. This protects both the business and the customer in the event of audits or legal scrutiny.

• Customer notifications
  This keeps customers informed about important account activities, such as successful payments, failed transactions or upcoming renewals. Transparency builds trust and helps maintain long-term customer relationships.

Each of these features contributes to a strong, flexible SaaS billing system that meets the needs of businesses and customers.

SaaS billing management best practices

• Granular reporting
  Collect and analyse data points related to user engagement, payment history and service tiers to identify customer behaviour patterns. This information can help you make data-driven decisions about pricing adjustments or targeted communications.

• Centralised billing
  Use a unified billing system to manage all revenue streams – from subscriptions to one-off payments. This consolidation simplifies financial reporting and improves data accuracy.

• Real-time updates
  Make sure that any changes to account status, usage or service level are reflected in the billing system immediately. Real-time data synchronisation between different departments can prevent invoice disputes while enhancing customer satisfaction.

• Customer communication
  Prioritise clear, transparent communication regarding any billing changes or actions. Sending prompt notifications about upcoming renewals, successful payments or failed transactions cultivates strong customer relationships and increases the chances of recovering payments successfully.

• Multi-tier verification
  Introduce multiple levels of verification for billing-related changes or sensitive actions, such as closing an account. This minimises the risk of unauthorised activities and ensures data integrity.

• Data security
  Prioritise the highest standards of encryption and data protection for the storage of billing information.

• Invoice customisation
  Offer customers the ability to customise invoices with relevant business details and branding elements. This improves the customer experience while reinforcing brand consistency.

• Multiple payment options
  Support a diverse customer base by providing a wide variety of payment methods.

• Billing cycle flexibility
  Allow customers to choose their billing cycles, whether that's monthly, quarterly or annually. Accommodating their preferences can lead to longer retention rates.

• Training and support
  Equip your staff with the skills and knowledge to manage the billing platform effectively. Strong internal competence will lead to smoother operations and fewer errors.

• Customer feedback outreach
  Seek customer feedback about the billing experience. Use this direct input to make any necessary adjustments to your processes.

• Disaster recovery plan
  Have a contingency plan in place for scenarios such as data loss or system outages. A detailed backup and recovery strategy will minimise the impact of unforeseen complications.

• Performance audits
  Conduct regular performance audits of your billing system to identify any inefficiencies or areas for improvement. Follow this up with action plans for continuous optimisation.

Adhering to these best practices can improve the effectiveness of your SaaS billing management – from improving financial reporting to increasing customer satisfaction and retention.

Stripe Billing and Invoicing for SaaS billing

Stripe Billing and Stripe Invoicing handle the complexities of SaaS billing for businesses. Here's how they work:

• Reliable revenue collection
  SaaS businesses need consistent and reliable revenue streams. Stripe solutions automate recurring relationships, manage customer events and prioritise repeat attempts to collect failed payments – which reduces disruptions in revenue flow. Additionally, Stripe Invoicing allows businesses to dispatch customised quotes promptly, automating account receivables for more consistent income.

• Minimisation of payment failures and churn
  Churn and payment failures are major concerns for SaaS businesses and can potentially lead to substantial revenue loss. Stripe automatically retries failed charges and works directly with card networks to update card details, thereby reducing payment failures due to expired or replaced cards.

• Flexible pricing models
  To remain flexible, SaaS companies often need to change their pricing strategies. Stripe supports a variety of billing models – from simple flat-rate pricing to complex tiered or usage-based structures. This enables SaaS businesses to tailor their pricing model according to market demands or business strategies without needing to revamp their entire billing system.

• Global reach and currency handling
  Currency conversion and handling can pose a challenge for SaaS businesses targeting a global audience. Stripe's solutions support over 135 currencies, allowing customers and businesses to use the currency of their choice. This global support expands market reach without currency-related complications.

• Simplified financial reporting
  Keeping track of finances, especially for recurring revenue models, can be complex. Stripe provides detailed financial reports that SaaS businesses can use to monitor their revenue health, to track unpaid invoices and to understand their financial growth trajectory without the need for additional accounting tools.

• Customer experience and trust
  Stripe offers a secure and easy-to-use payment experience, which enhances customer trust and reduces churn.

Learn more about Stripe Billing and how businesses can use it to enable unified, automated SaaS billing systems.