IP Applications Billing and Payments blog

Our last blog post dealt with our telecom billing heritage and the need for a strong rating engine if you want to handle the coming pricing models of cloud based applications. It turns out, a strong rating engine is only part of the story, and to our customers and prospects, quite often not the most interesting part.

It doesn’t matter where you start on the spectrum of monetization applications for subscription-based services and products, you have to do everything right to bring a subscription service to market.  As a “billing” company, prospective customers arrive on our doorstep looking for one or maybe two of the above.  The conversation warms up considerably when we talk about our whole range of capabilities. 

The Storefront gives subscribers a low-touch way to subscribe.  “Touch” is a weird variable in the business equation.  Regardless of the customer response, it costs money.  For some products, increasing touch increases satisfaction, but for many products it lowers it.  A well-designed self-service storefront can improve the customer’s experience as it reduces costs.  Subscribers like to set themselves up on your system because when they do it themselves, their name is spelled right, the products they want will be what they get, and they don’t have to worry about whether the stranger on the other end of a phone is going to steal their credit card number.  A clean and simple storefront improves customer satisfaction.   

The Admin Portal is how your company’s staff communicates with the system.  Through it they configure products, pricing plans, business rules and process workflows for your customer’s experience.  A well-designed Admin Portal connected to a comprehensive application provides tremendous flexibility.  Flexibility in defining pricing, product presentation and subscriber experience becomes increasingly valuable over time as product lines evolve and the customer base expands.   

The Rating Engine automates the financial administration of your business deals.  The Storefront and the Admin Portal are how the participants in a deal define the key business parameters.  Then, every billing cycle, the rating engine takes all that data about products, prices, taxes, currencies, subscribers and usage and computes an invoice.  Long-term contracts with variable terms, like subscriber counts or usage statistics are very difficult to bill accurately.  The rating engine doesn’t get bored, it doesn’t go golfing, it doesn’t take vacation, and it never forgets.   

The Payment Gateway, for those deals where payments are made by automated bank check or by credit card, is where money happens.  “Payment gateway” is a simple concept, but the actual implementation can be daunting because of its complexity.  Moving money around is done by banks and credit card issuers, and they protect us and themselves with walls of bureaucracy and risk mitigation strategies.  Your choice of business model has a powerful influence over how long it takes to get set up and your long-term costs of doing business.  The payoff to all the challenges is that once the setup and testing is complete, money “just happens” every billing cycle.   

There is a lot more detail behind a complete subscription commerce business, and that becomes evident as new customers work through the onboarding checklist we’ve developed over the last decade.  The good news is that once that detailed work is done, you have a smooth-running and efficient subscription business system that supports your products, your business model and your subscribers. 

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I wrote another post the other day about the key questions facing SaaS marketers.  I talked about Consumer versus Enterprise billing and about Direct versus Channel marketing models.  Overlaid on all of these choices, we have the concept of Session Control.

We implement Session Control through a component of our application called the "Session Manager".  It's an optional service but virtually all of our existing clients use it.

If you're a do-it-yourselfer and your application keeps track of users and sends data to the billing application (wherever it is), session management is done by the application itself.  If a customer doesn't pay their bill, someone in a place of authority has to take action to disable access to the application until they pay. 

If you have a small number of customers, the "someone" is probably in your accounting department and they call or email someone at the hosting company to pull the plug for a while.  It's a workable model for a small business, or if you don't care about timely payment.  It may sound odd, but if the customer has a perpetual license, for instance, or it's your corporate parent there's no payment to wait for and session management is unnecessary.  Manual control doesn't scale beyond a few customers, though - it becomes pretty labor-intensive as you grow.

What our Session Manager does is automate the control process and close the loop on payments.  After an account is set up for a new customer, the application and the Session Manager constantly swap messages about who's using the system (is this user that just logged in an authorized user?) and tracking the necessary billing data.  The Session Manager also monitors the payment queue to track whether the account is up to date.

The real value of the Session Manager becomes evident on that fateful day that a customer doesn't pay their bill.  Then the Session Manager uses the client's business rules to decide how to respond.  If the rules say that the customer is supposed to get daily "payment due" reminders and be allowed 30 days to catch up, then the Session Manager sends advisory messages to your administrative managers and implements that strategy without human intervention. 

At 31 days, if the account is still delinquent, an eerie silence descends on the freeloading users as the service is suspended pending settlement of the outstanding account.  While payment-due notices always get attention, a service suspension usually gets a response that a whole blizzard of notices just can't summon.

For any business model where customers pay on a monthly pay-as-you-go basis, session control makes a lot of sense.  It's one less administrative task for the accounting group, and one more control that keeps you from giving your stuff away through inattention to administrative detail.

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One of the challenges we faced as we set about bringing our SaaS billing product to market was how to explain our application's wide range of capability to potential customers.  It sounds simple but it's not.  We've already found that companies who've built their own billing solution are far more interested in our solution than those who haven't tried it yet.  The latter think billing's easy, the former have enough experience to know better.

After talking to a range of software companies and reflecting on the billing and subscriber management business we already do, we concluded that every client has different needs.  Our application is an integrated billing system.  At the start of the exercise, our application was like a restaurant with one prix-fixe menu.  Even if all you want is the salad course, the fish course and desert, we'll still bring you the beef tartare, the duck breast and the cheese.  Of course, our application is flexible enough that you don't have to take or pay for all of its functions, but they'll be there every time you look at it, whether you're using them or not.

We figured that to make it more attractive we'd have to make the presentation simpler so we set about clustering the application components into logical groups.  The prix-fixe analogy still works but now we have three separate menus - the short one, the medium one and the complete one that includes flights of wine.

There are three questions to aim you at the right menu:

1) Do you need Enterprise billing or Consumer billing?  "Enterprise" means we produce one complex invoice covering a collection of end user.  "Consumer" means one simple invoice per end user.

2) Are you going to operate with or without Session Control?  "With Session Control" means that unpaid bills automatically suspend service.  "Without Session Control" means that unpaid bills have to be handled manually outside the application.  Each is appropriate for some categories of client.

3) Are you marketing through a channel or direct?  Channels are structured ecosystems that are complex to bill and administer.  However, many software companies find they can make more money that way.

We're pretty confident that as the SaaS business matures, most vendors will follow Time-Warner's lead and host their customer and user records with a billing service and use its application and its business logic to manage their SaaS business.  I'm using Time-Warner for this example because over the last five years they've worked with us to implement a top-notch subscription and billing management application that we own and that they run a sizeable chunk of their internet business on.  There isn't a lot they don't know about subscription marketing and delivery. 

So, if SaaS delivery is part of your product plans, spend the time pondering the three questions and figuring out your whole go-to-market problem.  Read everything you can find and talk to lots of people who've already done it before you set your developers to work. 

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Back in January, we concluded that we raise our game with some sophisticated management software for our business.  The application we wanted is a common one these days but to protect the innocent, I'm not going to talk about it specifically.  The application isn't the point of the story - the story is about how two well regarded SaaS companies found themselves in a mess when they tried to work as partners. 

To digress for a moment, it was fascinating to watch ourselves go through the buying process.  For our staff, who've delivered hosted applications for years, setting up and running any web application is pretty much a brain-stem exercise.  Perhaps because we know what's involved we chose a SaaS product hosted by someone else for our internal operations. 

Anyway, back to the story.  After we chose a month-to-month plan for a SaaS product we learned that the chosen vendor had struck a partnership with another SaaS supplier we already did business with.  It was an easy choice to just add the new subscription for the new product to our existing account.  So far, so good.

Then things went a bit pear-shaped.  Our decision gave us a ringside seat to the headaches just waiting for SaaS companies working together as channel partners.  While regular on-premise software marketing partnerships are pretty well understood, SaaS isn't so simple. 

From a purely mechanical standpoint, any billing and provisioning problems that the SaaS product owner (effectively at the top of the food chain) doesn't solve will be inflicted on every partner and reseller all the way to the end of the line.  At each step along the channel, the billing and subscriber management process is challenged by an avalanche of details about users, prices, plans, commissions, rebates, revenue sharing agreements, refunds and incentive plans. 

The overall concept of "a single solution from a single vendor" is pretty attractive to technology customers.  So, SaaS vendors have to find ways of working together with each other, with on-premise suppliers and with integration partners.  However, because they're selling a subscription and not software in a box, the whole process of accounting for and administering the sales relationship has to change.  Figuring out the billing and the partner shares in a single up-front license fee deal can be complex.  Most finance and accounting groups don't really mind because big dollar amounts justify the effort.  Doing it over and over every month with small-dollar subscription revenues is another matter.

So how did our "two SaaS products from one vendor" plan work out?  I'd love to say it ended well, but really, it didn't.  The billing and provisioning problems were so severe that after months of trying we finally gave up.  We now have two separate subscriptions with the two suppliers. All is well again, at least until next time.

So what's the lesson from all this?  Even though both partners are successful direct-to-consumer SaaS vendors, when one became the channel partner selling the other's product, the arithmetic was "one plus one equals zero".  The problem for us as a customer was purely with their billing and provisioning process - both products are great. 

Simply put, channel marketing for SaaS companies is really difficult.  The administrative burden increases exponentially with success.

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Well, putting together a pricing model for SaaS billing seems to be a lot like allocating office space.  We're having a tough time coming up with something that's both simple and explainable.  The prices are fine, it's the logic behind them that keeps unraveling in the face of critical questioning.

Why is it so challenging?

Everybody wants a pricing plan that's simple to explain and implement and that makes sense.  The notion that "Our price for doing your billing will be a percentage of your revenue" has developed some momentum in the SaaS billing market.  It's a great little model - simple and easy to implement but pretty much impossible to defend under critical questioning.

We found this out early on a conference call with a prospective client we'll call "Targetco".  When we said we wanted a percentage, the Targetco finance guy on the call said "Really?  If we lower our price we can pay you less?  Why does that make sense?" Of course, what he really meant was "Hold on there buckaroo - do you really plan to charge me more than you'd charge to do the same work for a cheap product?"  There aren't very many ways to say "Yeah, pretty much" without feeling a trifle foolish.

So what did we come up with next?  Well, we started over with an earthshaking new concept: customers want to buy something tangible for a fair and competitive price.  Actually, I have to admit I'd heard that somewhere before.  Anyway, we got started by taking an interesting trip down memory lane. 

IPA's been doing subscriber management and billing for years, so we dug into our customer records and built up a market price model for online billing services.  It helped us to understand why the specific prices that we charge specific customers were fair and made sense to both parties.  We were on the road to a defendable pricing model.  Interestingly, the percentages it yields look kind of familiar, but the cool part is that it makes business sense.

So how did we use this newfound wisdom?  We distilled all the information down to a few really critical parameters and then we put prices to them.  Our next step will be a simple pricing tool on the www.SaaSAutomation.com website that lets a potential client estimate their costs for our service as a percentage of their selling price.  It'll be interesting to see how it works for site visitors.  While it delivers a percentage answer, the underlying model is built on specific prices for specific services - no filler, no padding, no awkward silences at our end of the phone call.

We're thinking it'll make prospect conference calls fun again.  We'll have really good answers for the finance guy's questions!

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Not that I haven't posted online before, though.  I'm a member of three online car enthusiast forums and while I don't post a lot, I've posted a little at a time for the last five years - enough to get over any sensation of stage fright.

So who am I and what have I got to say?  Well, I've been a technology entrepreneur pretty much since I graduated from university.  I've been an employee of technology companies, I've been a President and CEO of technology companies, and I've done the founder-in-the-garage thing as well.  I've run fast-growing tech companies, I've done a few turn-arounds and restarts, and I've slogged my way through some deep mud in some businesses where even a great product and a sharp strategy could only deliver beige results. 

Through five company changes (in 32 years) I've switched industries five times - power electronics to aerospace and defense to tech training to geospatial systems to internet technologies.  Some people make wisecracks about people like me who've done a wide variety of things being unable to hold a job - I've done enough different things to joke about not being able to hold an industry!  As for talking about my personal situation, I'm old-fashioned enough to believe that when it comes to the internet, my family and friends will have to find their own way there - I won't be doing any advertising.

What have I got to say? That's what blogging is about, or so the experts say, so you'll have to read on.  The focus of this blog is IP Applications and its business.  That doesn't mean I won't be wandering a little ways off the reservation to comment on other things, but in the short term it's going to be about IPApps and SaaS billing.

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