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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While here at IPA we regularly get excited about subscribers, recurring billing and payment processing, we understand the rest of the world doesn't always share our excitement. It seems everything the cloud topic touches these days is getting attention and subscription billing is now along for the ride!

IDC has just published a Cloud Billing research paper where they draw comparisons between telecom providers and emerging cloud infrastructure providers when it comes to billing for their services. For frequent readers of this blog you won't be surprised to hear that we completely agree with the thesis of the IDC paper. One of our favorite topics is pricing strategies (see our post on SaaS Pricing Strategies) for SaaS and Cloud subscription services and we often draw comparisons to the mobile phone industry.

At IPA we have a unique perspective on this topic. We cut our teeth handling subscription billing for the Telecom and ISP world and have moved into providing our on-demand recurring billing solution to SaaS and Cloud providers over the last 2 years. Comparing our experiences with our Telecom and ISP customers to the direction our SaaS and Cloud infrastructure customers are going we can offer some concrete examples of the fit:

• Metering: Cloud infrastructure providers in particular but many SaaS application providers have highly metered services. The best way to link value with your pricing strategy is often through usage based pricing.
• Subscription Plans and Pricing: A common criticism of purely metered services is the uncertainty factor. We see many providers now rolling out plans that bundle a certain amount of usage or provide unlimited usage for a fixed price. I've often pointed to GoGrid's pricing plans as a great example of this move toward the telecom model.
• Reseller support: Virtually all of our SaaS and Cloud customers are rolling out channel strategies this year for their subscription services. As a result they are working through how to support their resellers from a marketing (think white-labeled or co-branded online storefronts) and billing (who owns the billing relationship?) perspective.
• Partner Products: In the telecom world many of the products and services are not delivered by the telecom vendor themselves. SaaS and Cloud providers are beginning to bundle services from partners into their offerings and will be looking for their billing solutions to help with revenue settlement.

Clearly, there is a capability fit for providers of Telecom billing solutions to move into the cloud billing space (we ourselves are proof of it). The question we at IPA have is this:

Is there is a cultural fit between telecom billing providers and the growing cloud infrastructure providers?

Time to value: This is a key mantra of the SaaS and Cloud community. The model for selling Operational Support System (OSS) solutions, of which billing is one piece, to telecom vendors has included very long sales cycles, very long and expensive implementations and highly customized on-premise software.

Because our solution has always been delivered on-demand, and our pricing structure has very low implementation costs we've never felt like a traditional telecom software vendor. If our customers aren't making money, we aren't either.

Culture and Language: Not only is there a significant terminology/language gap between the telecom and the cloud infrastructure worlds but we also see a significant discrepancy in what each market finds important.

As we identified these issues, we brought people with SaaS backgrounds onto the IPA team and quickly devoted engineering resources to capabilities our new customers and prospects felt were important such as a rich UI experience.

Outside of our subscription billing capability fit, our on-demand philosophy and our willingness to quickly adjust to a new market have been the two biggest factors in our successful move into the SaaS and Cloud billing markets.

I'm certainly not going to say Telecom Billing vendors can't make the transition (look at us) but I strongly believe the functional fit of their products is only one of many factors they need to consider.

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Subscription services pricing strategies is a topic I have been asked to write about for an e-magazine article, but before I complete the article I would like to gather some opinion from business executives like you on how your pricing strategies are supporting your customer adoption and revenue.

Personally I like to think about the classic mobile phone plan as my idea of the standard to which we might all compare ourselves to and here's why.

A mobile phone plan, although rather complex in its execution, is actually pretty easy to understand and it accomplishes two major goals I think are absolutely key:

Number 1: Mobile phone plans virtually eliminate all barriers to adoption, by providing a pricing plan for every size of potential user.

• For the very smallest customer there is the prepaid card plan. You put as little or as much as you want on a card, use your phone and when you have used up what you paid for you can choose to add more funds to the card or not.
• With creative bundling and the use of a la carte menus there is a plan that will fit in to every users need and budget.
• As a result mobile phone adoption is amazingly high with some countries having adoption rates higher than 1 phone plan per capita.

Number 2: Mobile phone plans capture every penny of revenue by employing complex yet easy to understand and fair pricing strategies.

• You can choose from any number of bundles designed to target different user requirements and size of need. In addition you can select service upgrades from an a la carte menu, to get exactly what you want instead of being forced to pay for services you don't want or need.
• Most of the services come with a set amount of included usage (phone minutes, data plan, # of txt msg's), however you are never limited to how much you can use (exception being prepaid). You simply use what you want and get billed for the overage, maximizing revenue from customers who opt for lower cost plans as an entry point (remember with a higher entry point you might never have gained that customer in the first place).
• Mobile phone companies offer incentives (or is it higher prices) depending on the time of day or day of week you use the services. You pay a monthly fee for free evenings and weekends. This seems like a great deal to you but at the same time it is enabling the mobile service provider to shape usage patterns in order to spread the load out over their systems thereby saving them on infrastructure costs while still charging you for time that would otherwise have much less usage.

Subscription services pricing plans especially in SaaS vary significantly from company to company. My pet peeve is with the companies that have pricing entry points that assume consumption that is 10x greater than I can use. Why not give me a plan that suits my consumption of the services, capture my business and let me grow with you.

I would really like to hear your thoughts and opinions on this subject, so as an added incentive, I will select 5 responses at random and send those 5 a $20 U.S. Starbucks card.

To respond please follow this link to leave your comment on my blog (preferable), or e-mail me directly at klennox@ipapplications.com. Because of my submission deadline, I will select the 5 responses from those received by midnight Wednesday February 4th 2009.

I look forward to hearing from you.

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The overwhelming predictions among SaaS writers is that companies replacing outdated software or implementing new software capability will seriously consider SaaS alternatives. One big reason in 2009 will be to avoid large capital outlay.
 
According to a 2008 survey released by Softletter, 55% of SaaS companies sell their licenses as yearly or multi-year paid in advance subscriptions.  From a cash flow perspective that's great, but many of the prospects you are likely to work with in 2009 will be directed to conserve cash. As a result charging annually in advance may not be a good customer acquisition strategy.
 
Consider your prospects decision criteria in an uncertain cash is king environment. Their thought process is probably something like this:

• Do we need this or can we do without it? See our blog entitled The Economic Downturn and SAAS Companies.
• If we need it.
• What companies can provide the solution we need?
• What will it cost?
• What am I committing to?
• What if I need more or less of this service throughout the term?
• What are the payment terms?
• Am I comfortable with how and what I am being charged?

If all else is reasonably equal (product functionality, vendor viability, total cost, contract terms etc.) your prospect will surely prefer a monthly or quarterly payment option or some form of value / usage based pricing.
 
In SaaS, customer retention, renewal and growth are what drives continued revenue and profit. Your products and value based pricing is what attracts them and helps retain them. If you are one of the 55% asking for annual payments up front you may want to reconsider or at least keep a close eye on your prospects buying (or lack of buying) habits in 2009. If you are one of the 45% offering subscription flexibility with pay for use or monthly or quarterly payment structures, 2009 is the time to herald that advantage just as loudly as you can.
 
2009 could prove to be a pivotal year for those SaaS companies that are able to match the purchasing and payment criteria of their prospective customers.

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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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