Software as a service has witnessed immense growth in recent years, and estimates show it'll hit $195 billion in 2023. The future is bright for SaaS, as even more growth is expected, thanks to its multiple solutions, such as customer resource management (CRM), enterprise resource planning (ERP), etc. However, growing your business also means you need to manage your SaaS payment plans efficiently.
Whether it's SaaS for real estate, e-Commerce, or any other field, payment is a crucial aspect of all SaaS companies that take customers seriously. This article will help you navigate this confusing space and help you choose the best SaaS payment method.
What is SaaS payment processing?
Before we head further, it is important to clarify what SaaS payment processing is. It is done through a payment processor that mediates between your business and customers. It manages all the transactions and ensures the payments land in the SaaS merchant account.
Payment processor vs. payment gateway
It is essential to differentiate between payment processors and payment gateway as many often mingle the two. For example, a SaaS payment gateway approves or declines transactions and sends sensitive data to a SaaS payment processor. On the other hand, a payment processor gives this information to the relevant bank and asks it to move the funds.
One can argue that a SaaS company can manage pricing and payments like any other e-commerce company, but that's not true. SaaS companies need many different elements, such as subscription management, recurring billing options, etc. Therefore, a payment processor is crucial for them, as it provides all the tools for businesses to manage SaaS payments and subscriptions effectively.
How Saas payments work - the building blocks
Before processing SaaS payments, you'll need some basic infrastructure. It includes multiple elements that work together seamlessly and provide users with a secure experience.
SaaS payment gateway
As described above, a SaaS payment gateway collects sensitive information and sends it to the payment processor. It is the checkout page that your customers see, including fields for inputting their credit card/banking details. Does it mean a SaaS payment gateway and a regular e-commerce gateway are similar?
No, because a SaaS payment gateway lets customers choose from different payment plans. You can choose a hosted gateway to relieve some burden, as the host will be responsible for the secure storage and transmission of all payments.
SaaS merchant account
A SaaS merchant account is meant for clearing and settling customer payments. Usually, an all-in-one payment processor will include this account in the package.
Subscription management
A subscription management system is also an internal element of an effective SaaS payment system. As the process works, customers sign up and submit their payment details to the gateway, and the funds are transferred to the merchant account. First, however, you need a subscription management service to store customer data.
It helps you track retention figures, customer interactions, and scheduled recurring payments. A subscription management tool is indispensable if you want to have deep insights into how customers use your platform and want to give them a better experience.
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SaaS billing options
Usually, SaaS billing has monthly or yearly recurring payments. However, businesses offer different options between payment intervals or term subscriptions. Here are some SaaS payment models used by companies.
Flat rate
A flat rate means a business charges everyone the same recurring amount. Usually, companies go for this option because it is simple and makes it easier for them to calculate their revenues. However, it doesn't offer flexibility, especially when a business wants to grow and earn more customers.
Tiered
A tiered rate is a more popular SaaS billing model with different pricing tiers. Each tier has its price and a corresponding set of features. However, customers can switch to another tier in the future.
The most significant advantage of the tiered model is its flexibility. Customers have several options which they can choose according to their budget and needs. However, businesses that want straightforward billing may find tiered billing a bit too complex.
Per-user
Per-user pricing depends upon the number of users. Usually, SaaS companies reduce prices as the total number of customers increases. For example, a company offers a plan for $100 for 10 users, making its price $10 per user.
For the subsequent ten users, that plan might cost $150, making it $7.5 per user when used to full capacity. A significant advantage of this system is high revenue predictability. However, its harmful side is a high churn rate because customers sometimes cannot understand the value of this model.
Feature-based
As the name suggests, the feature-based model sets pricing according to the features offered with each plan. It allows easy subscription management and revenue predictability. However, a disadvantage is that customers might unsubscribe because of a feature they don't use but pay for.
SaaS payment methods
SaaS payments can be collected regularly through different options with distinct advantages and disadvantages. Let's discuss all of them and understand how they work.
Invoices
Invoices have been a trusted method of billing for a long, as they show all the important details, such as:
- Work done
- Products/services provided
- Amount due
- Payment terms
They can work both for one-off payments and recurring payments. Today, invoices are generated by automatic software and sent online through email. Customers can pay invoices through bank transfer, debit, credit card, cash, or cheque.
Pros
- Works for companies that are suspicious of online payments and those that prefer a tangible option.
- Provides a viable option for small business freelancers who do not have business bank accounts.
Cons
- Requires a lot of financial administration as everything is manual, and hundreds of invoices might be generated monthly.
- If the invoices aren't automated, there is a risk of late, missing, or incorrect payments.
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Credit card
Credit card payments have always been on the rise, with 166 million active users globally. E-commerce has made credit cards the center of financial transactions, allowing customers to secure them through one click. In addition, since online payments have stringent regulations, customers believe their payments are safe.
SaaS companies can opt for one-off payments for their subscription services by sending monthly links to customers.
Pros
- People trust online payments because of stringent cybersecurity measures
- Payments are instant and give full control to customers because no automation is involved in the process.
- Easy to change cards each time they pay, as the system cancels payments if the card is out-of-date or canceled.
Cons
- Manually sending links to multiple customers and monitoring every transaction can be overwhelming.
- Some transactions might be rejected due to card security protocols, which can frustrate customers. It might result in a loss of clients.
Direct debit
Direct debit allows businesses to collect money directly from customers' bank accounts. It is a highly regulated and closely monitored system to prevent companies from exploiting customers.
The customer grants the initial authorization, after which the business can change payment dates and amounts, given that they notify customers in advance. In the realm of SaaS payment methods, white-label acquiring software can offer a robust and customizable solution, enhancing the efficiency of payment processing.
Pros
- Reduced involuntary churn as most customers doesn't change their bank accounts. Businesses can reattempt direct debit if funds aren't collected the first time.
- Allows customers to upgrade or downgrade their plan from quarterly to monthly.
Cons
- SaaS companies offering direct debit services are international, but their schemes are different for different customers.
- Can be complex to manage, as customers come from different locations.
Credit card processors
Credit card processors allow customers to link their credit cards to their accounts. Afterward, the customers are charged recurrently on their credit cards. In addition, companies can charge credit cards worldwide in different currencies using credit card processors.
Pros
- Decrease canceled transactions and churn rate by allowing customers to add multiple credit cards.
- Allow seamless integration with multiple applications to simplify business processes.
- Improve user experience by bringing brand consistency.
Cons
- Might result in involuntary churn for customers who don't add multiple credit cards.
- Can result in failed payments if cards are charged after they have reached their limit.
- High-level security measures can also cause a card to be declined.
Also read: Calculating and interpreting SaaS LTV metric with an expert
Alternative payment methods
SaaS businesses offer alternative payment methods, such as PayPal, Apple Pay, Express Checkout, Amazon Payments, etc. These payment methods are also popular and bring peace of mind to customers. In addition, this system works for people who are uncomfortable sharing their bank or card details and who want to use only specific payment platforms.
Pros
- Makes global payments seamlessly, killing geographical restrictions.
- Platforms like PayPal are truly global, with more than 430 million users.
Cons
- Might come with high transaction fees.
Build a high-quality SaaS payment system
If you're a business looking for innovative SaaS payment solutions, SaaS Boilerplate is the way to go. Our toolkit is a developer-friendly, AWS-based infrastructure that is easily scalable.
SaaS Boilerplate is completely free and open-source! Check it out on Github.
Our preconfigured CI/CD system allows you to release a multi-environment system when you introduce any change in the codebase. As a result, you can detect and fix bugs quickly. In addition, since we have selected quality AWS cloud services that integrate seamlessly with each other, you can easily deploy, customize, and scale your solution.
SaaS Boilerplate allows you to include and manage various payment and subscription options, from recurring payments to instant charges.
If you have any questions, feel free to get in touch, and we'll happily assist you!