Technology & Innovation

Can your finance tech stack handle modern usage billing?

Can your tech stack handle modern usage billing? Learn about this popular SaaS pricing method and the tools it requires.

In today’s SaaS landscape, billing has become an essential component of streamlining business operations and staying profitable. 

The evolution of SaaS billing has transformed it from a basic backend process to a crucial driver of user retention and subscription revenue. 

That’s especially true for modern and flexible pricing models such as usage billing.

In this blog, we’ll explore 1) Why usage billing is becoming more common for SaaS companies, 2) The billing limitations of legacy finance tools, and 3) The key elements that modern SaaS companies need in their tech stack to handle usage billing. 

Let’s dive in.

The evolution of SaaS billing

Through the years, SaaS billing has undergone a significant evolution. 

Billing has gone from a siloed backend function to a core aspect of meeting companies’ business goals. 

In particular, usage billing has become much more popular among SaaS companies because: 

  • It removes the psychological barrier of fixed pricing for your users. 
  • It allows SaaS companies to capitalize on different user segments’ interest levels, upselling and cross-selling their top users. 
  • Churn levels tend to be lower since customers have more flexibility and choice.

This shift toward usage billing in SaaS has necessitated the development of robust technology stacks with backend functionality that can handle modern billing.

Let’s take a closer look at the strategic vulnerabilities SaaS CFOs face when using an outdated web stack or technology infrastructure for SaaS billing.

2 major risks of legacy SaaS billing

Below are two common drawbacks of using a legacy solution or web app for SaaS billing, especially with a usage pricing model.

  • 1. There’s no unified user interface or centralized operating system: Rather than being contained in a single web application, most legacy tech stacks are spread across a heap of discrete software systems. For usage billing, that won’t work. You need a centralized user experience–a single system with the backend technologies to record and store usage data and billing events and charge customers appropriately.
  • 2. This outdated set of technologies isn’t scalable: If you’re on a legacy web server and not a modern cloud server, you’ll eventually hit a point where your tech stack can’t keep up with your billing situation. That can lead to billing errors, voluntary and involuntary churn, and other serious issues.

If that just sent a flutter through your chest, don’t worry. 

For small companies and large enterprises alike, a little planning in the form of a tech stack strategy can go a long way.

Modern SaaS billing requires a tech stack strategy

Now you know more about the value of usage billing and the limitations of a legacy solutions stack in achieving it, we’ll look at what you should aim for. 

What should your tech stack strategy include to ensure you and your team can handle modern usage billing?

Tech stack integration is vital for usage billing

When you’re comparing different tech stacks for your company, look for a software solution that contains everything you need for billing in a single application. 

You should have access to touchless automated invoicing, forecast models for testing different usage billing scenarios, and automated revenue recognition that can keep up with the nuances of usage-based SaaS pricing.

And none of this should require knowledge of any programming language–such as Java, Ruby, CSS, or PHP–on your or your team’s part. 

Some companies that work with legacy tools use an in-house programmer, engineering teams, or internal development processes to increase the effectiveness and customizability of their tech stack. 

However, that’s an unnecessary waste of time and money. 

A modern integrated tech stack should be as straightforward to use as Google or Facebook once you and your team get trained on it. 

All the functionality and customizability you need should already be there or be available as easily-purchased add-ons.

Don’t compromise on billing scalability

As we mentioned earlier, scalability is a major aspect of SaaS billing. 

It’s not enough to ask if your system works with your current transaction load at the present moment. 

You need to ask, “Will it continue to work as efficiently at scale?”

 If you’re using a more complex pricing model such as usage billing, that question takes on even more urgency.

Cloud-based accounting suites that utilize touchless invoicing and SaaS billing AI eliminate the scalability issues plaguing manual software. 

When comparing different finance tools, look for a tech stack that can scale alongside you from seed to IPO and beyond.

Automated scenario planning enables profitable billing strategies

To make sure your tech stack is optimized for usage SaaS billing, you’ll want to prioritize forecast automation. 

On the surface, usage billing is simple. You bill your customers based on product usage. 

Easy, right?

But what should your usage metric or metrics be, and how much should you charge for them? 

In order to execute usage billing successfully, SaaS CFOs need to engage in intensive rounds of forecasting and scenario planning. 

And if you plan on leveraging hybrid billing, the number of variables increases, making your forecasting even more important.

For recurring revenue companies, even small pricing adjustments can have outsized impacts on your annual revenue. 

Without access to updated forecasting methods, you could end up leaving significant profits on the table because your scenario planning didn’t measure up. 

An automated billing forecast for a SaaS company.

With cloud accounting software, generating an automated forecast is as easy as typing in your starting data and clicking a button. 

This lets CFOs rapidly experiment with different pricing variables to find the perfect billing model for their company.

Cloud-based reporting helps you adjust as needed

In addition to automated SaaS forecasting capabilities, your tech stack strategy should feature real-time financial reporting.

There are several reasons we strongly recommend this, including:

  • The ability to quickly pivot or test ideas: With more nuanced pricing models such as usage billing, you’ll want to continually test different ideas through forecasting to assess whether you’re on the right track or should pivot slightly. Real-time financial reporting eliminates the data lag associated with legacy finance tools, giving you immediate access to your financial data. You can’t forecast or run predictive analytics if you’re stuck waiting on reports. 
  • The increased reliability of cloud-based reporting: Due to the lack of manual processes, automated financial reporting is much faster and more accurate than legacy methods. This gives CFOs confidence in their accounting data, which translates to trust in their financial strategies.
A role-based dashboard for a SaaS CFO.
  • The centralized nature of cloud reporting: One of the best things about using a modern tech stack for your reporting is that it centralizes your data. This makes it easy to share business intelligence with stakeholders in sales and marketing, customer success, product development, and other departments.

Financial reporting lays the groundwork for a SaaS organization’s profitability and should be a key element of your tech stack strategy.

Predictive analytics pave the way for upselling

Predictive analytics AI is important for gaining momentum with usage-based SaaS billing. 

Here’s why.

When you bill customers based on their usage level, you’ll want to upsell and cross-sell your customer segments that log the most mileage with your products. 

They clearly enjoy what you do and would probably derive genuine benefits from other products or software add-ons.

Cloud accounting software with predictive analytics can look at your financial reporting data and use AI to identify profitable upselling opportunities. 

This approach can give you additional revenue streams above and beyond your baseline usage charges, further highlighting the profitability of usage billing.

Automation eliminates revenue recognition challenges

When SaaS companies experiment with usage-based billing, revenue recognition can present a particular challenge. 

That is, if you don’t have the right tech stack.

Legacy revenue recognition requires intensive manual data reconciliation between different sources of record. 

Even for a simple, fixed-price billing model, this would significantly boost your chances of manual errors leading to revenue leakage. 

Automated revenue recognition for a SaaS company.

But with a nuanced and variable pricing model such as usage billing, leaked revenue is all but guaranteed if you go the manual route. 

A modern cloud-based tech stack, on the other hand, can help you:

  • Accurately handle complex usage-based revenue recognition scenarios.
  • Automate the contract management process, simplifying ASC 606 compliance.
  • Stay aware of regulatory changes impacting your company by sending automatic notifications.

For SaaS CFOs at early stage organizations, compliance fines and leaked revenue are especially bad news. 

They put a strain on precious resources that should be used for growth initiatives, strategic planning, and other worthwhile uses.

Have access to cloud-based usage metering and rating

“Metering” and “rating” are two extremely important words in the world of usage-based SaaS billing. 

Metering refers to the process of tracking customers’ usage, just like a parking meter would, and rating refers to the prices you assign to different billing events.

As an example, say you’re the CFO of a software company that sells subscription software for editing B2B blog posts. 

The baseline cost is $0.05 per word, which includes basic edits such as spell check, synonym suggestions, grammar checking, etc. 

However, your product also has an AI feature that allows users to select an entire section of text and rewrite it for you. 

That feature is usage-based as well and costs $2 per 200 words.

A cloud-based tech stack equipped with AI would be able to instantly meter and appropriately rate those usage events as they occurred. 

The alternative would be a nightmarish slog through a mountain of manual billing reconciliations.

Dynamic usage billing is especially attractive for early-stage companies

For CFOs at early-stage SaaS companies, usage billing is an especially promising strategy. 

Usage-based pricing lowers users’ hesitancy to try a product from a company with less of an established presence. 

If they don’t like what you do, they can leave at any time. 

Finance leaders can lower the psychological barrier for users even further by offering a short free trial before usage billing kicks in. 

But you can only make business decisions like that if your tech stack supports them.

Sage Ahead is a cloud-based, automated tech stack built for the unique demands of early-stage SaaS. 

It’s loaded with 500+ usage and subscription billing scenarios, features frictionless automated invoicing, robust revenue recognition that can handle the nuances of usage pricing, and much more. 

Unlike legacy tools, the software comes pre-equipped with everything you need for SaaS success. 

You have enough responsibilities on your plate–tech stack assembly should not be one of them.

Want to streamline your company’s success? Learn how Sage Ahead can help.