Even decades after subscription-based enterprise software companies took over the business software market, there still aren’t many viable options when it comes to enterprise billing systems. It’s not just a back-office problem; it's a first-order business decision that directly contributes to growth.
Some companies can get away with homegrown billing systems, but that’s not an option for everyone. The complicated, unsolved world of enterprise billing might just be the next big thing in SaaS.
“The SaaS billing problem has been around pretty much since there have been SaaS companies,” said Bogomil Balkansky, a partner at Sequoia Capital. “It's interesting that the problem is 20 years old but is still an operational challenge for SaaS companies.”
The root of the problem is that most of today’s billing systems were designed for the time before SaaS companies brought subscription-based pricing into the mainstream. Traditional billing systems were architected for one-time product-based transactions, not ongoing subscriptions.
While there are some products in the market like Zuora, Chargebee, Chargify and Stripe, they’re either not good at handling new pricing structures like consumption-based pricing, are lengthy to integrate or aren’t accessible to enterprises, according to industry sources interviewed by Protocol.
But the nascency of the billing software market is actually a good thing for early-stage investors. In the past few months, Metronome raised $30 million in a round led by a16z, Chargebee’s subscription management software was valued at $3.5 billion and SaaSOptics and Chargify raised a combined $150 million from Battery Ventures.
“There's a big opportunity here in the market: When you see a lot of in-house solutions and not a clear vendor of choice, which we haven't seen yet, it's something that gets us interested at Sequoia,” said partner Lauren Reeder.
‘A bit of an octopus’
Billing matters not just because it’s directly tied to revenue, but because it impacts everything from product design to customer retention.
“A billing system is a bit of an octopus,” said Balkansky. “It has its tentacles in so many different places, from the product itself to pretty much any major system that the company has: the CRM system, the ERP system, any sort of customer-facing communication system.”
Still, the roots of modern billing challenges stem from the shift to new pricing models in software businesses that trigger a host of downstream implications. Pricing decisions about software services are complicated because they have to balance providing value to customers with driving revenue, while working around the technical limitations of the underlying billing system.
That’s one reason why enterprise tech companies use wildly different pricing structures, such as Slack’s feature-based pricing, monthly or yearly subscription pricing from companies like Salesforce or the consumption-based pricing AWS pioneered in infrastructure tech. And each of these pricing structures has a different impact on customer growth and revenue. If a pricing model includes a free or low-cost option, that can speed up customer acquisition, but it can leave revenue on the table if the majority of customers aren’t paying.
The technical challenges vary by pricing structure as well. While consumption-based pricing can provide more value to customers because they only pay for what they use, it requires a billing engine powerful enough to accurately track usage data at the hourly, and sometimes even minute-by-minute, level.
But the complications of a billing system don’t start and end with pricing. The interconnectedness of the billing system means that billing can shift from being an accounting problem to a payment problem — and then to a product problem — in a shockingly short amount of time.
Switching pricing tiers, for example, isn’t just a billing issue. “There is inherent complexity in terms of implementing gates in the product itself to be able to lock and unlock certain features,” depending on which features a customer purchased, said Balkansky. For instance, if a customer purchased the free tier of a product, they shouldn’t have access to the premium features. “And so it becomes more of a product problem rather than just a billing problem.”
There are also accounting implications for those changes.
“Every single one of those events — the pause, suspend and resume, changing pricing — those all have downstream revenue recognition implications,” said Amy Konary, vice president at subscription management company Zuora. That’s why some of Zuora’s clients who want to offer new or different pricing models can’t; their accounting departments aren’t equipped to handle that change.
“They're somewhat throttled not so much by their systems capability on the billing side, but maybe by their financial processes needing to catch up to where they want to go from a business model perspective,” Konary said.
A company’s data infrastructure could serve as a bottleneck as well, especially when it comes to consumption-based billing. “The consumption billing problem is first and foremost a data wrangling or data processing problem, because you need to collect very sizable amounts of data about what the customer is actually using,” said Balkansky. “Which basically means that you need to create a fairly robust data pipeline that can collect all of his data fairly frequently and send it to some data store.”
And none of this work ends once the bill is calculated and delivered either, because a new set of complications arise from processing customer payments and handling everything from refunds, credits and chargebacks to expired payment methods. To mitigate the cost of payment errors, a billing system needs mechanisms for trying a failed payment method more than one time or reminding customers to update their credit card information.
Build or buy
There simply aren’t many solutions in the market that can accommodate all these challenges, which is why many companies choose to go in-house.
Both Balkansky and Reeder agree that while some billing products exist for large enterprises using subscription-based pricing, the same can’t be said for consumption-based billing or those that cater to early-stage companies.
When it comes to consumption-based billing vendors, it’s only been within the last year or so that Balkansky has seen early companies emerge. “And so for consumption billing companies, realistically there haven't been any options but to build and maintain it yourself,” said Balkansky.
The result is that many founders build their own low-touch billing systems with limited functionality. But that approach isn’t sustainable as companies scale, because most startups can’t anticipate all the complexity that comes with growth.
“Usually they don't architect the billing system with all these thoughts in mind, and at some point, they get stuck,” which usually ends in the startup rebuilding the entire billing system, said Balkansky.
Increasing competition and industry consolidation are telltale signs that the market may be poised to take off. At Stripe, revenue product leader Vladi Shunturov is bullish about the market opportunity. And he’s been putting his money where his mouth is: In the last several months, Stripe purchased revenue reconciliation company Recko and the company Billflow, which specializes in the customer-facing aspects of billing.
“If you look at enterprise software, Zuora and Stripe are the two biggest players in the space and we compete for deals very frequently,” said Shunturov. But “because Stripe is investing very aggressively in this area, we have the opportunity to out-invest other billing platforms and deliver that unified stack faster,” he said.
The few other vendors that do exist like Zuora, which counts Zoom, Zendesk and Microsoft as clients, have limitations. “At the larger end of the market, people tend to go with something like a Zuora, which you need an Accenture contract to help you implement and connect to all of your systems,” said Sequoia’s Reeder. But that extensive implementation process is more than many startups can stomach. “I think that the investment to add one of the tools like Zuora is typically a six- to nine-month process, and for an early-stage startup, that's not really an option.”
But building a billing system in-house isn’t necessarily any easier. Reeder, who worked at both Segment and Twilio, said that both companies built their own billing engines but also have substantial engineering teams to maintain them. Of course, not every company has those resources.
“And it's also not something you can get wrong. Bills are highly personal, it's your direct revenue. So it's a high-stakes project — you can't just have a junior engineer go try to build this by themselves,” she said.
In the future, the combination of data analytics, artificial intelligence and automation may solve many of the challenges facing modern billing systems, including helping enterprises more accurately predict their consumption and testing out how changing pricing models will impact customers and vendors. If billing software companies can manage to figure all this out, the complicated world of enterprise billing could become the next big SaaS market.
“I think this is bigger than the accounting space. I think this is bigger than the ERP space in the long run,” said Shunturov.