SaaS, Cloud and subscription billing - looking back at 2009

It is hard to believe it is 2010, for those of us that have been at the SaaS game since the early days it's been a decade already. Where did it go?

Last year turned out to be a turning point for the SaaS market.  The economic crisis provided yet another reason to move away from on-premise software and toward online services. The scale of some of our leading SaaS services such as Salesforce.com and Google Apps means outages are immediately reported and mainstream news. 2009 will always be remember for the financial collapse of the economy and the election of Barack Obama. However, in our market, 2009 will be known as the year SaaS became a mainstream delivery model. Yes, we still have many hurdles to overcome but as a legitimate software delivery model, SaaS and Cloud Computing have arrived.

Closer to home, 2009 was the year the cloud billing or subscription billing market was defined. We've been at the subscription billing game for over 10 years as a SaaS player. In 2008 we had a trickle of more mature SaaS companies with billing problems find us based on the marketing of our Telecom and ISP billing solutions. In 2009, a flood of SaaS companies from start-ups to highly success players came to us as the vendor community adopted subscription billing as it's defacto market segment.

Saugatuck, the premier SaaS analyst company, even did a complete study on the cloud billing space. It was nice to come out on top.

Here's hoping 2010 continues the momentum. It looks good so far.

Billing, it's all about the invoice

Let’s face it, you’re in business to make money.  Invoicing is how you monetize your product or service.  Think of it as the headwaters of your company’s river of cash.  The easier you make it for your customers to pay your bill, the faster you get paid. 

Collecting payment is easy when it’s one subscriber and one invoice per subscription.  That’s the business-to-consumer (B2C) model and it’s pretty well defined and people know what they’re getting.  As a vendor, your billing problem is simple. 

Life gets vastly more interesting and challenging when you start sending invoices to companies.  That’s the business-to-business model, or “B2B”.  Unlike a consumer, the B2B customer’s left hand (think “Accounts Payable Department”) usually doesn’t know what the right hands (the users of your product) are doing.  They rely on systems rather than memory, and your invoice has to work within their system, or payments will be delayed or stopped completely. 

In its most basic form, a business to business invoice has to communicate six things: 

• the seller’s identity
• what was purchased, usually by referencing a purchase order number and line number
• the value and how it was calculated
• taxes applied
• currency
• location and method of payment (electronic or physical)

 

Most consumers only care about the first, third and last points.  Businesses need them all, especially when the auditors arrive.  Things like corporate tax identifiers, company registration numbers and other information that looks needlessly bureaucratic is essential to getting your invoice through the maze of approvals and checks at the receiving end.  Even if payment is automatic, poor preparation of the invoice can lead to needless effort resolving issues that should never have come up in the first place.

Subscription Storefronts, Admin Portals, Rating Engines and Payment Gateways

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.

Cloud Billing - Are telecom billing vendors really the right fit?

While here at Monexa 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 Monexa 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 Monexa 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 Monexa 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.

PCI Compliance, subscriptions and the cloud - Part 2

Do you need PCI Compliance to sell a subscription service in the cloud?

Our previous post on this topic "PCI Compliance, subscriptions and the cloud - Part 1" covered some of the debate out there as to the effect of the cloud on PCI Compliance and why we think the cloud has improved the situation for companies launching subscription services.

Unfortunately, you'll get different answers to this question depending on who you talk to. Our last post in the PCI Compliance series will tell you why.

Our answer is based on our experiences dealing with PCI Compliance as a service provider and customers that have asked us to help them with their own PCI Compliance efforts.

The short answer is that subscription services in the cloud taking credit card payments must be PCI Compliant. There are generally two ways to get compliant and it comes down to how you handle the credit card and billing information:

1. Your service or marketing site handles, stores or processes cardholder information

In this case you've made a decision to host the forms that collect the cardholder data and possibly store it within your service to send recurring transactions to a payment gateway.

You will need to implement all the physical security, network security and application security required of the standard. Depending on transaction volumes you may have to pay for yearly audit visits from the assessors.

If you are hosted with a cloud provider that can not or will not meet the requirements (which is most of them right now) then you can't become compliant.

So, yes, hosting your solution in the cloud will be a problem for PCI Compliance if you go down this path.

2. Your service uses a PCI Compliant service provider to collect, store and process all subscriber cardholder data.

In this case, your service or marketing site does not collect or process cardholder data.

While you are still required to become PCI Compliant, that effort will likely be restricted to filling out a PCI Self assessment form in which you point to your service provider as handling the cardholder data. In this case, ensure your service provider does the following:

• They have service provider Level PCI Compliance. Ask them if they have this level of compliance.
• Your service provider's application or portal never allows anyone in your organization access to your subscriber's credit card information.

The proliferation of subscription services has really muddied the waters for online merchants. With traditional shopping carts and one-time purchases credit card information was rarely persisted.

As a result, many popular shopping cart frameworks have begun to add plugins for recurring payments but still require the merchant to collect and transmit the cardholder data for their new subscribers. This puts the responsibility on the merchant to meet the PCI Compliance standards.

Bottom line... If you are offering a subscription service, ensure you understand the effort involved to become PCI Compliant.

As a provider of subscription services, if you've had experiences with PCI Compliance, we'd love to hear about them here.

55% of SaaS companies sell their software licenses as yearly or multi-year subscriptions

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.