2024 CODiE Finalist
BILLING

Pricing Strategies and Billing Models: Which One Is Right For My Business?

Subscription and consumption billing models have transformed many industries that had relied on milestone billing. Milestone billing, in turn, remains a viable model for a number of industries. For companies that have the ability to choose their billing models, knowing the benefits and challenges of each will help to make the right choice.

Subscription Billing

Subscription or flat-rate billing is not a new model, but SaaS companies, streaming services, and a pandemic-driven increase in consumer demand for certain goods and services led to its exponential growth in the past few years. 48% of businesses with a recurring revenue model struggle to meet accounting and reporting challenges. The model is simple: a customer pays a set recurring price for a product or service over a period of time. The benefits are twofold: customers are able to pay a lower fixed-price for a service, and the company receives a stable revenue stream over time.
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Companies wish to optimally monetize their relationship with clients. In the subscription-based world, this drives a need for agility in pricing, along with improved, direct customer relationship management. Subscription billing also triggers some of the most complex areas of ASC 606 / IFRS 15. Accounting and financial managers and executives need to make sure revenue recognition is performed in compliance with this guidance.

The SOFTRAX Revenue Management System (RMS) allows flexible configuration and variety to assist sales, marketing, and finance teams in fine tuning their pricing strategy. A variety of price models can be established and experimented with customers to determine the optimal balance between monetization and satisfaction.

Consumption billing, also known as usage-based billing, differs from subscription billing in that customers are charged for what they use vs. a recurring, flat fee. Consumption billing is common with utilities and cloud computing, but more businesses are beginning to offer services on a consumption basis. The benefit for businesses are new revenue streams for their products or services that will grow as their clients grow, and the benefit for consumers is paying for only what they need and not being stuck with a recurring charge.

The challenge with usage-based pricing is to ensure that the revenue management system can track the amount of the goods or service used each billing cycle so the customer is billed correctly and the company realizes all potential revenue. Management of these price models can become quite complex given the need to account for minimums, tiering, overages and a host of other factors. For the finance department, consumption billing requires accurate usage reporting for the revenue management system. For sales and marketing, the teams must be confident in their services’ ability to scale or decrease and bill accordingly to maintain good customer relations. Similar to subscription billing, consumption billing triggers complex areas of ASC 606. This may include a need to automatically manage Variable Consideration to recognize revenue based on an expectation of consumption that is updated over time. It may also include the need to automatically account for contract combinations and modifications, particularly if users are able to upselect or downselect new functionality or make other changes that impact the overall value of the contract.

The SOFTRAX Revenue Management System can meet the billing, revenue recognition, and reporting aspects of a usage-based model, allowing companies to use consumption billing to grow their businesses without over-stressing their back-office.

The SOFTRAX Revenue Management System provides a wide range of subscription and consumption billing functions, including:

Milestone billing is a billing model popular in professional services management and companies with project-driven revenues. Milestone billing is a payment cycle that uses agreed-upon events or deliverables as billing deadlines. One of the main benefits of milestone billing is that it spaces out invoices and payments to make larger project fees more manageable for clients. It also helps business owners maintain a steady cash flow over many months and set specific goals service providers know to work toward.

Companies often use milestone billing because it helps structure budgets and ensures all parties stay within them, even if the project takes longer than anticipated. This payment method also helps both sides see a concrete relationship between payment and progress. However, milestone bill schedules can be complex, including 10s or 100s of milestone events.  A complex component of milestone billing is the need to associate fulfillment events with the milestone to which they are related in order to automatically initiate the bill process. In parallel with this, companies must recognize revenue according to ASC 606 as values transferred to the client, typically on a percent of transfer basis.

The SOFTRAX Revenue Management System automates the critical parts of milestone billing and associated revenue recognition, including the receipt of fulfillment events to trigger milestone invoice delivery and percent of transfer recognition, allowing companies to easily create tailor-made billing and payment schedules for even the most complex scenarios.

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What Is Your Best Billing Strategy?

The best billing strategy is the one that makes billing, revenue recognition, and reporting the easiest for your business. Regardless of which pricing model a business uses, it should make sure that the billing system supports each of these models with the depth and breadth to ensure companies can remain agile in their pricing and billing strategies.

Automation

Automation for both complex billing as well as ASC 606 / IFRS 15 revenue recognition and reporting, which require revenue to be recognized according to a five-step process. For some companies, this complexity has resulted in the more complicated functions being moved into manual processes like spreadsheets.

Subscription and Contract Renewal Management

Having strong transparency and controls on contract renewals ensures that there is continuity in the customer relationship and that the revenue stream remains continuous.

Order Management

The system should automate the flow of orders into the system and construction of the appropriate billing and revenue recognition treatments without the need for human intervention.

The SOFTRAX Answer

The SOFTRAX Revenue Management System (RMS) has the industry’s only system combining Broad Billing and Revenue Recognition support, in a sophisticated solution that provides a true path to automation and transparency across even the most complex billing and revenue recognition scenarios.

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