October 10, 2019
Growth

SaaS billing: When product-led growth fails to drive revenue growth

There’s a harsh reality to product-led growth (brace yourselves, editors…).

Yes, the way people buy software has totally changed. Any device, anywhere, anyone, anytime.

Yes, to compete in this new world you need to rethink sales, marketing, and product’s role.

Yes, the emphasis on building great products is stronger than ever since it influences every stage of the Product-Led Growth Flywheel.

But being “product-led”—i.e. building your product, organizing your team, re-orientating your company’s goals and focus—can’t ignore revenue. Evolving from a software product to a software business goes beyond product’s influence alone.

To dig into this, first it helps to understand how software businesses grow.

How software businesses grow

In tech, we often talk and think of growth functionally.

  • Build a product people love
  • Build a repeatable sales and marketing machine
  • Build a team

These mental models help us define our functions, but they warp our perception of how software businesses grow.

Software businesses, like any other business, grow by moving into new markets. A coffee shop becomes a global coffee brand by opening in more locations, selling more products, selling at a range of price points—by moving into new markets.

For software businesses, there are six market-moving strategies:

  1. Monetization: Testing, experiment and optimize pricing plans to maximize revenue from your customer base.
  2. Moving upmarket: Grow your ACV and move upmarket by bundling users into team and enterprise deals.
  3. Scaling self-serve sales: Maximize user signups then upsell via self-serve plans to grow revenues without intervention from a sales rep for a segment or all of your users.
  4. International sales: Maximize conversions across every global market with local currencies, languages, and pricing to each market.
  5. Product suites and platforms: Attract new customers, and grow ACV with your existing customers by offering more products or a complete platform solution.
  6. Channel partners: Grow your customer base through partners that sell your software for you.

At Paddle, we commissioned a research study to identify which of these six strategies we see software companies focusing on.

Across hundreds of European SaaS startups, 47% of teams are focusing on growing through expanding their product suite with 69% planning to do so in the next 12 months, whereas only 18% are focused on monetization. The top reason ‘monetization’ was not prioritised is due to other more urgent priorities.

But when we combined this data with each company’s reported performance, we found the opposite. Focusing on multiple market-moving strategies drives the highest revenue growth, with the monetization strategies being reported to have the highest impact on revenue growth.

For each of these strategies, particularly monetization, it is dependent on the tooling and processes for how you sell your software—your “billing stack”.

How and why your billing stack is holding you back

Thinking functionally about growth limits the “how you sell your software” problems till after functions like product, sales, marketing, hiring, and fundraising.

Shows 5 blocks: product, marketing, sales, hiring, and fundraising. With an additional block of "how you sell software" over to the right, away from the other blocks.

All of these are key priorities for specific roles within the company. Since “pricing” and “billing” isn’t owned by any one person, it isn’t a priority for any one person. Perhaps your CEO, but their list of priorities is exhaustive.

All this means our pricing, billing and revenue operation is an afterthought. Software teams deal with the problem in front of them.

“We need to be able to take payments!"
“And now we need to take subscriptions too.”
“If we have subscriptions, we need some subscription analytics!”
“Wait, how do we manage this tax?”
“How do we integrate our payments and subscriptions with our CRM?”
“How do I link this invoice payment to an account?”

And the lack of priority and siloed thinking shows!

It shows in your disjointed user experience in buying, changing or cancelling a subscription, getting an invoice, updating a payment method, and all your billing support tickets (typically 25-40% of all tickets for software companies)

It shows in your manual processes. Not only a third of your support headcount, but all the work to reconciling accounts, recognizing revenue, building and maintaining integrations, and trying to assemble all of your financial and customer data before each board meeting.

And it shows because software products don’t graduate to becoming software businesses—they grow slower.

Your billing stack is holding you back.

Introducing SaaS Commerce

The fastest growing software businesses wrap all of these functional silos with the “how you sell your software” problem—we at Paddle call it “SaaS Commerce”.

The same blocks as above, but this time in a large, encompassing box called "how you sell software".

The reality is SaaS Commerce crosses multiple functions - it is a mix of product, sales, marketing, finance, operations, and more. It cannot be relegated to any one functional team. You need to think of SaaS Commerce cross-functionally, and consider how to divide up these jobs to be done.

At Paddle, we think of SaaS Commerce across four functional areas:

  • User experience: Everything a user will see and interact with to become a customer and beyond
  • Subscription billing: Everything you need to price, package & sell software on subscription
  • Revenue operations: Everything you need to capture, reconcile, tax, integrate, comply & operate all your accounts receivable
  • SaaS strategy: Everything to direct, setup & optimize your SaaS Commerce stack for growth

For product-led software businesses, thinking across these four new functions, there’s a common pattern in how they approach SaaS strategy, SaaS commerce, and business growth.

#1: Iterating on your pricing and billing model

The fastest growing teams iterate and re-price their software as the market keeps moving and their feature set grows.

Often, teams cast their pricing and billing models in stone by hardcoding the logic into their own software and their supporting tools.

Instead, consider your billing models as a set of variables, and serve your billing logic from a versionable config file. This way you can quickly and easily iterate on your pricing whilst ‘grandfathering’ in your previous customers on their existing pricing plans.

#2: Product-led means international from day 1

Product-led software businesses can’t control who signs up or buys from them. Much of the SaaS rhetoric is US-focused, and whilst it is the largest single software market, it accounts for less than half the total market by spend.

International doesn’t mean needing to localize your software, or setting up localized offices (though both are helpful to double down). Localizing your purchase experience can make a dramatic impact on conversions and revenue growth.

We’ve seen company-wide conversions increase by 30% through localizing prices to currencies and translating checkouts to a buyer’s native language. On a market-by-market basis, we’ve seen markets like Germany triple conversions with German-language checkout and pricing in Euros.

Taking a step further, localizing pricing itself can increase conversions. Beyond removing foreign exchange needs and presenting a “prettier” price, the best SaaS Commerce strategies price to each market’s relative pricing power. For instance, India and Brazil represent enormous markets for software but have lower pricing power than the United States. By pricing lower to increase conversions, we’re seeing software businesses increase revenue and market penetration in their markets.

Supporting international pricing, managing foreign exchange fees (for instance, Stripe charges a flat 2% on top of their other payment processing fees), managing international merchant banks with localized payment processors to increase payment acceptance, and managing subscriptions in multiple currencies can be a challenge.

Finally, growing internationally, you need to be aware, calculating, filing, and paying the global taxes you owe from selling to customers in each of these markets. Software purchases from the same company, particularly those bought by card, are relatively easy for tax authorities to detect. Now software taxes in the place of purchase is widespread, you need to consider your taxation strategy to serve all the geographies you sell to.

#3: Scaling self-service sales

Even with a sales team, product-led software businesses are ripe for driving self-service sales. The mistakes made are usually around the price and presentation.

With pricing for self-service sales, the key is to think of marginal pricing—close the distance between where a free or paying user and their next level. By spacing pricing tiers far apart or not having easy incremental pricing (like credits or usage-based billing), you miss out on pricing to each customer’s current need.

Presenting your pricing goes beyond your pricing page (though that’s important). For self-serve sales, you need to consider the upsell experiences your product, including upsell modals, one-click upsell to a card on file, and removing the friction between a user’s goal and your pricing.

#4: Selling into teams and enterprises

If your software can be used across teams in an organization (for instance, collaborative or seat-based tools), you need to think about how your sales-assisted upsell strategy.

This goes beyond tooling identifying accounts who have signed up, tracking activation events, and triggering alerts for sales reps. There’s also the challenge of rolling up all your subscriptions across an organization into one “master” account to invoice.

When moving upmarket, most of the jobs-to-be-done around how you sell become manual work. Sending invoices, chasing payments, reconciling payments to accounts and updating user access, revenue recognition dependent on contract billing length, and so on. This ‘heavy’ structure often inhibits billing models (like driving further upsells, like in self-service) since every new invoice triggers this chain of pain.

For earlier stage product-led teams, this manual work commonly falls on founders—when it’s no ones job, it’s the founders job, right? But this doesn’t scale as you scale your sales team and mature into a software business.

You need to be able to track and combine subscriptions across these (and have subscription tooling that can support a roll up), integrate your subscriptions with your CRM so your sales team has visibility, and build a process to connect accounts receivable with your user access management and upsell process.

#5: Combine multiple strategies

The fastest growing software businesses don’t think of moving into one market at a time, but in parallel. Each of the six market-moving strategies becomes a “star” to your growth.

“Six-star” software businesses like HubSpot and Shopify work all six of strategies, from experiments with pricing to moving upmarket to growing internationally to adding new products and more—all of this is separate to functional growth (more product features, more sales rep, more marketing leads).

If you review S-1 filings, scale-stage fundraising announcements (and their investors hypotheses), and (probably!) your board meeting notes, they all talk about market moving strategies.

How will you move into new markets?

Product-led growth can’t be all “product” and no “growth”. Yes, billing is boring. But billing—how you sell your software—is all-too-often an afterthought for functional teams like product, sales, and marketing. This reflects in a terrible user experience, disparate data, exhaustive manual work, and a break on growth into new markets. 

By breaking free from traditional functional silos, you can be strategic about how you use pricing and billing to move into new markets like new international geographies, optimizing your pricing, and selling into larger teams and enterprise.

Currently, Ed Fry runs Growth and Marketing at Paddle, the All-in-One SaaS Commerce Platform. Prior to Paddle, Ed led growth at Hull the customer data platform. His time in tech has been focused on finding new ways to grow SaaS companies. Outside of tech, cooking, flying, and amateur dognapping.

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