Investing in a billing tool is a strategic move that requires thoughtful evaluation for any Software-as-a-Service (SaaS) business.
Whether you are a startup with 30 employees or a large corporation with 5,000, building an in-house billing system is always time-consuming, tedious, and resource-heavy.
Even if you speed up the process, it is never going to take a team less than 8–12 months to build it. Besides, the amount of work that goes into this billing system is often never-ending. But the rather critical part is — the deployment of 10s of engineers to build this product. This directly translates into plenty of opportunity cost, given how engineers dedicating a significant amount of time to building the billing system comes at the expense of other potential opportunities that they could have pursued.
This compels organizations to consider investing in a third-party billing tool.
Is this investment right for your business?
In the race for digital transformation, back-office functions have often been overlooked. They are a core part of a business’s revenue engine, and a finance tech stack should be given as much priority as marketing and sales tech are.
We believe that — to bolster an increase in revenue, you need to continually optimize your financial operations and create the most scalable billing and collection processes. This requires you to move away from managing billing using webs of spreadsheets or legacy systems that are not meant for the complexities of modern pricing models.
Whether it is built in-house or a third-party tool is purchased, it is imperative for finance leaders to evaluate the economics involved. It is tricky to evaluate the ROI of a billing tool solely because the blend comes with both the tangible and intangible benefits being offered.
In this article, we will explore the three main categories that you should consider when evaluating the ROI of billing tools:
- Increase in revenue
- Better cash flow and capital efficiency
- Reduction in operational costs
Increase in revenue
A robust billing tool empowers organizations with the flexibility to experiment with various pricing strategies and ensure timely product launches, in turn boosting revenue.
Here is how:
Pricing flexibility
If you lack the flexibility to iterate on pricing according to business and customer needs, you're letting potential profits slip away.
Here are some important questions to ask yourself, for instance:
- Have you been skipping pricing updates simply because the process seems too cumbersome?
- Are you losing customers to competitors with better pricing plans?
- Have recurring billing errors caused delays in your revenue collection process?
If you agree with any or all of this, then you need a billing tool that provides the agility to adjust pricing in ways that make sense for your business and your customers.
Most in-house billing systems and even some of the legacy tools on the market have only a few metrics that you can work with when it comes to pricing. As a result, businesses often make the mistake of not pricing their products based on value, leaving significant revenue potential on the table.
The closer you price a product to its customer value, the more money you make on that product. Consider an AI tool that automates complex legal document reviews for law firms, which significantly accelerates the review process, allowing legal professionals to handle more cases with increased accuracy. In this situation, rather than pricing on API requests or tokens, the tool’s pricing could be based on the number of documents processed.
This pricing strategy aligns directly with the perceived value of time saved in the review of legal documents. Implementing such changes in pricing models, especially when the underlying metric varies, becomes challenging and demands engineering bandwidth when you use in-house billing systems or legacy tools.
Modern billing tools, on the other hand, allow greater flexibility in pricing strategies, enabling salespeople to price closer to customer value and, in turn, increase revenue.
Timely product launches
Price optimization has a substantial impact on increasing profits. According to a study published by Harvard Business Review, a 1% improvement in price, assuming no loss of volume, generates an 11.1% increase in operating profit.
This makes it important to launch new pricing models or experiment with different pricing plans periodically. Implementing a new pricing structure or exploring different options requires a substantial time investment when using a run-of-the-mill billing tool. That said, a key advantage of advanced billing tools lies in their ability to expedite the implementation of new pricing models to ensure ongoing alignment with value.
Moreover, the time it takes to integrate a new product with billing processes can significantly impact a company's time-to-market.
Former Pipedrive CEO Raj Sabhlok recalled a scenario where the company invested heavily in product development only to have the launch delayed by several months due to the time it took to integrate their product with their billing system.
"The company invested tens of millions of dollars into the development of a new product, only to realize afterward that a few more months were essential for seamless product integration with billing — pushing the launch several months behind schedule."
- Raj Sabhlok
Delaying product launches can have a significant impact on sales. According to research findings, companies stand to lose 33% of their profit if they experience a six-month delay in shipping their products.
While assessing the ROI of a billing tool, consider its impact on revenue growth — by facilitating flexible pricing, streamlining pricing for new products, and ensuring timely market launches with ease.
Better cash flow and capital efficiency
Cutting-edge billing tools are instrumental in the strategic optimization of cash flow and capital efficiency within an organization.
Here’s how billing tools help:
Upfront pricing
One significant approach involves transitioning from billing in arrears to upfront pricing. This enables companies to collect invoiced amounts earlier in the contract period. For instance, a CRM company can switch from billing clients at the end of each month for the services used, to charging for the upcoming month's subscription at the beginning of the month.
Early cash collections
An advanced billing tool that automates invoicing — ensures accurate and timely generation of invoices. This automation minimizes errors and discrepancies, leading to quicker payment processing and a reduction in the Days Sales Outstanding (DSO). Additionally, your business will need to raise less money if you are more efficient with collections. Automating invoicing, streamlining billing processes, and collecting cash promptly naturally lead to a reduced reliance on external funding for the company.
Assuming you issue an invoice and your customer pays after three months, if you collect the same one month after invoicing instead of three months after, you basically get an interest-free loan for two months. This way, you are being more efficient with your capital.
Effortless usage data integration
Modern tools provide convenient and faster ways of integrating usage data into a billing system. As seen earlier, billing tools can contribute to improved capital efficiency by ensuring that capital is not tied up in products waiting to be integrated into the billing system.
Reduction in costs
Utilizing a top-notch billing tool leads to resource savings, liberating engineering bandwidth, and empowering non-technical stakeholders to focus on core activities and more strategic initiatives.
There are two broad categories of people linked to billing tools, which include:
- Engineering team
- Non-technical stakeholders
Engineering team
Quality engineers are expensive. They demand higher pay and spend a lot of time writing code to automate billing processes. When you use an advanced billing tool, it eliminates the need for engineers to manually write code to automate, since these tools come with innovative functionalities.
In some cases, engineers build in-house tools or a layer on top of a legacy billing tool. In both instances, evaluating how much engineering bandwidth is being spent on current billing processes will help you understand how much value a good billing tool can provide.
We cover this topic in detail in our blog post. We talk about ‘where and why engineering bandwidth gets consumed in solving billing problems’.
Non-technical stakeholders
The second group involves non-technical personnel engaged in manual data entry within the billing system. Most companies manually create invoices by reading contracts and occasionally consult individuals with data access.
The subsequent manual collection process includes tasks like downloading invoices, sending emails, and reconciling payments with invoices. In accounting, there is a recurring need for manual amalgamation of information from different sources, requiring the transfer of reports between tools.
This manual effort extends to internal reports and analytics, where individuals manually compile data for presentations or meetings. A thorough assessment of the time and effort invested in these manual workflows offers valuable insights to determine the cost-effectiveness of investing in a billing tool.
Calculating the upper limit for a billing tool investment
To evaluate the ROI of the billing tool accurately, start by aggregating data from stakeholders like finance, sales, and engineering. It is crucial to assess capital efficiency, time to launch new products and collect payments, and human capital costs, whether hourly or daily.
Additionally, it's important to consider both anticipated and unanticipated future changes in business and pricing models. There are aspects that businesses know will change and those they don't. Often, companies shift to entirely new business models, requiring a substantial overhaul of their billing processes. The costs associated with this transformation are, in most cases, unforeseen by the company before adopting the new business model.
When contemplating these new business models, companies recognize the need for advanced software infrastructure to support billing for these models. This realization brings attention to the effort, resources (time and personnel), and costs involved in such a project.
During ROI evaluation, it is recommended to ensure that a tool can accommodate any future business models. Foresight can avoid the tedious and expensive processes of migrating billing systems to a different tool.
This approach ensures strategic alignment overall while minimizing risk and extra expenditure.
Backed by this data, you can set a practical upper limit on how much it makes sense for your company to pay for a billing tool. It also facilitates an understanding of potential revenue increases and cost reductions achievable through the utilization of an advanced billing tool.
Summing up
Choosing a billing tool is more than just picking features; it's a vital part of how a company manages its capital. Built to assist businesses in implementing new-age pricing models, Zenskar is powering organizations to maximize product revenue with developer-free pricing experimentation and iteration, speed up collections, and unlock substantial savings on resource costs and bandwidth.
Schedule a demo with us to learn more!
