SaaS providers who effectively incorporate billing and payment solutions into their software can not only enhance customer value but also establish a consistent source of recurring revenue.
However, it’s worth noting that many SaaS providers have yet to embrace this potential, highlighting a knowledge gap regarding the mission-critical nature of harnessing the right payments functionality. In this blog, we will delve into the reasons why payments functionality plays an essential role and discuss the necessary steps forward.
The Importance of Payments Functionality for SaaS Providers
Subscription Model’s Triumph
The COVID-19 pandemic has witnessed a surge in online transactions, with one particular model flourishing – the subscription-based approach. Various businesses, from streaming giants like Netflix and Spotify to meal kit services such as Hello Fresh and Mindful Chef, and even companies like Costa Coffee and Volkswagen, traditionally adhering to fixed pricing, have embraced this model.
Notably, the subscription economy has expanded by over 435% in the last nine years, according to Zuora, a subscription management platform. A report by the Motion Picture Association further reveals that global streaming service subscriptions alone totaled $1.1 billion in 2020.
Continued Rise of Subscription Models
Subscription-based models continue to thrive, as consumers seek products and services they can enjoy from the comfort of their homes, especially during the pandemic.
SaaS Providers’ Adaptation for Subscription Success
While SaaS platforms have long collaborated with payment service providers, subscription models present unique challenges and opportunities that require careful consideration.
Challenges in Recurring/Subscription Payments
Recurrent payments made through bank transfers or company credit cards, suitable for one-time transactions, often fall short in recurring revenue models. Payment failures are a major hindrance to subscription model growth, resulting in significant customer retention and loyalty issues.
Statistics indicate that credit and debit cards have failure rates of 10-15% on the first attempt in recurring payment setups, attributable to various reasons like insufficient funds, bank blocks, card expiration, closed accounts, or lost cards.
From the supplier’s perspective, merchants must manually reconcile late or failed payments, leading to errors and substantial administrative burdens. At scale, especially for global businesses, this translates to significant time and resource allocation in recovering millions of payments, impacting cash flow and profitability.
For customers, payment failures can be frustrating and negatively impact their experience. They may have to update their payment information, and in severe cases, face service interruptions or cancellations, resulting in customer turnover or churn.
Harnessing Payments Technology for Recurring and Subscription Payments
Automation of Payment Recovery and Smart Payment Retries
Innovative solutions employing advanced algorithms can significantly reduce failure rates by monitoring customer behavior and implementing customized measures to enhance payment success during retries. This proactive approach reduces the burden of chasing failed payments and its impact on revenue.
Unlike manual retry strategies with rigid schedules, modern payment facilitators (payfacs) leverage machine learning models to assess payment success probability, automatically determining the optimal collection day for individual customers, leading to higher success rates. For instance, GoCardless’s Success+ solution utilizes recurring payment intelligence to predict and manage payment failures, recovering an average of 76% of failed payments for merchants.
This intelligent retry approach empowers merchants with transaction control, removing reliance on end users for payment initiation and minimizing payment failure risks.
Generating Additional Revenue Streams
Continuous data gathering by algorithms enables merchants to gain a clearer understanding of customers’ behavior and swiftly address potential challenges. This opens avenues to enhance customer retention through targeted content, loyalty programs, and rewards. With PSD2 and Open Banking improving visibility into customer accounts, the potential for customer intelligence development continues to grow.
SaaS providers offering integrated solutions, ensuring up-to-date customer details, can extend these value-added services to the wider industry, earning recurring revenue from payment processing, similar to credit card transaction fees.
Flexibility Enhances Loyalty
SaaS providers adapting their services to the evolving market will maintain a competitive edge. Merchants aiming to transform subscribers into loyal, long-term customers seek solutions with straightforward onboarding, flexible payment options, and customizable features.
Many consumers intend to continue their subscriptions post-pandemic, but flexibility to adjust plans is a key factor in retention. Offering configurable services that allow easy plan adjustments, pauses, and even short-term discounts (e.g., ‘refer a friend’ promotions) differentiates providers. Research indicates that SaaS companies allowing users to upgrade or downgrade at will often generate more revenue than those with rigid pricing approaches.
Additionally, optimized payment strategies enable easy adjustment of transaction values, with shorter payment timeframes potentially reducing churn, depending on the industry. Subscription-based services foster a deeper understanding of the customer base, leading to stronger relationships.
Eliminating manual payment processing inefficiencies reduces costs and benefits both parties. Merchants optimize cash flow management, develop better supplier relations, and create opportunities for discounts.
CruisePay Finance specializes in effective payment solutions tailored to specific use cases. We collaborate closely with SaaS providers to identify the right technology partners, develop integrated solutions, and leverage data at the core for long-lasting customer loyalty and business success.
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