A billing system is hidden at the heart of any business – it calculates your customers' due payment, considering factors such as their usage, selected plans, membership date, discounts, and the applied pricing grid.
From handling edge cases to managing business models like those of Amazon Web Services (more here), Algolia's API pricing (more here), or transaction-based billing like Stripe (more here), a billing system has to be versatile.
Billing lies at the heart of all your internal systems. It interfaces with your end users to invoice them and keeps them informed about their consumption. For your finance teams, it's the key revenue source of truth. And needs it to be readily accessible to business operations and sales teams.
So, how do you choose the right billing system?
The decision to implement a new billing system happens every three to five years, and billing is notoriously more complex than it seems. This is not a system you want to outgrow in a year or so, meaning foresight is key.
If your startup is still in its early stages, it's likely that your pricing structure is simple and your user base is relatively small. You may question the necessity of implementing a billing system or opt for a plug-and-play, no-code solution as the easiest approach. If you don’t plan to iterate on pricing, launch new lines of products, expand to new segments or geographies, they make sense.
Using no-code shortcuts in your billing engine can be appealing initially, but they come with technical debts that will eventually need to be addressed.
However, if you anticipate that your pricing will evolve, and become more refined as your startup grows, and you want to keep your options open.
You should ask yourself: ‘what type of scale and pricing do I reasonably expect in 18 months?’
For instance, if you plan to introduce usage-based pricing in the future, you should consider how your system will handle recording usage at scale.
Platforms like Chargebee limit the usage recording to 5,000 events per account, lifetime, which can be very limiting.
Composability and extensibility
As your business progresses, it's important to consider that your pricing and operational requirements may become more complex. It is crucial to ensure that the vendor you choose has an architecture capable of accommodating various use cases, pricing models, and workflows.
To assess the flexibility of a vendor's product, you may need to involve your engineering team in examining the underlying building blocks or primitives used in their solution. If the source code is openly available, this evaluation can be conducted more easily. The easier it is for your engineering team to comprehend the code base, the quicker they can implement and iterate on your monetization tools.
If you don't have access to inspect the code or architecture of the product, at the very least, consider the reputation of the vendor within your industry. Are other companies in your industry utilizing this vendor's services, and what has their experience been like?
The importance of real-time capabilities varies depending on your billing cycle and the nature of your products or services. If your billing is done on a monthly basis, you might question the need for real-time measurement. However, if your offerings include compute, storage, data sync, or fintech features, real-time usage measurement becomes essential.
For instance, if you offer prepaid credits for data syncs, like Fivetran, it's crucial to ensure that users do not exceed the allocated amount they have paid for. In the case of neobanks, real-time checks on user accounts are necessary to verify if they have sufficient funds to initiate operations.
Billing solutions that are event-based provide the advantage of real-time capabilities, enabling accurate and immediate measurements. On the other hand, no-code solutions that rely on query-based methods may not offer the same real-time functionality.
Self-serve and sales-led motions
Self-serve users and sales-led customers have distinct requirements when it comes to billing. Self-serve users typically choose from a limited number of pricing plans, while sales-led customers benefit from negotiated quotes, which necessitate flexible and customized billing plans.
The implementation of self-serve plans can usually be handled by engineers, as they can set up the plans once and for all. On the other hand, sales-led custom plans require involvement from the Sales or Finance teams to define bespoke billing arrangements according to specific customer needs.
It's essential to evaluate whether your company utilizes both channels or only one. If you have both, consider whether your billing solution is capable of accommodating these diverse requirements. For self-serve users, engineers typically handle the billing implementation, whereas non-technical teams like Finance or Business Operations often handle the billing for sales-led customers.
When selecting a billing solution, ensure that it satisfies the primary user within your organization, taking into account the specific needs and preferences of the team responsible for managing the billing process.
Industry or use-case specific features
Different industries have distinct billing requirements, so it is important to select a system that can cater to those needs or provide the flexibility to customize and build upon them.
For fintech companies, processing "instant charges" is often a crucial requirement. This means that they need to debit their users' wallets at the moment of consumption. For example, when a user withdraws cash from an ATM (which may incur a withdrawal fee) or initiates an international payment, the fintech company needs to charge the appropriate amount immediately.
If you are unsure about your specific billing needs or anticipate future changes, a good starting point is to ensure that your chosen vendor has customers in a similar industry or space. This indicates that the vendor has experience addressing the unique requirements of that industry and can better understand and cater to your specific needs.
Transparency & Security
Billing is a critical function of your business and involves handling various nuances and edge cases. If you opt for a third-party billing solution, it is crucial that your team possesses a deep understanding of the solution's architecture and mechanisms. This knowledge will be invaluable when dealing with complex or tricky use cases. Encountering a complete black box when trying to resolve a critical bug is a situation you want to avoid at all costs.
Open source solutions are typically scrutinized by developers before adoption. However, if you decide to use a closed-source solution, it is important to push for as much information as possible about its workings and inner workings.
Considering security certifications early on is also important, especially if you plan to onboard mid-market and enterprise customers. If your billing system handles sensitive data or operates in a regulated industry such as finance, healthcare, or the public sector, having the ability to self-host your billing system can ensure compliance with the required standards for your industry.
Lock-in is a concern commonly associated with multi-year contracts, but it can also extend to the choice of payment processors when it comes to billing vendors. For example, a specific billing vendor like 'Stripe Billing' may lock you in with their proprietary payment processor called 'Stripe Payments'. This means that if you choose 'Stripe Billing' as your billing solution, you are limited to using their designated payment processor and cannot easily switch to a different one. Read more here.
Most vendors will take a cut on your revenue as a fee. This is convenient in the early stage, but as your company grows, this cut can amount to a significant part of your margins.
Make sure to understand and estimate how the costs will evolve over the trajectory of your company.
That’s a wrap! If you want to go deeper on billing pain points, we also recommend this read about billing nightmares that might help give perspective on your evaluation process.