These are heady times — cloud computing, Big Data, M2M (machine to machine) communications and the Internet of Things (IoT) are enabling all kinds of innovative products and new services. GE talks about connecting the 250,000 machines it has installed globally and the petabytes of data that are generated by a single jet engine. McKinsey estimates the world needs 1.5 million data scientists. Companies moving to cloud-based, as-a-service offerings or creating their M2M or IoT business strategies, are discovering that their billing platform needs to change to keep pace with the trajectory of their business.
Billing and monetization, once the domain of the dark corners of the back office, are becoming more prominent as companies embrace usage and consumption-based pricing models and reengineer their billing processes and systems.
For many on-premises software companies that moved early to SaaS and Web 2.0 companies, the first consideration for billing was how to quickly launch a billing solution suitable for static product and pricing plans. The freemium to personal, professional and enterprise pricing plans gained widespread adoption as they offered simple, easy-to-understand models for both vendors and customers.
With more enterprise-grade, B2B-oriented companies launching as-a-service products and services, there is demand for billing engines that go far beyond handling subscriptions. Usage and consumption-based models are gaining traction. Customers want to pay by the drink, and progressive suppliers are realizing they can make flexible pricing and usage plans a competitive weapon.
The demand for granularity and customization is increasing. For a midsize to large enterprise — be it a tech business or an industrial company — the numbers of customers, multiple tiers of distribution, and n-number of pricing plans rapidly push the complexity of requirements far beyond the capabilities of billing systems designed for subscriptions.
The rise of agile billing
Frustrated by the limitations of existing billing systems and often manual, spreadsheet-based processes, organizations are looking for agile billing engines. Agile billing is defined as business, product, and IT agility. At its core is the ability to accelerate business timing and velocity.
In business terms, agile billing is about helping bring products to market faster, enabling rapid changes in pricing, promotions and solution bundles, and driving greater transparency with customers, partners and distributors. The results can be in the top line (faster time to market with a more differentiated offering), or on the bottom line, with greater insights into revenue and margin leakage and a reduction in the costs of sales and customer support.
Total functionality is no longer a high priority of product evaluations; rather, it is total consumable functionality and a measurement of how quickly a solution can be implemented and how easily it can be changed.
The one certainty for companies launching new products and services is that their product and pricing models will change and have to adapt to market conditions. Market leaders are using pricing and billing as a competitive differentiator and view their billing system as a key enabler. Established businesses are pragmatic about their needs. They have thousands of customers with hundreds or thousands of different contractual commitments and financial relationships. A new billing platform has to take that reality, with all of its complexity and nuance, into account, while also providing new capabilities.
Flexibility and configurability that can be managed by business people, not IT specialists, make it possible for the business to make changes faster and with less internal friction.
For those taking advantage of agile billing, it’s a great equalizer, as follows:
- For Fortune 500 companies, agile billing offers the nimble reactions of a startup.
- For startups, cloud-based agile billing systems are now affordable and place the same robust set of capabilities that used to cost millions of dollars within reach of a startup’s budget.
While agile doesn’t automatically equate to cloud-based, it’s no surprise that agile solutions are overwhelmingly being built in the cloud. They have been developed with modern tools, take advantage of current API and integration techniques and offer a clean, consumer-oriented UX that make it easy for a business person to use the system. All of these are critical ingredients to an agile billing solution.
One of the drivers pushing users to consider agile solutions is the reality that most on-premises solutions can’t keep up with today’s business pace.
Here is a typical scenario. The business wants to introduce a new product or service. To meet market requirements, the new product offers usage-based pricing or a range of different pricing models (subscription packages, pay-as-you-go, etc.). Upon request to the IT department responsible for the company’s ERP system (a traditional “home” for billing functionality), the business is told that to make the requested changes it will take nine months to over a year to adjust the ERP system. Faced with the threat of delaying the product launch and missing the market window of opportunity, the business team then seeks an alternative billing solution. Armed with the insights into the limitations of the on-premises ERP system, the business team goes into the market to consider alternatives.
Survey findings on billing solutions
Tech companies that are in the cloud, delivering “as-a-service” solutions are arguably at the forefront of innovation, and in highly competitive markets. Many are venture-backed companies with high growth rates and undergo intense scrutiny from their investors and customers.
To determine how these companies address their billing needs, MGI Research conducted a survey of SaaS, PaaS and IaaS vendors in late 2013. The key question was what type of billing solution — cloud based, hybrid (cloud+on-prem) or on-premises, do the respondents use.
The SaaS respondents included a broad spectrum of companies offering enterprise applications (e.g., HR, CRM, procurement, financials) and on-demand business services like Web conferencing. The PaaS respondents included on-premises, hosted and multi-tenant solutions. In the IaaS space, the survey respondents encompassed over 90 percent market share; in the PaaS space, the companies surveyed represented over 80 percent market share.
The survey found that:
- 74% use a cloud-based solution
- 8% use a hybrid cloud solution
- 18% use an on-premises solution
By no means an exhaustive view of all companies in hyper-competitive markets, this survey provides a lens into where tech-centric as-a-service companies are investing in billing capabilities.
Investment-target dynamics of the billing provider space
The good news for companies evaluating new billing systems is that the range of billing solutions providers is expanding as more companies enter the market and more investment dollars fuel the expansion of the vendors.
Billing solutions providers are attractive investment targets. Their revenues are incredibly sticky, as billing is at the core of every business. A customer can forgo an extra seat or two of CRM or marketing automation but can’t afford to stop billing its customers.
The accepted pricing model for billing vendors is to base the price of the service as a percentage of the customer’s revenue. As the customer grows, so does the revenue to the billing vendor. In simple terms, the billing solutions market will grow directly in proportion to the growth of the as-a-service and Internet of Things markets. It’s a highly attractive investment thesis and easy math.
No wonder that in 2013 over $100 million in venture money went into a small handful of billing vendors. Zuora has raised over $128 million and after its Series E financing last year is likely headed for an IPO or other exit in 2014.
The number of potential M&A acquirers is lengthy. Whether it continues to try and expand its own billing capability or acquire a fully developed billing engine, MGI estimates that NetSuite could garner an incremental $100 million in revenue, which would add more than $2 billion in market cap at current multiples.
All of the on-premises and cloud-based financials vendors are potential acquirers, including SAP and Oracle, as billing functionality and its complements, like revenue recognition, are key differentiators.
Intuit, Salesforce, and even the likes of Dell could gain with the addition of a billing offering. The investment dollars and level of strategic interest in billing vendors speaks to the rising awareness of the relative importance of billing solutions within the context of the enterprise applications landscape.
Periods of intense market dislocation and innovation expose weaknesses in business platforms and processes. For companies introducing as-a-service or cloud-based solutions, a modern billing and monetization engine is a vital element of success. The monolithic systems of the past that pushed billing departments into relying on spreadsheets are no longer the answer. For some companies making the move to new products and services, a simple subscription billing system will get the job done, while larger enterprises and those that want more flexibility and control require a more robust offering.
In all cases, agile billing engines are becoming the preferred solution. There is more choice than ever before — something progressive users and investors are discovering today.
SandHill is proud to be a sponsor of the Billing Innovators Summit (“Monetizing the Disruption”), an MGI Research event in San Francisco on March 23 from 12:00 p.m. – 6:30 p.m. Click here to register for the Billing Innovators Summit. Click here for the agenda and more information.
Andrew Dailey is a managing director of MGI Research. He leads the enterprise applications and billing solutions coverage for MGI. He has over 20 years of diversified technology and financial services experience as a software executive, industry analyst (Gartner) and advisor to Fortune 500 companies. Follow him on Twitter.