There's no question that Software as a Service (SaaS) is booming right now. A recent survey found that a whopping 38% of companies are running almost entirely on SaaS, and 80% of companies plan only to use SaaS systems by 2025. And if you still need convincing, SaaS spending across companies of all sizes will reach an eye-watering $500 billion by 2023.
With such rapid growth, more and more companies are moving into the SaaS space, creating new SaaS platforms that will help businesses today and in the future. But any fledging SaaS company has one crucial element to consider - monetization. That's what we're going to be getting into today. We'll discuss which monetization methods are the most profitable, the different types of SaaS billing systems, and which systems are most popular with users.
What Is SaaS? Profitable SaaS Pricing Models
Software as a Service, also known as SaaS, is a software distribution model that allows you to access applications via the internet from any device. This is made possible due to cloud servers. Essentially, with SaaS, you are freed from the potentially complicated task of installing and maintaining software locally. Instead, you can simply access the app via your web browser.
SaaS apps come fully configured, and the SaaS provider manages the setup, debugging, backups, security, performance, and so on, so you don't have to worry about anything. Some common examples of SaaS include Google Workspace, Dropbox, Salesforce, and Microsoft Office 365, but many thousands of SaaS products exist to meet unique customer needs.
Today, almost all businesses use some form of SaaS. According to BetterCloud, a company employs an average of 16 SaaS services for day-to-day operations. By 2025, it is believed that 55% of large enterprises will be adopting a comprehensive cloud-based SaaS infrastructure.
SaaS Pricing Models
Pay-as-you-go (usage-based): The more of the service you use, the higher the bill. This pricing model is most common in infrastructure and platform-centric software companies like Amazon Web Services (AWS), Digital Ocean, and Google Cloud. Cost is relative to the number of API requests, gigabytes of data used, and the number of transactions processed.
Value-based pricing: Under this model, the product is priced based on its perceived value to customers (what it can do for the customer). Value metrics are the features customers pay attention to. Some examples of value metrics include active users for tools like Slack and Asana, the number of subscribers for tools like Mailchimp, and the amount of money processed on tools like Stripe.
Tiered pricing: This option offers different packages with different combinations of features. The three most commonly used packages include an entry-level, a mid-priced segment, and a more expensive option. One advantage of the tiered pricing strategy is reaching several target groups and serving a broader range of customers. Adobe, Hubspot, and Photoshop use this model.
Freemium: The basic product is free, but users are limited by what features they can use. If they want access to more features, they must switch to the paid model. Dropbox and Zoom use this model.
Types of Payment Systems for Online Payment Processing
Today's SaaS companies have a wealth of options for online payment processing. However, choosing the right billing platform for SaaS will depend on several factors, so it's good to familiarize yourself with the different options.
The user pays with their own card on a dedicated interface on the merchant's site. Payment goes through a processing center before it reaches the recipient. This center can belong to the bank itself or be a separate intermediary organization.
The main benefit of this option is high security. Internet acquiring uses 3-D Secure and SecureCode security technologies for Visa and Mastercard. The company must sign an agreement with a credit institution or processor to use this service. The contract process can be pretty time-consuming. For example, the business has to fill out an application, gather various documents, and hand them over to the bank for verification. Then, to connect, the user must set up and maintain the technical infrastructure on their side.
Are you considering a payment gateway for SaaS? An online payment gateway acts as an intermediary that processes transactions and routes payments. The gateway is not directly involved in the money flow; typically, it's a web server connected to a merchant's website or POS system. An online payment gateway often connects several acquiring banks and payment methods under one system.
Benefits of online payment gateways for SaaS:
- Accessibility: The gateway provides a single interface for payments through multiple banks.
- More payment options: It allows you to accept traditional payment cards as well as e-wallets and electronic bank payments.
To integrate a payment gateway, you'll need to register and be approved by the gateway provider, which can take some time. Additionally, the gateway must comply with PCI DSS standards, and information must be encrypted for payment security.
Payment Service Provider
Payment service providers (PSPs) are third-party companies that assist businesses in accepting a wide range of online payments, including online banking, credit cards, debit cards, e-wallets, cash cards, and more. PSPs have a reputation for being simple and straightforward because the company doesn't need to enter agreements with each service and set up various APIs. Pricing is based on turnover, the type of business, and the payment methods used.
PSPs require a minimum package of documents and offer ready-made modules to connect to the CMS and documentation. Your clients can choose from several payment methods and systems on the site, picking the most convenient option. Compliance with PCI DSS guidelines is essential.
Hosting a Payment System on Your SaaS Platform (Basic Requirements)
Before you jump in, you need to ensure you can comply with the basic requirements for hosting a payment system on your SaaS platform. These are:
- The site must have a static IP address and be hosted on paid hosting.
- You'll need to provide your company's name, its legal address, and a detailed description of the goods and services you provide.
- You must ensure that the products or services you offer on your site are compliant with the law (aren't criminal) and follow ethical norms.
- Prices must be available in the local currency and be equivalent in foreign currency.
- If the site allows personal accounts, the registration and authorization process must be protected by HTTPS. If there is no individual account, the order placement process must be secured by other means.
- Card details can only be requested on the page with the secure payment form generated by the service provider.
- You must provide a policy of non-disclosure regarding customer data.
Most Popular Payment Gateways and Payment Service Providers for SaaS Platforms
Finding the right billing platform for SaaS can be a tricky business. Luckily many SaaS platforms have come before you and already decided on their platform of choice. Here we'll look at the most popular payment systems SaaS companies use today.
Stripe is famous for its industry-leading developer tools that enable businesses to integrate and customize payment processing solutions regardless of their preferred programming language. And critically, Stripe processes more than 100 foreign currencies and converts them at no additional cost.
Top Advantages of Stripe for SaaS:
- Instant integration with any CMS.
- Convenient payment window (users don't need to navigate to additional pages or register an account).
- Extensive customization features.
- Instant acceptance and refunds.
- Advanced security features: Stripe offers an advanced anti-fraud system with Stripe Radar (which uses machine learning to detect and block fraud). Stripe is also one of the first to introduce Strong Customer Authentication (SCA). It also supports 3-D Secure technology and requires users to enter an SMS confirmation code for verification. Stripe meets the PCI DSS standard.
There are no monthly charges, but companies pay 1.4% for European cards and 2.9% for non-European cards, plus a small flat fee of $0.30.
Companies with a large volume of transactions and a unique business model can opt for a customized tariff, including discounts.
In the case of a chargeback, the system charges $15, which is refunded if the retailer successfully disputes the chargeback.
Unless you've been living under a rock, you've probably heard of PayPal payment gateway. It's a universal payment service that allows merchants to easily accept online payments and buyers to make purchases quickly and securely. The system has been in existence for more than 20 years and serves more than 200 countries in 25 different currencies.
PayPal attempts to make online purchases more secure by providing a form of payment that does not require the payer to disclose a credit card or bank account number. You can also create and email invoices using free templates.
Security is a top priority for PayPal. As a result, you should be careful only to provide accurate, verifiable details when you register your account. If PayPal has even the slightest suspicion you've been dishonest, they may block payments.
PayPal also has a protection program for both merchants and buyers. The protection program for retailers extends to intangible items - including travel services and tickets.
The total amount you pay depends on the volume of sales and the region you trade. Registration is free.
Amazon Pay is a payment processing solution that enables businesses to record, track, and manage online payments. You can also monitor customer satisfaction, manage disputes, and handle chargebacks easily with Amazon Pay. Amazon Pay is popular because, like PayPal, it's easy to sign up and integrate the system into your platform. It's important to note that Amazon Pay offers no support for PayPal and customers need an Amazon account to make a payment.
Amazon Payment Services offers full and customizable support for 3D Secure technologies and is PCI compliant. You can find out more here.
Amazon Pay Fees
Each transaction involves a processing fee and authorization fee. For domestic transactions (those that take place in the US), the processing fee is $2.9%. For non-domestic (cross-border) transactions, the processing fee is 3.9%. The authorization fee remains the same across both scenarios and is $0.30.
WePay is an online payment system that provides integrated payment solutions primarily to SaaS and crowdfunding platforms. It's also one of the most well-known options on the market today. It was launched in 2008 as an alternative to popular payment solution options like Stripe and PayPal. WePay supports virtually any website by providing a way to integrate accounts to collect payments via ACH (bank transfer) and credit card payments. In addition, WePay's flexible API is available for all B2B, B2C, and P2P financing options.
WePay takes security seriously. They are a Level 1 PCI Compliant Service Provider (the highest level). They also use state-of-the-art cryptographic algorithms during data transmission, conduct daily testing (both automatic and manual) on their systems, and their employees follow strict security guidelines.
We Pay Fees
The cost to accept credit card payments is relatively cheap at 2.9% + $0.30. On the other hand, the cost of processing ACH payments is 1% + $0.30. In addition, sending invoices is free, and there are no monthly or setup fees.
Key Priorities When Choosing a Payment System
So now you know the popular SaaS payment systems and what features they offer. However, there are still some other things you need to consider before you lock in your choice.
Location of Your Customers. You need to ensure that the payment system you choose works in the countries where your customers live. In addition, you should tailor the payment processors to your audience. For example, Alipay and Tenpay are popular in China but much less popular elsewhere. Therefore, a customer in the US probably shouldn't see an option for Alipay.
Total Cost of Fees. You need to consider how many transactions you typically take and what the total cost of fees will be for each financial period. Make sure to read the documentation carefully to catch any sneaky hidden fees. For example, the bank may not specify a fee for making a card payment and assign a commission fee for each transaction individually. Extra fees can quickly add up.
Terms of Withdrawal. The first thing to check is whether you are allowed to withdraw funds at all in your region. Once you've confirmed you can, next, you need to check when and how you withdraw. Different companies have their own policy, and there may be drawbacks you need to consider.
Aggregator vs Payment Gateway. Is the service you want to use an aggregator or a direct payment gateway? An aggregator is a PSP like PayPal or Stripe, while payment gateways are the technology that facilitates online payments over a network. Payment gateways are typically provided by banks and you need to have a merchant account with the bank to use them. Which option you pick will determine how the user pays and how you withdraw your money.
Connection Specifications. Connections specifications are highly dependent on which platform you use to develop your site. For example, your payment system might work as a plugin, via an open API, or through some other process.
At Active Bridge, we use our many years of experience and technical know-how to find the best payment system for your SaaS platform. First, we pay attention to how the payment system API interacts with the SaaS platform source code, ensuring everything talks smoothly. We also consider the markets in which the platform operates, the payment system fees, and the preferred payment methods of your customers. If you need advice on connecting a payment system, or you have chosen a system and want to connect it, our experts can help.