Master Guide: Billing Strategies for Startups

For up-and-coming startups, financial health and long-term sustainability should be a priority. In our previous post on “What is Burn Rate and How to Calculate It?”, we discussed how a startup’s burn rate measures the rate at which a company spends its cash reserves to finance overhead, growth, and other operating costs before generating positive cash flow.

Keeping track of cash flow is essential to maintain your startup’s financial stability. This is determined by combining your startup’s burn rate and billing revenue. A startup’s billing revenue represents your income from customers, clients, or users paying for your products and services. By ensuring that your billing revenue consistently covers or exceeds your burn rate, you can maintain financial stability and aim for long-term sustainability.

Over the years, billing strategies among startups and businesses have evolved. In this article, we’ll look at why many startups rely on billing management software and the different billing models you can employ to boost your startup’s revenue over time:

Billing management software

For startups to properly manage customer billing and revenue over time, billing management software can offer significant advantages such as added efficiency and accuracy to prevent human error.

Revenue management software Softrax offers comprehensive features for complex billing and revenue recognition using a unique and high-level automation system to facilitate continuous accounting. Revenue management software can also account for variables such as exchange rate, tax, and payment data to ensure accuracy and punctuality in processing.

Based on data from financial operations platform Maxio, many software-as-a-service (SaaS) companies use usage-based pricing to grow their customer base and boost usage of their software. However, companies that still use traditional subscription-based pricing models also benefit from the stability and predictability of their billings. Below, we’ll look at the different types of billing models to consider for your startup:

Consumption billing

Consumption billing, or usage-based billing, is a payment scheme where the customer pays according to the resources or services used instead of paying a fixed rate monthly or annually.

Insights from TechTarget describe how consumption pricing is standard in cloud computing and utility computing, as they are commodities that may be required to scale up quickly and down based on demand. Startups tend to use consumption billing to maintain cost advantage and profitability.

Tiered billing

Meanwhile, tiered billing refers to a payment scheme where customers are charged based on different usage levels or tiers. Businesses can offer multiple pricing options, each with varying sets of features, usage limits, and pricing levels.

Customers enjoy the flexibility of tiered billing as it accommodates different needs. However, tiered billing may not suit all types of products or services. In the state of California, for instance, users worry about the extra charges resulting from tiered-rate electricity billing. Once usage exceeds a set baseline, prices increase, which may cause unplanned customer expenses.

Hybrid billing

Finally, there’s hybrid billing. This payment scheme is a mixture of different billing models, which can provide customers with pricing flexibility with a given set of features. By adopting hybrid billing, your startup can attract a broader range of customers.

Implementing accounts payable best practices ensures that these diverse billing models are managed efficiently, reducing errors and improving financial transparency. This strategic approach streamlines operations and enhances customer satisfaction by ensuring accurate and timely billing.

By offering complete customization, startups can let customers choose a billing method that best suits their needs and preferences. For example, startups can combine a fixed subscription fee with “extras” in the form of “pay-as-you-go” charges in case a customer has less consistent usage demands or patterns. Hybrid billing can also lead to revenue growth as customers needing additional services can quickly pay for them at a fixed rate.

Given the different types of billing strategies, startups must adapt their models to the most revenue-friendly option. By looking at relevant data and listening to customer concerns, your business can better choose a billing strategy that works for everyone.

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