Strategy & Best Practices

Build vs. Buy for the Next Evolution of Subscription Billing

By Ideas @ AppDirect / July 25, 2018

For today’s ISVs, the barriers to launching and going to market have never been lower. With a great product and an easy-to-use website, a software vendor can start selling almost anywhere around the world as soon as the site goes live. But there’s a critical question that ISVs must answer before they can begin: Should you build a billing solution or buy one?

For many ISVs—especially born-in-the-cloud companies—building your own billing can be an attractive option. Staff developers often have the know-how to use a payment gateway API to run credit card transactions, and even developing the logic to handle recurring billing, manage subscription lifecycles, and other advanced tasks is becoming easier to do in house.

For many ISVs—especially born-in-the-cloud companies—building your own billing can be an attractive option.

However, the world of software sales is changing, and the build versus buy question is becoming more complex. ISVs must consider many of the same factors as before—the direct cost of development, opportunity costs, implementation time, and the availability of in-house resources, among others—but now with added dimensions, such as multi-party billing and the customer experience, that are key drivers of today’s digital economy.

Here we’ll take a deeper dive into these new areas of consideration in the build versus buy debate for recurring billing.

Subscription Billing Basics

ISVs are a diverse group with billing requirements that are just as varied. However, there are a few fundamental components that every cloud billing solution must-have. At a minimum, these include payment gateways and merchant accounts, and there are a variety of providers—such as Authorize.net—to choose from. In a build scenario, an ISV would develop logic on top of these solutions to meet its specific needs (monthly billing, billing per user, etc.).

Problems with do-it-yourself integrations to payment gateways can crop up, however, when billing is complex, including upgrades, downgrades, prorating, and other cases. Technical support can be lacking, which means your team will spend a lot of time troubleshooting billing issues instead of focusing on your core products.

Security is also a major concern. More than $7.77 of every $100 spent on digital goods like software is at risk of being lost in a fraudulent purchase. Beyond dollars, companies also risk losing something even more important: customer trust. Just one security incident can create lasting damage to an ISV’s brand.

More than $7.77 of every $100 spent on digital goods is at risk of being lost in a fraudulent purchase.

Before you build a billing solution, be sure your team is comfortable with developing or purchasing the right third-party tools to ensure the highest levels of security, as well as monitoring and maintaining them.

Considerations for Billing Build vs. Buy in the Digital Economy

While these basic elements are critical, they are now table stakes. To turn billing into a key business driver and customer experience differentiator, you need to expand your scope and evaluate build versus buy considerations in these additional areas.

Pricing Flexibility

Agile companies that can quickly respond to changing markets and customer demands have a huge competitive advantage. That’s why the ability to price products innovatively—and change pricing when needed—is so important.

Your billing should allow you to sell your products by any unit, such as per seat, per GB, per seat plus surcharges when a certain data limit is reached, and so on. While you may only charge per seat on a monthly recurring basis now, giving yourself the ability to introduce new pricing models later will provide the most flexibility to scale as your business grows.

In addition to flexible unit pricing, your billing should allow you to change those prices at any time. With an in-house solution, changing pricing can be time and resource intensive. On the other hand, some third-party vendors charge tens of thousands of dollars to make simple changes. In general, whether you build or buy, it’s smart to avoid pricing that is hard-coded into your solution.

Whether you build or buy, it’s smart to avoid pricing that is hard-coded into your solution.

Direct and Indirect Billing

Beyond pricing, flexibility is also an important factor when it comes to direct and indirect billing. Many ISVs start out selling directly to customers, often through a website. As a next step, software vendors often turn to the channel—specifically affiliate, reseller, and other types of partner programs—to drive more revenue.

Today, innovative software vendors are also building ecosystems of developers around their core products, a development that takes billing to new levels of complexity. Reconciliation of subscription sales, remittance at the end of each billing period, taxation, customer billing, and other factors must be accurate and timely across the entire ecosystem, which could include hundreds of developers.

Moreover, for ecosystems to scale effectively, ISVs must give third-parties a way, such as a developer center, to manage their own integration and rate cards. In short, your billing solution must make it easy to partner with other ISVs, providers, and other ecosystem stakeholders.

To scale effectively, ISVs must give third-parties a way, such as a developer center, to manage their own integrations.

Again, launching an ecosystem may not be on the immediate horizon, but laying the groundwork now with a flexible solution that can handle every type of direct and indirect billing should be a priority. Whether on-premise or in the cloud, in-house or third-party, ripping and replacing a billing solution is almost always disruptive to the business.

The Customer Experience

The old saying goes that the customer is always right, but in the digital economy, the customer experience is more important than ever. Why? For most digital products, including software, it is incredibly easy for customers to compare products and switch providers if they become dissatisfied.

Instead of an impersonal transaction, billing should be treated as an opportunity for ISVs to strengthen customer relationships. “Billing presents an opportunity to fulfill a brand promise of convenience and trust,” noted a recent report on billing transformation. “It is the primary opportunity that [organizations] have to interact with their... customers, and errors can be costly.”

Instead of an impersonal transaction, billing should be treated as an opportunity for ISVs to strengthen customer relationships.

The only way to achieve customer-centric billing is to make sure that your billing is fully automated. Some ISVs can get away with manually inputting sales data from spreadsheets into their billing solutions, but this will be unsustainable as the business grows. Customers expect instant payment processing and software provisioning. If your in-house team can’t deliver full billing automation, then working with a third-party billing vendor that can is the better option.

The Right Questions to Ask to Get Started

Billing is an important lever for innovation, but it is just one. ISVs that are poised to succeed in the next era of the digital economy are using billing as a starting point for new products and go-to-market strategies, not the final stop. With this in mind, here are several questions to keep in mind when evaluating your options.

Can your proposed billing solution:

• Bill customers correctly?
• Make pricing changes easy and cost-effective?
• Calculate usage charges (by the minute, by GB, by seat, etc.) accurately?
• Provide flexibility for full reseller and ecosystem commerce?
• Handle reconciliation and remittance between all parties in your ecosystem?
• Serve as the single source of truth for invoicing?
• Easily integrate with multiple other systems to lower risk?
• Provide accurate billing data and insights from any area of your business?

As you make your way down the list, be sure that flexibility and the customer experience are top of mind. If you’re confident that your internal team can develop a solution that answers “yes” to these questions, then build may be a viable option. If you don’t have the internal resources, then this list is a great place to start to evaluate vendors.

To learn more about subscription billing, download our datasheet, "Snapshot: AppDirect Subscription Billing Service," to learn more about the features and functionalities of AppDirect's billing solution. 

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