With the global economic outlook growing gloomier, enterprises are looking to tighten their belts — and inevitably, that’s leading them to fret about the price of their SaaS solutions, which often involve substantial upfront costs to implement, plus large payments each time a contract renews.
To help buyers overcome these concerns — and reduce the need to offer discounts in order to close deals or retain customers — a growing number of vendors are now offering flexible pricing strategies. Essentially, vendors let customers tweak their payment terms and reduce up-front payments in exchange for longer contracts with a higher lifetime value.
In principle, that’s a winning strategy: the customer gets a pricing model that suits their needs and helps them maintain capital reserves, and the SaaS vendor can maximize revenues over time, along with reducing their reliance on price-slashing as a lever to close deals.
But there’s one problem: for vendors who’ve built their business around conventional SaaS pricing models, transitioning to a new approach — or a hybrid model that combines both pricing options — can make it harder to maintain visibility into financial performance. Tracking financial KPIs and using them to forecast effectively requires a smart, clear-eyed approach without which it’s impossible to unlock the full value of flexible payment models.
A blueprint for the future
All businesses — especially early-stage enterprises — require effective financial planning to facilitate growth. Why? Because a financial forecast isn’t just a guess at the future. It’s a blueprint for where your company is going, and how it’s going to get there.
Compiled and presented correctly, such forecasting is a powerful strategic asset when it comes to winning over investors. That’s especially true during these turbulent times: with funding in short supply, investors and lenders expect to see evidence of responsible financial management and rigorous forecasting before they’ll open their wallets.
In the SaaS space, financial projections are particularly important. A subscription-based recurring revenue business model should, theoretically, lend itself to forecasting. But the opposite is often true, especially for companies stepping into the flexible pricing space.
What if you need capital to invest in your product — or simply to make payroll — but your biggest customer has switched to a long-term, low-payment contract? The contract value is still there, but you also need to ensure your cash flow will align with your actual needs on a day-by-day basis over the next month, quarter, and year.
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Flexibility and complexity
Almost by definition, flexible payment models create the scope for greater complexity. Rather than selecting from a fixed price sheet, customers using a flexible pricing structure have the ability to craft a payment package that best fits their unique financial circumstances.
That’s great for the customer, but it means your financial team has to work with a wide range of different contract types and revenue streams. You can’t just count your customers and multiply by a given monthly rate — you need to know exactly how much each customer has opted to pay, and how often, and over what period.
The benefits of flexible pricing to the vendor can also create new challenges when it comes to managing financial reports and projections. It’s vital to ensure you’re correctly accounting for reductions in discounting, reductions in overall customer churn, and increased upsell opportunities as you work to assess a flexible pricing program and communicate its benefits to executives, directors, and investors.
A data-driven solution
With so many variables in play, software leaders sometimes struggle to build a cohesive, data-based picture of where their business is going. But the reality is that the same tools required to implement an effective flexible payment solution can also help you to manage financial reporting and forecasting.
That’s because your flexible payment infrastructure should be a tight-knit part of your overall fintech apparatus. Pricing and payment options shouldn’t just be left to the whims of your customer; they should be tailored to each customer’s specific value and risk profile, as part of an intelligent, data-driven, and fully integrated tech stack.
When you connect the dots between the different elements of your business, using the right SaaS payment solution to manage your offering, it becomes possible to capture and analyze critical financial performance data in real time — and to use that data to rapidly create effective forecasting that deliver full visibility into both where your business is and where it’s going.
A more agile approach
Traditional SaaS forecasting draws on historical data sources to project future performance. In terms of providing a general overview, that’s a solid approach — but it isn’t nearly forensic enough to navigate the intricacies of flexible payments. If a SaaS business wants to innovate on pricing, it also needs to innovate on forecasting, which means analyzing financial information from across the organization. Brands need to lean into more powerful AI-enabled analytics that draw on data from across their operations — including their payment tools — to deliver rich and actionable intelligence in real time.
Such tools can provide far more visibility into how payment decisions impact future performance — not just locked-in revenues, but also likely churn rate, customer health scores, and so on. Armed with that granular, forward-facing financial intelligence, service providers can also leverage vendors’ existing contracts to provide low-cost capital, helping SaaS companies to manage their cash flow and cope with the revenue volatility that can accompany flexible payment options.
Planning for the future
Accurate forecasting is a vital capability for today’s SaaS companies, especially as they seek to win customers and maximize revenues with new flexible payment strategies. Reliable and up-to-date data is essential if SaaS leaders are to make smart decisions, drive enduring growth, and win over investors.
To achieve the kind of robust and intelligent financial planning that’s needed, SaaS leaders need to leverage technological innovations to deliver full visibility across their operations. With a well developed fintech stack, vendors can gain a holistic view of their financial capabilities, see clearly where and when revenue is coming in; planning strategically for the future.
At Ratio, we’re helping SaaS businesses keep track of their key financial indicators while drawing on new capital channels and offering customers the pricing flexibility they desire. Visit our website to learn more.