How long is a billing cycle? Subscription billing cycles in SaaS explained

McKinsey research shows that barely one-third of software companies achieve the "Rule of 40", which is a key metric indicating profitability and healthy growth. One of the critical factors in reaching that benchmark is effectively managing your billing cycles.

In this article, we'll break down everything you need to know about billing cycles in SaaS – from their impact on your business to the various types and how to manage them effectively.

You'll also learn:

• How do billing cycles impact cash flow, revenue predictability, and customer satisfaction?
• How long is a billing cycle?
• What are the most common types of billing cycles in SaaS?
• How do you overcome challenges in managing billing cycles?
• How can Orb's billing platform streamline your billing operations?

Before getting into the nitty-gritty, let’s explain what a billing cycle is in the first place.

What is a billing cycle?

A billing cycle is the period between one bill and the next. It's like a clock that resets regularly, setting the pace for your recurring payments.

How long is a billing cycle?

Monthly billing cycles are a popular choice, mirroring the structure of credit card billing. However, with SaaS, there's a lot of room for flexibility. You might choose weekly, bi-weekly, or annual billing cycles. It'll all depend on your product, pricing strategy, and target market.

The length of your billing cycle influences several aspects of your business. Think cash flow, revenue recognition, and the customer experience. It also impacts when you generate invoices, which will show a statement date marking the end of the billing cycle.

The invoice's due date, however, indicates when the customer's payment is expected. Communicating the difference between statement date vs. due date clearly to your customers is vital. It helps with transparency and to avoid any confusion.

How long is a billing period for your SaaS?

That's a question you, as the provider, need to answer strategically. It's about finding the sweet spot that optimizes your operations while meeting your customers' needs. In the next section, we'll dive deeper into the strategic implications of billing cycles.

Why billing cycles matter in SaaS

Billing cycles are a core component of your SaaS business strategy. We’ve answered the question, “How long is a billing cycle?” Now, we’ll explore why these cycles matter in SaaS. Let's take a closer look:

Cash flow management

Think of billing cycles as the engine that drives your revenue stream. Consistent billing cycles create a predictable flow of funds. This predictability makes it easier to forecast earnings, manage expenses, and invest in growth.

Regular billing cycles in SaaS contribute to a healthy business, similar to the case of having a credit card, where timely payments contribute to a healthy credit score.

Predictable revenue

Knowing when to expect payments allows you to accurately predict revenue. This aspect is crucial for making informed business decisions, from hiring new talent to launching new features.

Basically, with a clear view of your incoming revenue, you can plan for the future with confidence.

Customer satisfaction and retention

Billing cycles also play a vital role in customer satisfaction. Clear, consistent billing practices build trust and transparency.

When customers know what to expect and when to expect it, they're more likely to be satisfied with your service. Of course, happy customers are more likely to stick around and even spread the word by becoming advocates.

Common types of billing cycles in SaaS

Now that we understand why billing cycles are so important, let's explore the different types of billing you might encounter in SaaS. Here's a breakdown of some common options:

• Monthly billing cycles: This is a popular choice for many SaaS companies. It often mirrors the familiar cycle of credit card billing. It provides a good balance between consistent revenue flow and manageable payment frequency for users.
  
  ‍Benefits: Customers appreciate the predictability and alignment with their budgeting cycles. SaaS providers enjoy a steady, recurring revenue stream that simplifies financial forecasting.
• Quarterly billing cycles: With quarterly billing, customers are invoiced every three months. This option can be a good middle ground between frequent billing and longer-term predictability.
  
  ‍Benefits: Reduces the administrative overhead associated with monthly billing. It also still provides a reasonable level of revenue predictability for forecasting and planning.
• Annual billing cycles: Annual billing provides the greatest level of revenue stability. It’s also often favored by companies with high customer retention rates.
  
  ‍Benefits: Maximizes upfront revenue collection, reduces churn, and simplifies accounting processes. It’s ideal for mature SaaS businesses with strong customer relationships.
• Custom billing cycles: Some SaaS providers offer custom billing cycles to cater to the unique needs of their customers. This approach can be a great way to build strong relationships and accommodate specific circumstances.
  
  ‍Benefits: Provides flexibility to align with customers' specific budgeting cycles or project timelines. It helps foster stronger relationships and increases customer lifetime value.

How SaaS companies manage billing cycles for clients

Managing billing cycles is about orchestrating a frictionless experience that fosters customer trust. But how do SaaS companies actually achieve this? Let’s find out:

Subscription management tools: The engine behind billing

Most SaaS companies rely on specialized subscription management tools to handle billing cycles. These tools automate many key processes, such as:

• Invoice generation: Automatically generate and send invoices at the start of each billing cycle. This way, you’re ensuring accuracy and timeliness.
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• Payment processing: Securely process payments through various methods. These methods include credit cards, online payment platforms, and even wire transfers. The goal is to offer customers flexibility in how they can pay.
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• Proration: Calculate and adjust billing for customers who join or leave mid-cycle. This process helps guarantee fair and transparent pricing.
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• Dunning management: Automate reminders for overdue payments to help manage failed transactions. Dunning tools also provide self-service options for customers to update their payment information. The end goal is to reduce churn due to involuntary cancellations.
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• Reporting and analytics: Track metrics like recurring revenue, churn, and customer lifetime value. By monitoring these metrics, you gain insights into your billing performance and spot areas for improvement.

Aligning billing with product usage

Many SaaS companies align their billing cycles with product usage. This alignment means that customers are charged based on their consumption of the service. Consumption can be tied to the amount of storage they use or the features they access, for example.

Such an approach requires sophisticated metering capabilities. Why? Because you need to track and measure usage accurately and ensure that customers are only billed for what they consume.

For instance, usage-based pricing is also highly adaptable to different billing cycles. For enterprise contracts, it works seamlessly with longer cycles like quarterly or annual billing, offering predictable invoicing with periodic adjustments based on usage.

For smaller businesses or startups, monthly billing allows for agility in handling variable consumption patterns.

Transparency: The foundation of trust

Clear communication is paramount when it comes to billing cycles. SaaS companies should be upfront and transparent about their billing practices, including:

• Answer the question: “How long is a billing cycle?”Clearly state the length and frequency of billing cycles in your terms of service and on your invoices.
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• Statement date vs. due date: Explain the difference between the statement date (the end of the billing cycle) and the due date (when payment is expected) to avoid confusion.
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• Payment terms: Outline accepted payment methods and any late payment fees. It’s also important to provide clear instructions on how to update payment information or manage subscriptions.

By providing this information clearly, SaaS companies can build trust with their customers. They can also reduce billing-related inquiries and minimize potential disputes.

Factors influencing the length of a SaaS billing cycle

The ideal billing cycle length can vary significantly based on a number of factors, and finding the right fit for your business is crucial. Let's explore some of the key considerations:

Customer preferences and industry norms

You need to consider your target audience and their expectations when choosing your billing cycle. Let’s dive deeper and explain why:

• Customer expectations: Consider your target audience. Are they used to monthly subscriptions like their Netflix account? Do they prefer annual contracts, as is common in enterprise software? Ask yourself these questions to make sure you’re always aligned.
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• Competitive landscape: Research your competitors. What billing cycles do they offer? You don't have to follow the crowd, but understanding industry norms can help you benchmark your offerings.
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• Payment preferences: Offer a variety of payment options and consider their typical billing cycles. For example, aligning with common credit card billing cycles can make budgeting easier for customers.

Your company's revenue strategy and cash flow needs

Your company's financial goals and needs will also play an important role in determining the most effective billing cycle. Let’s take a look at the factors you’ll need to keep in mind:

• Revenue predictability: Shorter billing cycles provide a more consistent revenue stream. Longer cycles (e.g., annual) can lead to greater upfront revenue but less predictability.
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• Cash flow management: Monthly billing can improve cash flow. This fact is especially true for startups or businesses with high growth. Longer cycles might be suitable for established companies with stable revenue.
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• Pricing models: Your pricing strategy should align with your billing cycle. For example, flat-fee subscriptions often work well with annual billing, offering upfront simplicity for both the provider and the customer.

SaaS product lifecycle and updates

The nature of your product and its stage of development can also influence your billing cycle decisions. Here’s how:

• Early-stage products: Shorter billing cycles can provide flexibility for early-stage products. Especially those that are still evolving. This strategy allows you to adjust pricing or features as needed.
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• Mature products: Longer billing cycles are better for products with established features and a stable user base.
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• Product updates: Consider the frequency of major product updates. Aligning your billing cycle with major releases can incentivize renewals and reduce churn.

Challenges with managing billing cycles in SaaS

While billing cycles are essential for SaaS businesses, they also present some unique challenges. Let's take a look at some of the common hurdles and how to overcome them:

Dealing with failed payments and dunning processes

Failed payments are an inevitable part of doing business, but they can disrupt your revenue stream and create extra work for your team. When payments fail, it's important to have a clear dunning process in place to recover lost revenue and minimize churn.

Potential solution:

Implement automated dunning management tools. Choose one that sends timely payment reminders and offers self-service options for users to update their payment data. If it can also escalate to manual intervention when necessary, that's even better.

Consider offering flexible payment options or payment plans. These plans are particularly useful for customers facing temporary financial hardships.

Adjusting billing cycles for upgrades, downgrades, or cancellations

Customers often change their subscription plans: upgrading, downgrading, or canceling them altogether. Adjusting billing cycles to reflect these changes accurately and fairly can be tricky.

Potential solution

Use a subscription management platform. Choose one that can automatically adjust billing cycles and prorate charges for mid-cycle changes. You should also share your policies for upgrades, downgrades, and cancellations in your terms of service to set clear expectations.

Managing prorated charges for mid-cycle changes

You'll need to calculate prorated charges when users change their subscriptions mid-cycle. This is a must because you need to confirm they're only billed for the services they used. The process can be complex, especially if you have many pricing plans and billing cycles.

Potential solution

Leverage subscription management software with robust proration capabilities. Make sure your system can calculate and apply prorated charges for different billing scenarios.

Remember that communication continues to be the key. You must clearly explain prorated charges on invoices to be transparent with customers.

Orb’s approach to flexible billing cycles

But how do you actually implement and manage billing cycles effectively?

That's where Orbcomes into the frame.

Orb is a done-for-you billing platform designed to streamline and automate your SaaS billing operations. We empower you to create a truly flexible and scalable billing infrastructure. Leading companies like Perplexity and Vercel trust Orb to manage their complex billing needs.

Here's how Orb can help you optimize your billing cycles:

• Customizable billing cycle options: Orb offers a wide range of billing cycle options, from monthly and quarterly to annual. You can tailor your billing cycles to match your customers' preferences, the nature of your product offerings, and your revenue goals.
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• Real-time data for accurate invoicing: Orb provides real-time insights into customer usage data. We help guarantee accurate invoicing across all billing cycles, even with complex pricing models. This eliminates billing errors and boosts customer trust.
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• Billing scenario management: Whether you're using usage-based billing or another model, Orb can handle it. We help implement better pricing models without adding complexity to your operations.
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• Proration and billing changes: Orb handles proration and billing adjustments for mid-cycle changes. Think upgrades, downgrades, or cancellations. This feature helps ensure accurate billing and reduces manual effort.
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• Seamless integrations: Orb integrates with your existing tech stack. Our platform plays nicely with payment gateways, CRMs, and analytics tools. The result? A unified billing ecosystem.

Ready to unlock the full potential of your SaaS billing? Give Orb a try and experience the difference a truly flexible and automated billing platform can make.