Billing in arrears: What it is and how a SaaS business can use it

Did you know that a recent study found that 84% of companies are shifting towards fixed-fee billing, with many embracing billing in arrears? This trend highlights the growing need for flexible and transparent billing solutions in the SaaS world.

In this article, we'll explore the ins and outs of billing in arrears. We'll dive into how it works, its advantages for SaaS businesses, and best practices for implementation.

You'll also learn:

• The difference between billing in arrears and billing in advance
• How to choose the right billing model for your SaaS business
• Real-world examples of billing in arrears in SaaS
• Strategies for maximizing customer trust and satisfaction with billing in arrears
• How to leverage hybrid billing models for greater flexibility

Let’s start by explaining what billing in arrears means. 

What is billing in arrears?

Billing in arrears simply means charging customers after they've received your services. Think of it like your utility bill. You use water and electricity all month, and then the company sends you a bill for that usage. That's billing in arrears in action.

But what does in arrears mean? Essentially, it means "after the fact." So, when we talk about "payment in arrears," we're talking about payments made after the service has been delivered.

Now, it's important to understand that the meaning of billing in arrears isn’t necessarily tied to the payment being "late." Even if a customer pays immediately upon receiving an invoice for services already rendered, that's still considered payment in arrears. 

The key is that the service happens first, followed by the invoice and payment.

Billing in arrears for business

This is a common practice across many industries. For example, many businesses bill for their services in arrears, as do most utility companies. It's a straightforward way to make sure that customers pay for the exact services they've received.

Billing in arrears vs. billing in advance

When it comes to setting up your SaaS billing, you have two primary options: Billing in advance or billing in arrears. Each approach has its own set of advantages and disadvantages, so it's important to understand the nuances before making a decision.

Let’s look at each one, explain how they work, and look at some pros and cons.

Billing in advance

With billing in advance, payment is collected before the service is delivered. Think of it like your Netflix subscription — you pay at the beginning of the month for the month ahead. This is a popular model for many SaaS businesses, especially those offering annual subscriptions.

Pros

• Improved cash flow: Having that cash upfront can be a major boon for your business, providing a predictable and steady income stream.
  ‍
• Simplified accounting: It can make your accounting processes a bit easier, as you don't have to track outstanding invoices or worry about late payments as much.

Cons

• Customer hesitation: Some customers might be wary of paying for something they haven't yet received. This issue can be especially true for new or smaller businesses that haven't yet established a strong reputation.

Billing in arrears

Billing in arrears, on the other hand, involves collecting payment after the service has been delivered. This is the model we discussed earlier, similar to how utility companies operate.

Pros

• Increased trust: It can foster a greater sense of trust with your customers, as they can see the value they're getting before they pay.
  ‍
• Supports variable billing: This approach is ideal for usage-based pricing models, where the cost fluctuates depending on the customer's consumption.

Cons

• Cash flow challenges: Waiting for payments can sometimes create cash flow hiccups, especially if you have significant upfront costs or longer billing cycles.
  ‍
• Collections: There's always a risk that some customers might not pay, requiring you to invest time and resources in collections.

When to choose each

So how do you decide which billing model is right for your SaaS business? Here are a few guidelines:

• Usage-based or high-trust customers: If you have a usage-based pricing model or you've built strong relationships with customers who consistently pay on time, billing in arrears can be a great option.
  ‍
• Predictable recurring revenue: If you prioritize a predictable and steady stream of recurring revenue, billing in advance might be the better choice.

How billing in arrears works

Billing in arrears is all about providing the service first and billing later. It's a simple concept, but let's break down the process step-by-step:  

1. Service delivery: Your customers use your SaaS product and consume your services. This consumption could involve anything from storing data on your cloud platform to making API calls to accessing premium features.
   ‍
2. Usage measurement: Your system accurately tracks and measures each customer's usage throughout the billing period. Think monitoring data storage, API call volume, or feature usage.  
   ‍
3. Invoice generation: At the end of the billing period (e.g., monthly), your system automatically generates detailed invoices for each customer, outlining their usage and associated costs.
   ‍
4. Payment collection: Invoices are sent to customers, who then make their payments according to your payment terms.  

Examples in SaaS

Let’s look at two very simple example scenarios in SaaS:

Example 1

Imagine a cloud storage provider that charges based on the amount of data stored. Customers use the service throughout the month, and at the end of the month, they receive an invoice for their actual data usage. This is a classic example of billing in arrears for usage-based services.

Example 2 

Consider a SaaS company with a base subscription plan that offers extra features or usage tiers at extra cost. Customers who exceed their base plan limits or opt for add-ons are billed in arrears for those overages.

Advantages of billing in arrears for SaaS businesses

Billing in arrears offers several compelling advantages for SaaS businesses. Let's explore some of the key benefits:

Customer trust and satisfaction

With billing in arrears, customers only pay for services they've already used. You’re fostering a sense of transparency and fairness, as they can clearly see the value they received before any charges hit their account. 

It's like a "try before you buy" model that can build confidence and strengthen customer relationships.

Flexibility for variable usage

Billing in arrears is incredibly adaptable to fluctuating usage patterns. It’s particularly valuable in metered billing models, where customers are charged based on their actual consumption of resources. 

Whether it's API calls, data storage, or feature usage, billing in arrears ensures that customers only pay for what they use, promoting a sense of fairness and encouraging them to scale their usage as needed.

Encourages customer retention

By eliminating upfront payments, billing in arrears reduces the financial barrier for users to sign up and start using your SaaS product. 

Billing in arrears can be a powerful incentive, especially for new businesses or those with limited budgets. It allows them to experience the value of your service firsthand before committing to a payment, which can ultimately lead to higher customer retention rates.

Best practices for implementing billing in arrears in SaaS

Successfully implementing billing in arrears requires careful planning and execution. Here are five key best practices to keep in mind:

• Track usage accurately: Precise usage data is the foundation of billing in arrears. Invest in automated tools that can capture real-time data on customer activity within your SaaS application. Doing so ensures accurate invoices and builds trust with your users.
  ‍
  
• Set clear payment terms: Transparency is key. Clearly define your payment terms, including due dates, any penalties for late payments, and potential grace periods. This approach helps manage customer expectations and encourages timely payments.
  ‍
  
• Offer flexible payment options: Make it easy for customers to pay you. Support a variety of digital payment methods, such as credit cards, ACH transfers, and popular online payment platforms. The more options you offer, the less friction you'll encounter in the payment process.
  ‍
  
• Communicate clearly with customers: Provide detailed invoices that clearly outline the services rendered and their associated costs. Consider including usage summaries or visualizations to help customers understand their bills. Clear communication fosters trust and reduces the likelihood of disputes.
  ‍
  
• Monitor accounts receivable: Keep a close eye on your outstanding invoices. Regularly review any unpaid invoices and implement follow-up strategies, such as automated payment reminders or personalized outreach. 

Hybrid billing models

Many companies find success with hybrid billing models that combine elements of billing in arrears with upfront charges.  

For example, a SaaS business might charge a base subscription fee upfront, but bill for any overages or additional features in arrears. This approach could apply to usage exceeding plan limits, add-on features, or premium support services.

Benefits of hybrid billing

• Balances cash flow: By incorporating upfront charges, you ensure a more predictable and steady cash flow, while still accommodating flexible usage patterns.  
  ‍
• Accommodates diverse needs: It allows you to cater to a wider range of customer needs and preferences. Some customers might prefer the predictability of a fixed monthly fee, while others value the flexibility of paying only for what they use.
  ‍
• Promotes transparency and fairness: Customers appreciate knowing exactly what they're paying for, whether it's a fixed base subscription or variable usage charges.

Use cases

• Cloud services: A cloud provider might charge a base fee for a virtual machine instance, but bill for storage, bandwidth, or compute usage in arrears.  
  ‍
• API billing: SaaS companies offering APIs often charge a fixed fee for access to a certain number of API calls per month, with overages billed in arrears.  
  ‍
• Pay-as-you-go models: Many SaaS tools, especially those geared toward developers or businesses with fluctuating needs, utilize pay-as-you-go models where usage is billed in arrears.  

Use Orb's billing system for billing in arrears

We've explained what billing in arrears means in the SaaS world and how it can benefit your business. But to truly leverage this model, you need a billing platform that can help you bill users accurately and implement any pricing model you desire. 

That's where using Orb becomes the answer.

Orb is a done-for-you billing platform with extensibility to grow with you. We provide businesses with the tools and insights they need to optimize their recurring revenue strategies. Whether you're a startup or an enterprise, Orb gives you the flexibility to manage your billing processes with ease.

Here's how a partnership with Orb can improve your billing in arrears strategy:

• Track usage with greater accuracy: Orb's robust usage tracking infrastructure captures every billable event in real time, ensuring accurate invoices that reflect your customers' actual consumption. Such a level of precision builds trust and minimizes billing disputes.
  ‍
• Support variable pricing agility: Orb helps create diverse pricing tiers and implement usage-based billing models with ease. You can accurately charge customers for their exact usage, whether it's API calls, data storage, or feature consumption.
  ‍
• Gain deep insights: Orb provides detailed financial reports that offer valuable insights into your revenue streams and customer behavior. This data helps you make informed decisions about your pricing strategies and customer success initiatives.
  ‍
• Simplify operations: Orb integrates with popular data warehouses and accounting software. It automates your billing operations and reduces the risk of errors. This perk is particularly important with billing in arrears, where timely invoicing is vital.
  ‍
• Customize your approach: Orb's intuitive interface and custom SQL editor are key. They give you the power to define your own usage metrics and tailor your pricing models to perfectly match your business needs and billing in arrears strategy.

Ready to unlock the full potential of your revenue strategy with billing in arrears? Consult our flexible pricing options to find a plan that perfectly aligns with your needs.