When you are setting and collecting fees, you should consider how often and when you will invoice your customer. Additionally, you must consider how your customers can pay, what you can do when they do not pay and any cancellation fees you may apply. This article will explore the factors your business should consider when setting and collecting fees.
When Do You Invoice?
It is common for SaaS providers to invoice customers monthly as the regularity ensures cash flow continuity. Furthermore, it is popular amongst customers as it does not require a significant upfront payment (such as for an annual subscription) and is a shorter time commitment.
Conversely, many SaaS operators prefer invoicing customers annually because it generally assists with retaining customers for a longer period of time and securing payment upfront.
You may also need to invoice customers ad hoc for one-off projects or services provided. Payment can also be due in advance and before any service or membership is provided or after the billing period has finished. You must clarify this in the contract terms.
Clearly setting out the invoicing arrangement in a contract is important so that both parties are aware of:
- when invoices are prepared and issued;
- what work was carried out under that invoice; and
- when payment is due so that both parties can plan for their businesses financially.
You will need to ensure that your contract is drafted so that you have the right to invoice when you need to. Even if you have transitioned to an online or automated accounting platform, you should continue to regularly issue invoices to your customers for records and management.
Automatic Direct Debit vs Credit Card Payments
There are many ways to obtain payment from clients. The more popular ways include:
- automatic direct debit from a customer's nominated bank account; or
- a credit card payment initiated by a customer.
Setting up automatic recurring direct debit reduces the administrative burden for your business and requires the customer to nominate a bank account with sufficient funds. You need to be aware of charges your business may incur if an automatic direct debit request is rejected due to a customer's lack of funds.
Additionally, you can pass this cost on to the customer by setting this out in your contract. You can also have customers make the credit card payment themselves which carries more risk in that payments may not always be made or on time.
How to Deal With Customers Not Paying?
There is a difference between not paying altogether and not paying on time. If a customer does not pay at all, then the customer owes your business a debt. You should seek legal advice concerning how to approach the matter of recovering that debt. Using an automatic recurring direct debit would reduce the risk of this happening. However, where a customer is not paying, it is worth communicating with the customer why they cannot make a payment. Preserving the customer relationship is important for a business because of the time and cost of obtaining customers. As such, you may want to consider suspending their account or membership with your business whilst they resolve any internal issues concerning non-payment. You can include a right in the contract to ensure you can suspend their account for this reason. Once the customer can make payment, you can unfreeze or resume their membership.
If a customer makes a late payment, you may also charge interest on the late payment. However, if you charge interest, ensure this is clear in the contract terms. Specifically, you must include the interest rate and how often it is calculated and accrued. Using an automatic recurring direct debit, adding interest to a debit charge is a viable option that carries less risk provided you notify the customer and allow the customer the opportunity to dispute any charges. You should also set this out in your contract terms.
Membership or Plan Tiers, Upgrades and Downgrades
Creating a SaaS model is an architected plan which can change as your business model and your product's iterations. It is common for SaaS businesses to start with a 'freemium' where users can access basic or advanced features for a limited time. Using a 'freemium' model is effective at generating customer interest. Furthermore, it is an opportunity to showcase your business' services with minimal customer commitment.
From the 'freemium' version, you may add other plans or tiers where users pay an increased fee for access to more features and benefits. Users can then choose to upgrade or downgrade plans or tiers depending on their usage and needs.
Whether your business can facilitate an upgrade or downgrade is a commercial decision and the payment terms are subsequently guided by that decision. You may charge a user who has upgraded to a higher tier the higher fee at the date of upgrade, or you may choose to upgrade both the user's plan and fee at the date of next payment in the billing cycle. Common considerations for determining tiers or plans are the number of authorised users permitted under a plan or the data limits available.
Cancellations and Refunds
Generally, users should be allowed to cancel their plan or membership at anytime. When users do cancel, you may choose to provide access to their membership until the next payment date in the billing cycle or even cancel access immediately. This depends on the circumstances of the cancellation. If a customer has paid upfront and cancelled, you may need to provide a refund, albeit one that is calculated on a pro-rata basis for the membership time lapsed or services provided.
For longer-term contracts where your business may have incurred sunk costs concerning the implementation or onboarding of a customer, you may be able to recover any costs arising from a membership termination that occurred earlier than expected. However, you should speak to a lawyer, as the way you draft your terms and conditions and any cancellation or refunds language should avoid inadvertently imposing a penalty disproportionate to any loss your business may incur. If you are a business that provides goods or services to an Australian consumer, you likely also have to comply with the consumer guarantees in the Australian Consumer Law where you will be required to provide refunds.
In summary, when setting and collecting fees, your business must consider when to invoice customers and how they may pay. Assuming customers cannot make payments on time, you should consider suspending their membership rather than terminating the relationship to retain the customer. With any clauses, it is best to seek advice from a lawyer to protect your commercial interests.