Revenue management is about predicting customer behavior to maximize revenue. It’s about selling the right products at the right prices to specific markets, and since its conception in the mid-’70s, it has helped companies like British Airways, Marriott Hotels and National Car Rental thrive.
One way that revenue management works in travel and hospitality is by adjusting prices to fill up inventory (i.e., seats and rooms) that would be wasted if they went unused. Revenue management describes the entire system of setting prices and adjusting them based on supply and demand, but it’s even broader than that.
In the end, revenue management unites sales, marketing, customer service and accounting under the banner of Revenue Operations (RevOps), giving them the tools and analytics they need to maximize earnings.
But you may be wondering…
Can the principles of revenue management help SaaS companies succeed?
SaaS companies face some unique challenges that simply aren’t an issue for airlines, travel, hospitality, and other sectors where revenue management has been successfully applied in the past.
The cold, hard truth is that revenue management can be a business blocker for SaaS companies if it isn’t handled with the right strategies and the proper tools.
I’ll go into detail below about the tools that will help you overcome those challenges, but before we dive into the solutions, it’s important to identify and fully appreciate the unique challenges that SaaS companies face.
Revenue management: Why the struggle is real for SaaS companies
Here are some of the stark realities that SaaS companies face and why revenue management is more complicated in this sector.
SaaS products and transactions are high on complexity. Consumption happens regularly at a massive scale, and everything can change overnight.
SaaS pricing models aren’t simple, and they change constantly as companies test out new pricing packages and roll out new products or features.
The problem? It can be challenging to scale pricing models as market share grows.
Simple plans evolve
You may start out with a simple pricing model when your product is less complex, but as you grow—adding more features and winning bigger customers with more complex requirements—it can create complications that make it harder to calculate and predict revenue.
Some common complications include:
- Customizing plans, features and pricing for larger clients
- Adding more complex pricing models into the base rate (e.g., usage-based or metered billing)
The problem? It’s hard to figure out what revenue you’re earning on various plans and features when everyone is paying different rates.
Endless combinations of “recurring” and “usage” pricing
You want to give customers options, accommodating those who prefer to pay as they go as well as those who want to pay a recurring weekly/monthly/yearly rate.
The problem? Closing the books each month becomes a nightmare.
Experimenting with pricing is challenging
With so many different variations, how do you try out new pricing to see how the market responds? It can be done, but in many cases, SaaS companies resort to manual tracking to understand the impact of new pricing.
The problem? Manual tracking is not only time consuming, but there’s no way you can get the amount of actionable information from manual tracking that you’d get from automated price tracking.
Usage-based pricing can complicate things
SaaS companies try to be flexible by including pay-as-you-go pricing options, but usage-based pricing can mess things up on the sales front.
The problem? With usage-based pricing, it can be challenging to calculate commissions for salespeople.
Billing can be a roadblock to product releases
Teams sometimes fail to prioritize the task of establishing pricing and/or updating pricing models for new features and new releases.
The problem? Until you’ve researched your market and your customer base, and figured out the finer details of your pricing model, your hands are tied — allowing competitors to steal your market share before you can launch your latest innovations.
The Solution: Elastic Billing, RevOps and SaaS Insights
Now that you have a clear understanding of the challenges, it’s time to explore the solutions. When it comes to revenue management for SaaS, the best solution is one that fully integrates all the different components of revenue management, from operations to analysis.
Chargify’s recently expanded platform does just that — seamlessly uniting all things revenue management in the same platform. Built for SaaS, the three pillars of our expanded platform are Elastic Billing, RevOps and SaaS Insights. Here’s a brief introduction to how each one works.
Elastic billing is our core product, and it allows SaaS companies to create complex pricing offers without writing a single line of code. You can vary pricing in a wide variety of ways, create coupons and recurring discounts, and bill for usage-based pricing, as well as monthly-based pricing, without creating headaches.
The struggles that arise with SaaS pricing can create friction between the different departments that handle revenue generation, retention and accounting. Chargify’s RevOps capabilities include:
- A native recurring sales commissions calculator
- Account management dunning strategies
- Revenue maximization alerts
- Growth automation activities
- Compliance and accounting certainty
- Tax automation
With so many metrics for different pricing models, it can be difficult for SaaS companies to know the truth about their revenue, cash and operation metrics at any given moment. And without that information, it’s difficult to make intelligent business decisions about the impact that product- or pricing changes will have on customers.
Our SaaS Insights solve these issues, giving merchants a single source for accurate, reliable data regarding pricing, revenue and user behavior.
What’s next for revenue management in SaaS?
SaaS companies have been on the cutting edge of many innovative business practices, such as Lean UX Design and Agile development. However, when it comes to revenue management, SaaS can learn a thing or two from 20th-century businesses in an entirely different sector.
It’s not surprising that revenue management hasn’t yet taken hold in SaaS, since revenue management really is more challenging in the SaaS world. It took some additional innovation to address these issues, but now the hard work is done.
The next step is to integrate all these principles of revenue management that were developed nearly half a century ago — and step into the future to maximize revenues.
Want to learn more? Download our free ebook: The Ultimate Guide to Revenue Management for SaaS Companies.