What SaaS’s Business Model Evolution Means For B2B Payments

The B2B Software-as-a-Service market has followed a fairy unique evolutionary path over the last few decades. Built with its foundations largely in the enterprise world, software first began being sold to organizations as more of a product, licensed one time to be used on-premise.

But as the software ecosystem bled into the consumer world, new business models emerged that continue to shape the way the B2B space buys and pays for technology today.

The rise of Software-as-a-Service was the first major business model shift in the software world, said Christian Owens, CEO and co-founder of Paddle, and it’s had significant implications for the way SaaS companies acquire customers and accept payment.

Indeed, recurring revenue is an attractive business model for many developers. But as Owens explained in a recent conversation with PYMNTS, B2B SaaS firms must be diligent about their approach to the market — particularly as that market becomes increasingly crowded and competitive.

Owens offered insight into some of the biggest changes the enterprise software market has faced as buyers’ expectations for how they procure and pay for SaaS products continue to evolve.

The Customer Acquisition Journey

The rise of consumer software via app stores and popular products like Netflix has turned expectations among business SaaS buyers on their head. Like so many areas of B2B products and solutions, corporate purchasers now expect a consumer-like experience when buying for their organizations.

This has had a prominent impact on B2B SaaS firms’ customer acquisition strategies, according to Owens.

“There is almost a virality to products within medium or large organizations,” he said. “They don’t buy products like Slack by making an internal corporate decision that they need a communications tool. They make the decision to buy Slack because certain teams and individuals use it internally, and then it kind of grows virally within an organization.”

This shift from a top-down buying approach to a bottom-up one impacts the way SaaS firms intersect with new customers — but that’s only the beginning of the purchasing process, and only the beginning of the way that process has changed for both buyers and sellers.

Payments As A Competitive Differentiator

Historically, organizations procuring software had to navigate the usual workflows of request-for-proposal processes, purchase order generation, then receiving an invoice and fumbling through the payment experience via outdated interfaces and gateways.

Now, thanks to the rise in demand for a consumer-like buying experience, purchasers of enterprise SaaS are seeking a more seamless payments experience, too. That means the act of payment itself is now a competitive differentiator for SaaS providers.

“If you’re buying a project management tool, there may be a product out there that’s easier for you to purchase because they support a payment method that is far easier for you to deal with administratively or logistically,” said Owens. “You’ll choose that product over the other.”

This is especially challenging for software companies operating across borders as the number of payment methods grows. There are commercial cards, wires and a variety of domestic bank transfer networks, as well as a slew of digital wallets and payment gateways like PayPal and Stripe — and SaaS firms must be able to support them all in order to actually acquire the customers interested in their products.

On top of this challenge is the added complexity of the growing number of jurisdictions establishing their own tax requirements for SaaS firms operating across borders, a pain point that Owens said can be a headache for smaller software providers.

A Continually Evolving Business Model

The barriers to entering the SaaS market are now lower than ever, leaving the door open for even smaller enterprise software firms to compete. The landscape is a double-edged sword, however, as competition surges, making customer acquisition and payment strategies crucial components for success.

According to Owens, they’ll continue to be paramount as the B2B SaaS landscape continues to evolve, ushering in even more complexity to the payments process.

A second wave of business model evolution is in the works today, he said, fueled by the likes of AWS (Amazon Web Services) and the concept of usage or volume-based billing.

“We’re seeing a transition towards pricing on the basis of the value a product is adding, which leads to much more complex billing and monetization strategies,” he said, “and thus, much more complex payment processes that have to occur.”

Billing by the minute or the second, rather than billing per year, month, or employee, is not an easy workflow to accomplish, but it’s one of the biggest pain points that companies like Paddle aim to resolve for the B2B SaaS world. The ecosystem is continually evolving, and as competition continues to grow, SaaS providers must prioritize an optimal user experience — and increasingly, that includes the payment process.

While challenging, the B2B SaaS firms that can achieve that goal will land at the head of the pack as the industry overall takes a more deliberate approach to growth, according to Owens. While it may have been acceptable years ago for a software firm to ignore the 2-3 percent revenue loss linked to billing issues, the most competitive firms will be the ones that can capture that stream of capital.

“It’s no longer this process of churn-and-burn, let’s grow the top line as much as we can,” he said. “It really comes down to thinking about how to retain customers, and payments plays a huge part in that.”