Complete Guide to Transactional Billing

Subscription Business Needs beyond QuickBooks to be Successful:

Businesses need to consider beyond just subscription billing, invoicing and payments for their product/service monetization.  Relying on semi-automated systems like Accounting Systems or Payment gateway to perform recurring billing is not going to help businesses in the medium to long-term. It will only slow down and limit the business growth and the opportunity cost is not worth it considering how competitive the subscription billing market has become.

Understanding  Transactional Billing:

Charging per transaction is a popular monetization practice for products or services. When businesses charge for transactions, the fee is typically calculated using a price per unit of work or price per unit of a measurement or a resource consumed or price per unit of service used.
In the world of transactional billing,  ‘transaction’ is defined as a business event that has a financial impact i.e. there is a cost to the business for handling or completing the event for or on-behalf-of a customer or a partner. The definition of the event itself varies from business to business depending on the product or service offering. For example:  In case of any SaaS business generating a lot of events that can be monetized may be in the form of event data records (EDR) or call data records (CDR) in case of the communications business. The event is a record of the actual business transaction that forms the basis of settlement (payment) between the parties. This transactional event is then transformed into a meaningful billing record after applying monetization value (look up to a rate card per event/ business context) and then charged to a customer.
Some of the actual business examples of the transactional events that businesses may process include:

  • Music downloaded from the music service provider by a customer.
  • An eCommerce order from a customer to the supplier.
  • Collection of e-waste from customer premises.
  • Answering a phone call from a customer.
  • Delivery of flowers on behalf of a customer.
  • Critical alarm raised by an IOT (Internet of things) device.
  • A pet sitting visit – charge based on per sitting/number of hours rendered.
  • Facilitating’ a settlement transaction between two parties (or funds transfer done by a party).
  • International voice call made by a UCaaS or VOIP customer.
  • Receiving an order from a customer referral.
  • Logistics company sending in actual shipment transactions as they get dispatched from different locations – Vendor shipping rates apply based on the actual weight from point A to point B. 

When businesses bill their customers or partners based on the transactions, usually the customer or the partner is charged only when the underneath event or transaction occurs and meets the criteria agreed in the contract between them. ‘Usage based pricing’, ‘Pay per Use’ or ‘Pay-as-you-go’ (PAYG) are other names used to refer to the transactional billing model.
Typically, there is a rate-card agreed by the vendor and the service provider for every business transaction or the contract, and the billing system interprets business events into the actual billing value and charges the vendor company for the transactions occurred.

Evolution of Transactional Billing:

Communications service providers have been using transactional billing model for decades to charge for customers’ voice, text and data usage. The voice or the SMS transactions are a result of customers using the telecom service provided by the business. The service contract for each customer defines how he or she is charged for these transactions.
It is very rare to see the transactional billing model used in isolation. It is an integral part of the overall contract or pricing along with the one-time fees, rental charges, deposits etc. Many times, customers are offered a certain number of transactions free (in the first month of the service or every month) before they are charged for transactions – This is also called overage billing. Some contracts define minimum billing commitment required in the form of ‘minimum number of transactions per month’, while others may define a cap on the maximum amount a customer will be charged for the transactions in a given month (a simple strategy to avoid bill-shocks)! Today, communications service providers all over the world use these hybrid-pricing models.
Many modern businesses belonging to the subscription-economy successfully utilize the transactional billing model to enhance customer experience, differentiate their services from the competitors, provide better pricing strategies and control over subscriptions and charges to the customers, or to meet auditory and regulatory requirements. The transactional billing model augments and extends the flexibility, adaptability, and efficiency of the subscription model. As subscription-based businesses mature and look for ways to acquire more customers while retaining existing ones, the transactional billing model could very well be one of the tools to accomplish this.
Another example in the healthcare domain is that a digital health provider offers annual membership plans, which provide set of digital tools and value added service like same day online appointment booking, prescription renewals etc. Members are allowed to utilize additional services over and above the plan benefits for a per transaction fee. The health provider sends a consolidated invoice for every customer who has made additional transactions during the month.

Monetization of Transactional Billing Needs the Right Tools:

While transactional billing has been used for many years, very few customer management (CRM) and Billing systems can handle this efficiently. The underlying abilities of a business to translate a ‘business contextual event’ into meaningful accounting/billing entry is the key for Transactional Billing adoption.  There are inherent process complexities as well involved in the transactional billing model. Businesses should consider identifying transactions to bill before deciding  whether their existing system (or even the the ones they are contemplating for the future) supports their short term and long-term business strategy of using transactional billing models to better monetize their services and products.

Identifying Transactions to Bill:

The type of transactions identified for monetization will vary from business to business depending on its industry, products and services, markets it operates in and other variables. “Establishing a business contextual transaction that can be monetized with a $ value, identifying the parties involved in the transactions, interpreting the receivables/payables/revenue/cost element to every transaction and translating each of these transactions in the voluminous scale would be the key.”
Internet of Things (IoT) / Internet of Everything (IoE)  based businesses have to deal with complex and convoluted business scenarios and address the ensuing challenges and dilemma in deciding their monetization strategy. There are numerous connected parties, devices and IT & network systems at play. So identifying a business transaction of interest with precise location of event(s) or records churned out by disparate systems for that transaction is a daunting task. In such a complex situation, the proposed transactional billing system must  be able to accept complex record(s) produced by one or many of the external systems for processing.

Pricing Rules:

Transactional billing is seldom as simple as Charge = (Unit Price X Quantity). Transaction pricing involves complex combinations of multiple variables such as type and properties of the transaction, type of device or service used to perform the transaction, geographical attributes, properties of the subscriber performing the transaction and so on. In addition, contract specific details could also influence the price of a transaction e.g. common quota of free transactions allocated to multiple users of a corporate customer account. The ability to configure these business rules as part of the same common product definition used to bill monthly subscription charges is a very important aspect that service providers need to check.

Quick Time to Market:

Defining new business ideas, coming up with new product launch and monetizing them may not sound as easy as the marketing/sales team announcing a product plan to the customers. There are a number of backend activities to be considered such as:

  • Defining the product price plans.
  • Capturing orders, Orchestrating the orders, Fulfillment automation.
  • Activation and billing start date capture.
  • Customer plan detail capture.
  • Capturing the business event and applying fees/taxes accurately,
  • Generating invoice.
  • Collecting payments.

These activities seem daunting and time-consuming processes that can slow the productivity of the business.  A robust billing platform is meant to handle these new ideas/concepts through flexible configurations and go-live quickly to help businesses focus on the core rather than worrying about solving billing automation.

Automated Transaction Processing vs. Manual Input:

Many companies spend far too many hours tracking, recording, and processing transactions manually. Once the event(s) and transactions to the bill and the source systems that provide those records are identified, pricing information is fed; rest should be handled by the billing system without a need for any manual intervention. It should provide a mechanism to identify and re-process transactions that fail to the bill.

Event Reconciliations / Revenue Assurance to check Revenue Leaks:

Tracking each business event and ensuring that they are processed, rated and recorded in the billing system for monetization would be as important as just generating the transaction events.
Automatic checks between the source and the target accounting systems and having automated baselining checks (checkpoints between every system to system hops) to ensure that no event is missed (revenue leakage checks) and that their value is accurately captured (proactive or reactive revenue assurance checks) in the scale of a business would be the key.

Taxation / Audit and Compliance:

Being able to charge for transactions also means being able to determine tax liabilities correctly. Taxation rules could be different based on the nature of transactions, type of business and geographical locations involved in completing the transaction. A Billing system processing the transaction may need to consider the same attributes it used to determine the pricing to determine the tax applicability or it may need to consider additional parameters at transactions, customer or service provider level for this.

Detailed Customer Invoicing:

Transactions billed need to be represented on the customer bills / invoices with enough details so that the customer understands why he/she has been charged for the amount. Since the volume of the individual transactions for a given customer could be very high, the billing system may need to represent the transactional charges in summarize format. Flexibility to represent the summary in different possible ways is important to make the charges on the invoices clear enough or else there could be increased support calls regarding invoice queries.
Charge transactions along with the critical information about  each transactions needs to be preserved for audit or compliance purposes. For example, service providers paying USF fees based on the inter-state usage would need the VoIP call details for tax compliance Internal audit teams will need the transactional reports to reconcile with records from source systems or other systems, and to verify for the correctness of charging so that any revenue leakage is identified during the audit.

Why Accounting Systems can’t Replace Billing Systems:

  • QuickBooks/accounting system like Xero or Oracle Finance does not support dynamic pricing configuration of products with transactional rates (simple or complex) such as “$0.01 / minute for toll free calls”, “$0.20 / minute for international calls to India on weekdays”.
  • It does not allow to upload raw transactional data from external systems like VoIP/Soft Switches and rate it based on customer-specific contracts.
  • It does not support the calculation of transactional charges e.g. QuickBooks cannot determine charges for local Vs long distance calls.
  • QuickBooks does not support taxation requirements for complex services, For example, taxation of voice calls based on the calling and called locations or parties.
  • QuickBooks cannot be used to store individual transactions like voice calls made during the month for audit/compliance purpose.
  • You do not get much flexibility when it comes to representing the transactional charge summary.
  • QuickBooks requires you to enter the transactional charges manually on every invoice.
  • Auditing the transaction charges applied for each customer and verify that with the individual customer contract (plan subscribed) is not possible in QuickBooks.
  • There is huge effort involved every month to calculate transactional charges manually and enter the same in each customer’s invoice in QuickBooks.
  • QuickBooks does not provide detailed reports for the transactional charges, For example, a report providing international calls usage for last 6 months for a given customer account.
  • QuickBooks does not provide any means to track transactions not billed or failed to the bill.

This table provides a comparison of transactional billing done using Accounting System Vs Specialized Billing System like Onebill

Accounting System Transactional Billing Platform / OneBill
Cannot define complex transactional pricing rules. Define complex transactional pricing rules as part of the main product definition.
External transactions cannot be directly fed into the system for billing. External transactions can be directly fed into the system for billing.
Cannot process transactional records in various formats. Allows you to process transactional records from external systems in any csv or text format.
Require manual processing of transactions and calculation of charges. Automates the transaction processing and applies pricing rules as per the customer contract.
Cannot categorize or label transactions automatically. Can categorize or label the transactions automatically based on the business rules and represent on the invoices in a format that customer can understand easily.
Does not provide any means to store the transactions for audit or future reference. Billed transactions are maintained for the pre-defined period for reporting and audit.
Does not provide any mechanism to identify failed or missed transactions. Failed transactions can be analyzed, fixed and reprocessed before invoices are finalized.

Final Thoughts and Conclusion:

QuickBooks and other accounting systems like it are great options for a business when it is starting out. But as the business grows and faces increased competition, it needs to consider billing platforms that ensure scalability and flexibility. Accounting systems can never live up to the challenges of a growing business. To efficiently monetize their services and offerings and focus on core strategy rather than billing issues, businesses must consider SaaS subscription billing platforms like OneBill.

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