How Chargebee became a competitive Subscription Billing product
The Billing problem
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Many companies sell software products to other businesses. This category of B2B product is widely known as Software as a Service(SaaS).
SaaS companies build their product and depend on recurring payments. Many things go behind a subscription business — multiple currencies, payment gateways, different plans, and free trials. The problem of managing subscription billing called for separate software to take care of a lot of things including pricing and invoice. Thus Chargebee was born in Chennai with 4 people at its helm — Krish Subramanian, KP Saravanan, Rajaraman Santhanam, and Thiyagarajan Thiyagu in 2011.
There was a major problem present among different businesses — managing multiple recurring payments with different needs.
How it started
Krish had worked in IT service companies TCS and Cognizant where he had customer-facing roles, while his friends — Rajaraman, Saravanan, and Thiyagarajan — were in Zoho, one of the earliest SaaS, based in Chennai. Krish says the team found inspiration in Zoho.
Krish has had the experience of working with enterprise customers in the software industry for more than 10 years. Saravanan, Rajaraman, and Thiyagarajan had more than 12 years of experience in Product Management.
Krish and Rajaraman were college friends from college and studied together at AVC College of Engineering in Mayiladuthurai, Tamil Nadu. They used to talk about starting up someday. They were not sure about when and how.
When they decided to make the dive, Krish became the CEO, Saravanan-CTO, Rajaraman-Product Manager, and Thiyagarajan-Senior Developer. The 4 people believe that “Subscription is a long term relationship and it is not just monthly payments.”
Shan Krishnasamy, co-founder of Freshdesk(now Freshworks), and Rajaraman had joined AdventNet(now Zoho) on the same day. They lived in the same apartment. The team at Chargebee met Girish Mathrubootham, founder and CEO of Freshworks, through Shan. Freshworks was a catalyst for starting up Chargebee — it became one of Chargebee’s first paying customers.
“I met Krish in the early days before Chargebee was even set up,” says Girish. “We bonded over our common passions — our love for good coffee and South Indian food. We would pick the right spots to eat and have good startup conversations.”
Demoed at UnPluggd 5th edition, it offered more benefits to its foreign merchants. This could not be done in India due to RBI regulations.
The pitch goes like this — Chargebee enables storage of credit card data and charging the card based on usage automatically on a month-on-month basis. It has the retry management feature, which helps in reducing churn due to soft errors in credit cards like expired cards and credit limit exceeded.
Krish used to take these calls in the car on his morning office drive. It involved questions with Shekar, Partner at Accel about the customers — who they are, how did they find Chargebee, what problems get solved. Accel is the first Venture Captial(VC) firm that placed trust in Chargebee.
The 3 powerful tools that enabled Chargebee to start at a low cost are AWS micro-instance, Braintree’s Ignition program, and SendGrid email.
AWS offered a secure cloud infrastructure that had cost them only $100 per month for the first year. This helped them get going against their competitor Zuora which already had big funding.
As Chargebee evolved, it became one of the primary startups in the Chennai SaaS ecosystem. Currently, it is also part of the SaaS founders community SaaSBOOMi.
Building the product
The problem statement is to build a plug-and-play product with the following features:
- Managing recurring payments
- Managing billing and invoice
- Support for different payment gateways
- Managing subscription renewal
- Billing adjustments
- Accounting and Taxation
- Reports and Analytics
- Support for multiple countries and currencies
All these have to take care of different needs like free trials, differential pricing, and billing based on usage.
Chargebee provides timely customer management and email notifications. It helps optimize revenue operations, revenue recognition, and compliance. The tech stack is centered around Revenue Operations(RevOps), which is the core of any subscription.
Chargebee provides a robust API and SDK that can be integrated into any company’s tech stack. It supports multiple client libraries including legacy systems — .NET, Java, PHP as well as Node.js, Ruby, and Python.
“The challenge is to deliver an easy-to-use billing solution with clear value and unrivaled support because our success lies in the success of our customers” according to Krish. “Our customers love us for 2 main reasons — API and Support. We strongly believe that a billing system should not inhibit the growth of a business and should be flexible enough to support newer pricing models or innovative promotions. Businesses should dictate terms to the billing system not vice-versa”.
Chargebee has integrations with various apps into collaboration, customer support and success, helpdesk, finance, sales, marketing, reporting, and analytics. A few notable examples are Hubspot, Salesforce, Zapier, Freshdesk, Google Analytics, GetAccept, NetSuite, Avalara, MailChimp, and Shopify.
Customer acquisition
Chargebee implemented inbound marketing to keep the cost of marketing low. Krish says “The simplest way to go to different forums, solve problems for them in the absence of Chargebee. Then I used to sign off saying by the way if you are looking for a system, we are also building one. Feel free to sign up for a beta.”
Freemium is a popular business model where software is offered with both free and premium plans. The user pays to remove limitations and for more features. “You need to have a very strong purpose for why you need to do freemium,” says Krish.
Chargebee started with a low price point. “One of the difficulties of the $49 price point for a B2B (business to business) solution is that people don’t take you very seriously” says Krish.
To acquire customers in the initial days, Chargebee started the freemium model where the product is offered in both free and premium plans. The free plan had limitations. They thought if the customer used it for free and started seeing the need they would go for paid.
But businesses started using this as a free subscription invoicing product. The freemium model had to be shut down but there was good learning from this. The team increased the product price and added more features. When the value addition is justified, the price is also justified.
Subscription businesses find Chargebee primarily through search to find a solution to their problems. The main customer acquisition channel is thus inbound marketing, which is primarily based on interest. This is done through a visually appealing website, blogs, and social media like LinkedIn.
Chargebee is a SaaS that sells primarily to other SaaS. Apart from that, the customer base also includes companies in e-learning and e-commerce.
It acquired its first paying customer in 2013 and currently serves more than 15,000 customers in over 53 countries. It has a solid customer base with companies like Calendly, Freshworks, Fujitsu, Study.com, Pret a Manger, Vinyl Me, Linux Academy, Okta, Envoy, and Sharetribe.
Chargebee has offices across the US, Europe, Australia, and India to take care of enterprise customer acquisition, with offices in places like Salt Lake City, Utah, and Amsterdam.
How Growth happened
Chargebee is a fintech product and the common characteristics of payments remain the same. The question arises within a company — to build or to buy. Every function has a decision-making process. CRM is the best example of an external SaaS purchase.
“In subscription, several players were developing solutions themselves. This is how the category got built — it has to be defined, and there have to be market leaders before more people come into it” says Krish.
“We were able to spot it (the opportunity) by being in the same market. We knew how to build SaaS products, so we knew the problems as well. But it took a long time to develop a create vs. buy proposition. That is the case with every category you build” he adds.
In companies that have an ARR(Annual Recurring Revenue) above $25 million, three finance persons, two developers, and one product manager can be freed up for half the year to do other jobs. This results in saving $150,000 to $200,000 for the company which uses Chargebee’s product. Krish says “We manage almost $3 billion in ARR of our customers. And that’s growing by 100% year on year. The ecosystem is so inefficient that payment-processing rates itself will pay for Chargebee”.
The plans of Chargebee are based on the amount of customer revenue that is processed per month. It operates under the freemium model where new startups can try out the product. For enterprises, the pricing is largely customized. For some companies, pricing can also be done based on the invoice.
To add to this, Chargebee has a startup work culture. It takes not only a great product but also great employees to keep the product going. Chargebee has got a strong founding team and other resources who contribute immensely. This has determined its evolution over the years, making it grow higher with each passing year.
Chargebee follows an adaptive marketing strategy which helped them be flexible towards changing and unpredictable needs. It is one that converts changes in the world into new opportunities. It is important to understand the buyer as well as the goals and aspirations of the buyer. Distribution channels, market environment, and diversity of the marketing team are significant in this strategy.
Subscription billing management is a high-margin business with margins going up to 80%. Even if the company doesn’t get new customers revenue will keep coming in like any other SaaS.
“We believe that a steady SaaS-i-fication of the market is already underway, with traditional businesses replicating the best practices of SaaS pricing and business models even outside the realm of software. Subscription businesses today have to be ready at all times to identify and leverage market opportunities rapidly,” says Krish.
Current Market State of Chargebee
Chargebee appeals to a specific set of businesses. Even though the Total Addressable Market(TAM) is the global SaaS market and e-commerce, the Serviceable Available Market(SAM) is companies within the TAM that have enough revenue to use the product. The Serviceable Obtainable Market(SOM) for Chargebee depends on various factors like tech stack, need for revenue management, and pricing.
Chargify, Recurly, Sage Intacct, Braintree, FastSpring, Fusebill, and Wave Financial are some of its competitors. The major competitor is the bigger product, Zuora.
By volume, clients with an ARR of less than $1 million are more, but 70% of the revenue comes from business with an ARR of $1 to $25 million and $25 million and above. According to The Economic Times, 10,000 customers are using its services out of which 3,000 are paying customers. As per industry experts, the ARR of Chargebee is close to $30 million.
At present, Chargebee’s primary market is the US, just like most of SaaS companies. The least business is from the Asia Pacific(APAC) region, which includes India, Australia, and New Zealand. The sales cycle varies for each company to adopt its product. It is the shortest for startups which mostly go for the freemium model, and usually takes a few days. For small and medium businesses it would take up to 2 months and for companies with higher revenue, it will definitely take more than 2 months.
Pandemic has forced businesses to rapidly adapt and rework their revenue models. Chargebee was able to easily grow post the lockdown. It ended up doing 20% more business after Covid. It also hosted a conference in July 2020 to celebrate its users.
Funding raised
The San Franciso-based company, which has more than 450 employees, has so far raised a total of $105 million including $92.8 million from its 4 investors.
In 2012, Chargebee raised $350,000 in seed round where a few angel investors participated including Suresh Sambandam(founder of Kissflow) and Girish Mathrubootham (founder of Freshworks).
In 2014, the company secured $800,000 in Series A round from Accel Partners.
In 2015, it raised $5 million in Series B funding round, led by Tiger Global and Accel Partners.
In 2018, it raised $18 million in Series C funding, led by Insight Venture Partners, Accel Partners, and Tiger Global Management
In 2019, the company raised $14 million in its Series D funding, led by Steadview Capital, Insight Venture Partners, and Accel Partners.
In 2020, it raised $55 million in its Series F funding round led by Insight Partners and existing investors Tiger Global and Steadview Capital.
In 2021, Chargeebee raised $125 million through its Series G financing round led by Sapphire Ventures and existing investors Tiger Global and Insight Venture Partners, thus becoming a unicorn valued 3 times more than the previous valuation, at $1.4 billion.
In 2022, it raised $250 million in its Series H funding led by Tiger Global and Sequoia Capital, thus raising its valuation to $3.5 billion.
Growth of Subscriptions
Allowing the customer to choose based on their needs and avoiding large upfront costs is the flexibility that subscriptions offer. Another major advantage is payments are taken care of automatically, to ensure continuity in product or service delivery and this is even more beneficial if the amount is similar every month or year. Compare this with manually having to pay every time.
The subscription model is an attractive business model for any software product that offers its services right from consumer service Netflix to B2B cloud service AWS. Payment for a software product is usually based on usage, the number of users, or both.
According to the Digital media trends survey for 2020 by Deloitte, 38% of consumers, out of the total surveyed in the US, have tried a new digital activity or subscription for the first time. More than 66% said they were likely to continue the subscription. 2020 also had subscription fatigue due to consumers in the US taking up multiple subscriptions.
Over the seven-year period till 2019, subscription sales have grown by more than 300% across North America, Europe, and the Asia Pacific. This represents a Compound Annual Growth Rate(CAGR) of 18% which is about five times that of S & P 500 companies(top 500 companies listed in the US) and US retail stores.
There are significant benefits of subscriptions. A subscription ensures seamless continuity of products and services. It takes care of last-minute payment hassles as well as avoiding the friction of manual repeated payments.
For companies, subscriptions aid in customer retention. Apart from subscription and billing management, customers have to be given a personalized experience and regular interaction to keep the relationship alive.
India is the world’s second largest internet consumer base after the US with over 40% of the population being connected online. There is an e-commerce boom with more stores enabling online shopping and with more people purchasing on Amazon and Flipkart. Growth is more evident in tier-3 and tier-3 cities.
FMCG & e-commerce, food delivery, travel and hospitality, banking, and various other consumer services app have implemented subscriptions.
How Subscriptions are managed
A subscription has several requirements.
Consumer requirements include changes in payment mode, discount options, add-ons, and reports. Merchant requirements include trial, edge cases, and dispute resolution.
Setting up and managing payment subscriptions is a long process. Free trial, change of plan, discount — many things are possible.
Chargebee offers usage-based pricing and can renew billing based on different criteria. Rules can be defined in advance. On the interface available for users of Chargebee, there is a visual representation of the customer data in the form of dashboards as well as reports. There is no pricing for customers who process a revenue below $50,000.
A subscription model helps businesses that are into SaaS, e-commerce, and media scale up while taking care of the payments.
The challenge of scaling up comes when ARR crosses $1 million or when a sizeable customer base is obtained.
Significance of RevOps
There are 4 layers of a subscription billing product:
- Payment Processing
- Billing Automation
- Subscription Management
- Revenue Operations
Out of these, the last one is the most challenging and significant layer that can impact the other 3 layers.
RevOps is the division that helps companies optimize their revenue management. It helps teams in sales, marketing, customer success, support, and finance align together to drive efficiency and scale up as needed. It can directly help in Go-To-Market(GTM) functions.
From arresting churn to finding new ways of revenue, the possibilities are many. This helps companies make key decisions and take action in a faster and more effective manner. Churn is similar to the attrition rate within a company. In SaaS, churn is a percentage measure of the rate at which customers cancel their subscriptions and drop off.
Operational inefficiencies cause loss of revenue. According to a research by Sirius Decisions (part of Forrester), there is 19% faster revenue growth and 15% higher profitability when multiple functions of a company are aligned together. Inefficiencies are common across the revenue cycle. It can happen during acquisition due to sales cycles and friction anywhere in the acquiring process. It can happen during retention — preventing churn. Some of the other inefficiencies include misreporting, manual processes, processing fees, managing middleware.
RevOps for any company helps in more accountability, data-driven decisions, business growth prediction and faster sales cycles, and conversion of leads. Aligning organizational goals and breaking down bigger structures to solve problems definitely help in the long run.
Take the example of Monthly Recurring Revenue(MRR) which is a key SaaS metric. RevOps can predict MRR growth in the next quarter of the financial year.
Here are some processes that help measure and predict long term goals:
- Pricing Analysis
- Competitor Analysis
- Sales Funnel Analysis
- Churn Analysis
RevOps is built around people, tools, processes, and analytics. It is usually headed by a Chief Revenue Officer(CRO) and consists of many people including Revenue Analysts.
The RevOps customized by Chargebee can be easily integrated into the tech stack of a company to help in both operation and optimization of Revenue.
Global Challenges
Chargebee supports more than 30 major payment gateways including Stripe, PayPal, Checkout.com, Amazon Payments, GoCardless, Authorize.Net, Worldpay, Braintree, Adyen, Bluesnap, and eWay.
One of the main challenges for Chargebee is these primary collaborators becoming its competitors. Stripe Billing is already there to take care of subscription management. PayPal has PayPal Subscriptions as a part of it.
A Payment Gateway just needs to add certain features to become a product for subscription billing management. The friction between the layers in payment procedure and lack of trust adds on to the challenges for Chargebee.
Payment security, compliance, and dispute resolution are some of the common challenges involved with payments.
Challenges in India
India is slowly opening up to the subscription economy but it is limited by the infrastructure and friction in payments. Moreover, if someone is wrongly charged, there will arise a lot of other issues including the need for online reputation management.
Previously, two-factor authentication was a major reason for friction but now there are other problems.
Auto payments can function in India in the following ways:
- e-Mandate and e-NACH(National Automated Clearing House)
- UPI AutoPay
- Credit and Debit cards
All the above ways support one-time authentication for enabling recurring payments.
Credit and debit cards are issued by banks and serviced by various payment gateways. Currently, Credit cards and Debit cards have new protocols for auto-debit, mandated by RBI.
National Payments Corporation of India (NPCI) implemented NACH. Before NACH, there was the Electronic Clearance Service(ECS). NACH is a centralized system that consolidated multiple ECS systems across India. It has a single set of rules and supports financial inclusion by having Aadhaar based transactions. It has a Mandate Management System (MMS) and Dispute Management System (DMS). e-Mandate is similar but it is maintained by banks on their own.
Previously ECS was primarily based on physical forms. The bank had to verify the signature and then issue the mandate. This process took about a month and had many inefficiencies. NACH has solved most of the problems of ECS. Payments are reflected as NEFT transactions.
While banks are reluctant to allow high-value transactions on a subscription basis, they do allow it for emerging technologies. The UPI ecosystem has seen tremendous growth in India in the form of Peer-to-Peer(P2P) payments and payments to various offline stores through apps like Google Pay, PhonePe, Paytm, and Amazon Pay. UPI has grown more than 100X from 2016 to 2020. UPI Payments hit 1.34 billion transactions with a volume of nearly 2.62 lakh crore(around $35 billion) during June 2020. The demand for UPI AutoPay is still less, despite this growth. The UPI AutoPay limit has been increased to INR 5000 from 2021.
The majority of current recurring payments are financial — insurance premiums, mutual funds, and government bills. There is a huge potential for utility payments, content like newsletters, retail, and e-commerce that is left untapped. Most merchants currently use e-NACH due to the advantage of dispute resolution.
As Payment Gateways lack in solving merchant problems in India, the merchants go on to manage it internally. This is unlike the US where memberships are common, infrastructure is huge and the paying capacity of a large part of the population is much more than that of India.
This deters Chargebee from entering the Indian market with a prime focus. Krish says “Trust needs to be built first, which is heavily dependant on brand value. Large brands stand to gain.” Trust is a major factor for auto-debits.
Despite the problems, Payment Gateways have started providing subscription management in India. Razorpay has started its own subscription management stack called Razorpay Subscriptions. Cashfree provides subscriptions with UPI AutoPay. A lot of additional services are built on top of payment gateways.
Mobile applications like SpiderG, Khatabook, and OkCredit provide payment collection and bookkeeping for small vendors. Their target is Micro, Small, and Medium Enterprises(MSME) like newspaper vendors.
Payment gateways like Razorpay, Instamojo, and Cashfree serve SMEs and freelancers. SMEs include the likes of gyms, yoga trainers, and clinics. There are also white-label payment solution providers like Safexpay which enable rebranding to make it look as if another brand built it.
Currently, there is good growth in recurring payments due to online streaming (OTT), gaming, rentals like RentoMojo, online memberships like that of Swiggy.
“The US is an easier market to enter because everything sells on subscriptions there — socks to pet food. India, too, is catching up now, but is still nascent,” says Sivaramakrishnan Iswaran, Vice President at Zoho.
The Global SaaS Market
There are 4 major categories of SaaS business that has captured the Market:
- Enterprise Resource Planning (ERP)
- Customer Relationship Management (CRM)
- Human Resource Management (HRM)
- Supply Chain Management (SCM)
The global SaaS market size is projected to reach $307.3 billion by 2026, from $158.2 billion in 2020, at a CAGR of 11.7%.
Some of the major trends that influence the size of the SaaS market include the adaptability of Artificial Intelligence for faster response and business optimization. Increasing use of micro SaaS, smartphones and laptops, hybrid cloud adoption, and corporate outsourcing are some of the other trends that have helped the SaaS industry to scale.
Technology advancements like Machine Learning and digitalization contribute to the continuous growth of SaaS in Europe. The SaaS market in the European region is projected to grow at a CAGR of 25% by 2023.
The APAC region is set to get the highest incremental growth during the forecast period till 2023. Key government policies help in the adoption of cloud-based solutions at a fast pace.
In the SaaS market, the SMB segment is less penetrated and therefore will experience more growth than the enterprise segment.
According to a report by Google & KPMG, the global SMB SaaS segment is expected to grow at a CAGR of 36% over the 2017–22 period.
The Global Cloud Billing Market
Cloud billing is a key subscription-based service that has powered the IT world. Any cloud-based service can be offered as SaaS, PaaS, or IaaS. SaaS is where software applications hosted on the cloud are offered as services. PaaS(Platform as a Service) is where cloud frameworks are provided. IaaS (Infrastructure as a Service) consists of software as well as hardware around the cloud including server, storage, OS, and network.
There are 3 primary types of cloud in terms of storage — private, public, and hybrid that drive adaption among companies.
The global cloud billing market size is projected to grow from $3 billion in 2020 to $6.5 billion by 2025, at a CAGR of 16.6%. The growth can be attributed to the increasing adoption of the Internet of Things(IoT), AI & ML, Blockchain, and other emerging technologies.
India, China, Japan, Australia & New Zealand are the leading adopters of cloud billing services. Increasing investments, government support, and the availability of a huge workforce will drive the growth in APAC.
Here is the market share of cloud billing by region, according to ReportLinker:
North America–40%, Europe–28%, APAC–25%, Middle East and Africa— 4%, and Latin America — 3%
The IaaS market size stood at $38.94 billion in 2019. It is projected to reach $201.83 billion by 2027 while growing at a CAGR of 23.2% from 2020 to 2027.
The PaaS market size was valued at $ 6,353 million in 2019. It is estimated to grow at a CAGR of 28.8 % from 2020 to 2027.
The Future is Subscription Economy
Chargebee adapted its service to help its customers reiterate on pricing — especially those who have been heavily affected due to Covid like travel and hospitality brands. It plans to help higher growth customers capitalize on new pandemic opportunities and aid in deployment. Several businesses with brick-and-mortar stores have signed up for Chargebee. It includes small coffee chains and professionals like teachers.
Globally, SaaS and subscription-based solutions are growing at a fast pace. There are complaints about revenue leakage due to unnecessary charges, auto-renewals, and a lot of other reasons. As businesses across the globe are moving to a subscription model, Chargebee becomes more significant. This is due to automating key functions of a company.
“Enterprises and rising startups recognize the value of subscription businesses. Unlike transactional revenue models, subscriptions require companies to evaluate longer-term metrics and redefine Key Performance Indicator(KPIs) for success,” says Krish.
Focussing on high-growth startups to scale up, rather than larger organizations will help Chargebee. Shorter sales cycles and the fact that growing companies help in growing revenue for third-party providers will drive more adoption.
The regular flow of investments in Chargebee is a mark of the growth of SaaS in India. “We take a lot of pride in remaining behind the scenes while powering our customer’s businesses. We want to be the AWS of Subscription Billing” says Krish.
Chargebee has an annual churn of 12% mostly because of startups that get closed. In contrast, the go-to-market in the US is growing by 30% annually.
“Our customers are subscription-first businesses. That is different from small businesses with $1 million of revenue every year. They only need an invoicing system, which allows recurring payment. There is a large market which only needs recurring payments. That is not where we have value. That is where accounting comes. We will have to build an accounting system to help them, that is sub-optimal,” says Krish. This leaves scope for businesses to experiment and tweak their subscription models.
In India and many other countries, people are slowly adapting to subscriptions and it is a long way ahead. With a niche market to target and various regions to focus on, Chargebee has multiple challenges at hand.
Nevertheless, the future is bright!
Edit (2023)
Chargebee allows you to integrate with Stripe India to process card payments. Stripe India categorises accounts based on currency (INR and Non INR).
