As a B2B software company builds its customer base, it often also builds up a sizeable payments monetization opportunity. For every dollar the software company earns from its customers, its customers likely collect and spend hundreds. Here are 4 ways well-positioned software companies can earn additional revenue on all that payment volume.
The setup: A software company that sells to businesses who serve consumers helps its customers more easily collect consumer payments.
Who this works for: companies that sell software to plumbers or shopkeepers or consultants or pretty much anyone else who’s providing goods and services to consumers. There are plenty of consumer payment options out there, but if the software is core to its customers’ operations an integrated solution has the advantage of tidily tracking everything in one place. Consumers like and expect to pay with credit cards, and credit card payments tend to be the most lucrative to monetize, so B2B2C software companies sit in a favorable position.
Who pays transaction fees: usually the supplier, but sometimes the cost is passed onto the buyer for large and/or recurring payments (like rent or tuition)
What’s it worth to the software company: the value of the payments opportunity is driven by the percentage of each transaction that the software company captures and the total volume going through the system. High payment volume is doubly good because companies with greater total transaction volume tend to be in a better negotiating position. Software companies can also earn more by assuming more risk; acting as a referral partner is the lower risk and easier way to start, but becoming a payment facilitator (payfac) allows software companies to capture more of the transaction fees.
The setup: A software company facilitates transactions between two parties, both of which are users of the platform.
Who this works for: Marketplaces (duh), which can be organized around goods (think Etsy) or services (think Upwork) and can be between any mix of consumers and businesses. Some B2B software companies may be positioned to create a marketplace if their customers buy the same types of things or from the same vendors. For instance, a company that sells software for dentists might be in a good position to create a marketplace for dental supplies.
Who pays transaction fees: usually the supplier, though payments fees are often baked into a larger commission percentage. If the supplier has an existing relationship with companies on the buyer-side, a marketplace can be a way for the software company to make more money on existing customers, without actually charging those customers more.
What’s it worth to the software company: the value of a marketplace is all about the traffic across it, and the commission that the marketplace is able to take for making those transactions possible. In general, if the marketplace holds inventory and/or connects suppliers to buyers they didn’t have before, the commission can be higher (10%+). If the marketplace just makes existing buyer-supplier relationships more efficient, the marketplace opportunity might look more like other payments opportunities.
3) B2B2B from the supplier side
The setup: A software company that sells to businesses who serve other businesses helps the first set of businesses more easily collect payments from the second set of businesses.
Who this works for: the lower the average transaction amount and the more consumer-y the business buyers, the better, because that means they’ll be more likely to use credit cards. But, there could theoretically be a payments opportunity for any B2B software company that helps its customers collect payments from their customers more easily.
Who pays transaction fees: usually the supplier.
What’s it worth to the software company: if credit card payments are common, then the situation looks very similar to B2B2C (above), but there’s a good chance that ACH will be a bigger driver in a B2B2B context because businesses that don’t deal with consumers don’t want to pay the high credit card transaction fees. Sometimes fees for ACH are charged as a small percentage of the transaction amount, but they’re often billed at a fixed amount (up to a few dollars per transaction). This means that the payments opportunity tends to be larger when payments are smaller and more frequent vs. large and irregular. A software company’s payments monetization opportunity would be equal to the number of payments its customers receive times their cut of the per-payment fee (which depends upon what they can negotiate with their payments partner, which depends upon total payment volume). The rate of utilization of the online payment system (vs. just sticking with the old way—typically paper checks) is also an important consideration.
4) B2B2B from the buyer side
The setup: A software company that sells to businesses helps its customers more easily pay their suppliers.
Who this works for: companies that sell software to customers who have high COGS spread across many different suppliers and invoices (like construction or manufacturing companies). There could be an opportunity to help consolidate and streamline all those outgoing payments.
Who pays transaction fees: it depends—if the buyer is much bigger than its suppliers, it can sometimes throw its weight around to get suppliers to use its preferred payment system AND bear the cost. But if the big goal is to increase payments efficiency by getting away from paper checks, the buyer might assume the cost to drive up adoption.
What’s it worth to the software company: buyer-side arrangements are most lucrative for the software company when they include virtual cards, which are single use credit card numbers generated for specific transactions. On the supplier side, these payments run like other credit card purchases (the supplier pays the transaction fee), but both the buyer and the software company facilitating the virtual card system can get cash back on the transaction. If the system includes a lot of suppliers who are willing to accept credit cards for payment, that cash back can really add up. If the system is more ACH-based, the payments opportunity will likely be smaller, and will depend more upon the number of transactions being processed.
Where do payments programs work best?
Monetizing payments works best if the software is its customers’ core operating system, an accounting tool, or acts as a sales channel. Some of the best payments opportunities exist within a industry vertical, and the more incestuous the market, the better the opportunity can be. If multiple buyers interact with multiple suppliers (and vice versa) within the network, the platform will achieve higher transaction volumes for the same onboarding effort.