What is Split Billing?

What is split billing?

Split billing is a cost allocation mechanism involving segmentation of an invoice into multiple proportional charges, allowing equitable distribution of expenses for shared services/products used across multiple stakeholders. In the SaaS industry, it can be advantageous for businesses that wish to split subscription costs between teams, departments, or external clientele, thereby allowing concurrent access to a unified product/service.

When bills are partitioned, it is ensured that each party involved pays as per their usage. This ensures a transparent, usage-based cost-sharing framework that supports financial accountability and operational fairness across teams and stakeholders.

By implementing split billing, companies can mitigate financial strain on a single entity and simplify financial management and cost matters through a collaborative funding model. This can also benefit firms where multiple stakeholders share costs within a company, focusing on equal proportion of payments via a mutual agreement.

Strategic Importance of Split Billing in SaaS

Cost optimization is a primary advantage of split billing, as cost division helps companies to allocate costs efficiently. This in turn allows each department to contribute fairly in the billing cycle based on measured consumption. Moreover, it can reduce overhead costs and allow financial clarity as the budget truly resonates with how much a team uses software.

Split billing helps with resource allocation optimization as it gauges deeper insights into which departments are using certain services. Moreover, it helps to know whether costs align with the value they offer.

Moreover, SaaS-based split billing can streamline invoicing by automating cost division based on predetermined criteria such as number of users, feature access, and more. It eliminates the need for manual intervention, saving time for financial teams, especially in large-scale enterprises where calculations can be hard due to multiple users using the same platform. External cost sharing with clients is also possible with split billing, and this can help build trust among partners and collaborators.

Example of split billing:

As an example, a SaaS company utilizes a third-party analytics software to monitor product performance, customer behavior and infrastructure metrics with a monthly cost of $2000 USD. The platform is used by three functional units, i.e., Product analytics, growth marketing, and infrastructure engineering, and one external technology partner collaborating on joint integration initiative. The organization opts for split billing to allocate costs proportionally based on usage metrics. Each department uses the platform as follows:

• Product Analytics Team: 35% of total platform usage
• Growth Marketing Team: 30% of total platform usage
• Infrastructure Engineering Team: 20% of total platform usage
• External Partner: 15% of total platform usage

The share of each stakeholder on a per-month basis is

Product team: 35% usage = $700

Growth marketing team: 30% usage = $600

Infrastructure engineering: 20% usage = $400

External Partner 15% = $300

This example indicates how split billing can facilitate scalable, transparent, and auditable expense distribution across internal departments in modern SaaS ecosystem.

What are the practical applications of split billing?

Split billing applies to complex billing environments such as usage-based billing models, multi-tenant SaaS environments, tiered billing models, partner or reseller settlements, and white-label SaaS models. Here is an elaborated description of each:

Usage-based billing

In this system, charges are incurred based on variable consumption metrics such as data storage, API calls, and user activity. Split billing helps with the allocation of costs to respective internal departments or external clients based on respective usage of services.

Multi-tenant setups

It involves multiple customers or tenants, and they share the same software. Split billing enables equal sharing of billing records per tenant, thereby allowing accurate tenant-level expense tracking and chargeback processes. Each tenant is required to pay based on usage of a service or as defined in a mutual agreement.

Tiered Billing

In case of tier-based platforms offering customized pricing tiers or feature-based access levels, split billing enables equal distribution of costs based on entitlements or service configurations across stakeholders.

Partner settlements

In some cases, companies can have relationships or alliances with other companies or suppliers. Split billing can be applied to simplify partner settlements through precise monitoring and apportionment of revenue derived from shared customer subscriptions or usage.

White-Label SaaS Services

In white-label SaaS offerings, split billing allows the provider to assign the costs of various instances of the service to multiple clients who have resold and rebranded the service. The original service provider can charge each white-label client for their own usage record.

How to choose the right split billing method?

Choosing the right split billing method relies on the expense type, agreement among parties, and billing software or tools used. The detail of each is as follows:

Expense evaluation

Having complete know-how about the expense type is crucial for opting for a suitable split billing method. Fixed-cost scenarios i.e. annual licenses or office maintenance can align with fixed-amount splitting. Whereas, variable expense types such as cloud storage, and more can count on usage-based allocation of bills. Evaluation of expense type with the method of billing can help with error minimization and simplified billing.

Agreement among parties

Clarity of agreements among parties is a critical component of the B2B domain. If entitlements are equal, a fixed split bill can work well. However, if parties contribute based on usage, then percent-based or usage-based methods can work. Documentation of such billing agreements is critical to avoid risks of disputes among parties.

For instance, two partner firms co-develop a white-label SaaS product. One firm manages development, i.e., 60% usage, and the other takes care of marketing, 40% usage. In this case, a proportional billing agreement documented in a service-level contract is necessary to avoid cost-related disputes.

Tool assessment

The intricacies of split billing must be considered when opting for an automation tool. With the help of sophisticated, latest software for automating, it is essential in the event of repeated costs. But minor expenses can be managed with less technical applications.

For example, a startup with routine monthly license fees across four regional offices utilizes Chargebee to streamline split invoicing according to headcount by region. Yet, their one-time equipment rental is invoiced via a basic spreadsheet template and manual delivery.

What are the challenges of split billing?

System integration challenges, scalability issues, administrative complexities, and technical challenges can hamper the split billing process. Here is a detail of how these can disrupt the billing process:

System integration

Legacy traditional software often lack the complex mechanism to accommodate split billing and other methods. For organizations operating with traditional models of billing, integration into existing systems can be arduous.  This is especially true if extensive customization, upgrades, or system replacements are needed to allow split billing.

For example, a company using legacy ERP software attempts implementation of split billing for shared warehouse costs across divisions. The system lacks support for rule-based billing, resulting in costly middleware development and delayed implementation.

Administrative challenges

Billing operations can become derailed with fragmented billing procedures. The personnel need to monitor resource utilization, settle payments, and clear out any contentious areas. This can be time- and effort-consuming for companies operating in constantly changing dynamic cost environments like usage-based services or subscription-based models.

Suppose a cloud services provider rendering shared virtual machines must manually extract usage logs to allocate costs among four departments. The process is time-consuming and requires repeated follow-ups, leading to billing delays.

Scalability is tough

With a growing customer base and complicated transaction volumes, it can become tough to scale up in split billing. For instance, if a SaaS company has thousands of billing splits to manage inclusive of all departments in the organization, it can become challenging. This can also lead to erroneous billing, delays in bill management, and data inaccuracies leading to high risks of flawed billing.

Technical difficulty

Technical limitations can often disrupt automation of complex billing cases. Variable pricing, tiered costs, or partial allocation require robust software and an overall calculation mechanism. The absence of such tools can compel manual handling of billing processes, making room for errors and discrepancies.

What are the top benefits of split billing?

Precision and accuracy in billing, customization flexibility, savings and cost control, and financial transparency are among some top benefits of split billing. Here we will elaborate on each of the following in detail:

Precision in cost allocation

Split billing ascertains fair distribution of costs among users and stakeholders. It encourages transparency and financial clarity. Moreover, this helps minimize the chances of over- or undercharging.

Cost control

Split billing improves cost control by tracking expenses more effectively. By utilizing data on cost allocation based on usage parameters, firms can figure out high-cost areas and apply strategic cost-saving protocols.

Flexible billing

Split billing encourages customization and invoicing flexibility based on certain requirements. It can bear various pricing models and adapt to the needs of various user groups.

Financial transparency

Split billing offers a cost breakdown for businesses to know their costs with each product/service. This establishes a sense of transparency among customers, as they know what they are billed for. The customer-business relationship improves as the cost mechanism stabilizes between them.