Companies waste tens of thousands of dollars every year on SaaS products they subscribe to but don’t use. And when I say “don’t use,” I literally mean zero logins for paid users during a subscription period.
Here’s what the SaaS industry doesn’t want to admit: SaaS providers are more than willing to use dark billing patterns to increase their growth metrics and revenue. They exploit positive user acquisition loops in recurring subscriptions to get money from users as surreptitiously as possible.
For the past year, my startup has helped companies understand and manage their SaaS subscription spend. I’m shocked at the billing practices I see. Some SaaS providers are highly ethical, do what they promise in their contracts, and prioritize the customer. A vast majority of the providers I’ve seen use practices that are unfavorable to their customers — sometimes illegally.
I’m going to share some common dark patterns we see SaaS providers enacting, from the ethical gray areas to basically-illegal ones. Then we’ll discuss what needs to change and examine a few companies that run their billing in a customer-first, ethical way.
1. No Notification When Free Trial Converts To Paid
Free trials should not require a credit card. Collecting your payment information is an obvious red flag that you will be billed as soon as the free trial period ends. Worse, billing usually happens automatically and without any email notification that you’re about to start paying.
Sadly, it is extremely common practice for SaaS providers to require a credit card number before starting that free trial. While they might tell you it’s to “prevent usage interruptions,” that’s rarely the case. The truth is, they count on you, forgetting that your card will be charged at the end of your trial. The results? The provider makes months of revenue from a “free” offering.
It’s a free offering, all right — free money for the SaaS provider.
You email the provider, and they say they can’t reverse the charge. It’s in the terms and conditions, which you read and agreed to when you signed up. You begin to wonder if the expensive headache is part of the terms and conditions, too. To add insult to injury, you’re paying for this user experience.
2. Silent Recurring Transactions
Let’s say you sign up for a research tool. You choose the monthly payment plan because you’re not planning on using it forever, and you’ll remember to cancel.
The company charges you every month on the same day, but you won’t get a notification about that upcoming payment.
The tool is useful to you and your team for about a month. Nine months later, your CFO asks, “What’s this $300 monthly payment for this tool I’ve never heard of? Are we still using it? We’ve spent $2,700 this year already.” Now you’re facepalming because you promised yourself you’d cancel it as soon as you stopped using it.
That’s eight months of paying for nothing. The SaaS provider has happily and quietly taken your money without telling you they’re doing so. Could you have been checking your monthly business card statements more closely? If you have access to the statements, sure. But it often takes time to realize your teams aren’t using a tool — time you pay for every month.
If you’d received an email before the bill hit, you’d have stopped yourself from paying for something you don’t use.
Recurring transactions like these SaaS subscriptions are merchant-initiated transactions. Merchants either use a third-party subscription management tool or write their own code to initiate and manage these transactions. Merchants know that billing notifications are like waking a customer up and may result in a cancelled subscription — which of course, they don’t want. So instead, the merchant either suppresses alerts through their third-party tool or never writes them into their code, and unless you religiously check your card statements, you don’t hear from them again.
3. Shady Credit Authorization Practices
The practices we’ve just seen are tricky, ethically murky, and perfectly legal. Through our day-to-day work, we’ve learned that there are many SaaS providers going the borderline illegal route.
With only a few exceptions, every credit card transaction is required to follow these three steps.
Step 1: Credit Card Authorization
Credit card authorization is the approval request from the merchant’s bank to the cardholder’s bank to verify that the card is legit and that the customer has enough money to cover the incoming charges. The merchant then saves this approval to use later. Often, merchants validate a card by charging $1 and then immediately reverse the charge once it is validated.
Step 2: Credit Card Capture and Clearing
Credit card capture and clearing is when a merchant uses the above approval to confirm the transaction. They can add up to 20% or 25% on top of the approved amount if there were tips (such as in a restaurant) or adjustments. The approvals from step 1 usually follow this step to consummate the transaction.
Step 3: Credit Card Settlement
Credit card settlement is when money changes hands and IOUs are cleared. This is the final step in a card transaction and allows SaaS providers to get their hands on that sweet, sweet cash.
Overstep: Breakin’ the law, breakin’ the law!
I have seen scenarios where SaaS merchants do not follow the card network laws. Some merchants validate a card with the standard $1 charge but do not immediately reverse it. Instead, they use the authorization for the $1 to convert a free trial to a paid one by sending a $200 charge for capture/clearing. This streamlines the authorization process and allows larger $200 charges to go unflagged by authorization rule engines.
What they should do in this case is send a second authorization for the $200 charge before following up with a clearing. Because most systems apply rules during the authorization process and not during the capture/clearing process, transactions like these go unnoticed.
4. Proration and Onboarding Overcharging
Your company needs a CRM, so you sign a year-long contract for, say, 50 seats on your chosen SaaS CRM. Then — yikes! After six months, half your team is laid off. Will the CRM let you adjust and pay for 25 seats for the remainder of their contract?
That’s a big NO. Unused seats? Still gotta pay for ‘em. (It’s called “SaaS waste” for a reason.)
But what if halfway through your contract, you actually hired 25 people and wanted to add the seats. Well, the CRM would be only too happy to accommodate!
Here’s a similar problem with a different scenario: You sign a one-year contract with a SaaS provider. You start paying immediately. The process to get API access, build integrations, set up the software, and onboard and train your team takes three months.
In those three months, you still paid for a service you couldn’t use yet. In fact, you had to pay to set it up! You had to pay upfront to get the functionality you needed.
We don’t think that’s right.
Why do SaaS providers deploy the dark patterns?
Our research shows that companies underutilize their SaaS products by an average of 30% across the board. Companies are paying more money for tools they use less.
Because of this, SaaS providers have no incentives to report on utilization. So they don’t. Now consider that most of these providers are held to business metrics that target increased net dollar retention every year. Sales reps are held to account for expansion targets every year.
What does that lead to? Ethically shady billing practices that hurt customers and lots of wasted SaaS spend. If vendors have to ensure their revenue grows every year, they’re going to get creative with how they achieve it.
There are a few SaaS providers that try to do right by their customers. Slack is the gold standard in billing proration. If you sign up in the middle of a billing cycle, they only charge you for the time you use their product. Leave the service before a billing cycle ends? They’ll prorate you and refund what you haven’t used.
Product roadmap service Aha! offers a free trial with no credit card required, and they have for years. The same goes for Shopify, Squarespace, and many other companies. Product managers and experience designers know the trade-off:
- Requiring a credit card reduces the number of sign-ups and increases lead quality
- No credit card requirement increases sign-ups and decreases lead quality
For companies that practice the dark patterns mentioned above, they always go with the first option.
How to avoid SaaS billing dark patterns
Now that you’ve seen some types of dark patterns in SaaS monetization, how can you lower your risk of getting into an infinite billing cycle? I’ve put together a few tips to identify and get around the red flags.
- Try not to give your credit card information at signup. If you have to hand over a CC, be very careful and aware that your free trial may be converted to a paid trial without any notification. Set a reminder in your calendar before the end of the trial period and don’t dismiss the alert when you get it.
- Look for a notification email on signup. If you don’t get an alert or notification when you sign up for a trial, that’s a pretty sure sign you won’t get an alert or notification before you start seeing charges on your credit card.
- Look for big-name credit card processors. SaaS providers that use Stripe or Chargebee are more likely to use transparent and consumer-friendly payment loops. Most of the dark patterns come from payment loops built with custom code.
- Look for a clear cancellation policy. If you don’t see a pricing page with an actual pricing model, then you’re going to be working with a human on account setup, payments, and more. This also means you’ll be working with a human on account cancellation. Make sure you speak to that person about cancellation before you sign a contract and negotiate terms that are favorable for you.
- Beware behind-the-scenes integrations. Some notable SaaS providers won’t even let you cancel your account without exporting your own data, submitting a signed form certifying that you are ready to finally cancel your account, and ensuring cancellation of all sub-accounts related to your account.
NOTE: Items 4 and 5 in this list are known as a “roach motel” dark pattern.
There’s a lot more to say about avoiding dark SaaS monetization strategies (and SaaS dark patterns in general), but these tips above should save you a lot of strife. SaaS vendors are highly motivated and incentivized to get as much money out of you and your company as possible.