Why SaaS Companies Struggle with Traditional Business Systems

Unveiling the Pain Points in Subscription Business Management

In the dynamic world of SaaS, effective ERP systems are the backbone for scaling, managing finances, and navigating complex revenue structures. However, traditional ERP systems often become bottlenecks for subscription-based SaaS businesses. Despite their wide range of functionalities, many SaaS companies find themselves outgrowing these systems, seeking alternatives to address their evolving needs. This is not surprising, as classical ERP applications were designed without awareness of modern concepts like subscription contracts, cloud architectures, and AI services. The typical customer profile of the time was likely a manufacturing firm producing and selling physical goods for an upfront price. Today, not only are software companies increasingly adopting the subscription business model, it is also used for digital products that were formerly shipped as physical goods (e.g., Netflix, Spotify), and even physical products are now available via subscriptions (e.g., cars like Volvo or Porsche, machines like DMGMori Payzr, food via HelloFresh, and more). The assumptions about the target market as well as the underlying technology have dramatically changed, hence the need for new solutions.

The Unique Challenges of Running a Subscription Business

SaaS companies face unique challenges that are fundamentally different from traditional business models. The subscription model demands precision in revenue recognition, subscription lifecycle management, and forecasting—areas where systems without a SaaS DNA often struggle to keep pace with the complexities of recurring revenue.

Here’s a closer look at the major pain points for companies running a subscription business model:

1. Revenue Recognition and Compliance Subscription-based businesses need sophisticated tools to handle revenue recognition, spanning multiple months, varied contract lengths, and complex pricing models. Standard capabilities, sufficient for industries like manufacturing, often fall short for SaaS companies that require real-time, automated solutions complying with ASC 606 or IFRS 15. This creates inefficiencies, placing a heavy burden on finance teams to manage processes manually or patch with third-party tools.

2. Lack of Flexibility in Subscription Management Managing subscriptions demands constant updates to billing, renewals, and cancellations. SaaS companies need an ERP that can dynamically adjust pricing, contracts, and customer needs. Unfortunately, most systems lack native capabilities for agile subscription management. This rigidity forces businesses to adopt complex workarounds or expensive customizations.

3. Missing Cloud and AI Cost Transparency Cloud and AI costs are increasingly important for SaaS companies as they scale. Many use an ERP to track financials but find it challenging to link growing cloud expenses to subscription pricing models. Without granular insights into how cloud costs impact profitability, finance teams struggle to make informed decisions. This challenge is amplified as AI adoption and data processing increase cloud spending unpredictably, complicating cost management further.

4. Inadequate SaaS Metrics Transparency Native ERP reporting tools make it difficult to create compelling solutions for key SaaS metrics—such as MRR/ARR, churn rates, customer lifetime value, and net revenue retention. Often, reports are developed during implementation by external consultants, leaving companies reliant on data extracts and spreadsheets to supplement what’s missing.

5. Slow Adaptation to Changing Business Requirements Making changes to an ERP system is notoriously difficult and time-consuming, with few opportunities throughout the year for modifications. This leads to unmanaged shadow processes outside the system as teams wait for critical changes, resulting in inefficiencies and risks to data integrity.

The Cost of These Pain Points: Who Suffers the Most?

These issues don’t just create operational hurdles—they impact every part of a SaaS organization:

• Finance Teams are stretched thin managing complex revenue recognition, creating makeshift reports, and dealing with misaligned forecasts. This increases the risk of non-compliance and reduces productivity.
• Operations and Product Teams struggle to integrate subscription management and align cloud costs with pricing, making it difficult to adjust based on actual costs.
• C-Suite Executives face limited visibility into performance data, making it challenging to make informed decisions about scaling, pricing, or product development.

The Cloud and AI Cost Surge: How It Changes the Game

AI adoption and advanced cloud architectures have turned cloud and AI costs into a strategic concern. As SaaS companies invest in AI to enhance products and customer experiences, the need to accurately track these rising costs becomes essential. Companies often find themselves shifting pricing models—for example, moving from seat-based to usage-based pricing—to cover these expenses.

Without the ability to link cloud consumption to specific revenue streams, companies risk overspending or undercharging, both of which hurt profitability.

Why SaaS Companies Are Considering Switching ERPs

For SaaS businesses scaling quickly, the pain points often lead to a tipping point where switching ERP systems becomes necessary. Inefficiency and complexity force teams to spend too much time managing workarounds, customizations, or third-party integrations. Poor visibility due to the lack of out-of-the-box reporting and real-time insights limits strategic decision-making. Additionally, rising cloud and AI costs become a significant threat to margins when the inability to effectively track and manage these costs persists.

The Path Forward: What to Look for in an ERP System

Given these challenges, SaaS companies are increasingly seeking ERP solutions built specifically for their subscription-driven business model. Key features they’re looking for include:

• Native Support for Subscription Billing: Systems that handle subscription contracts and revenue recognition with flexibility and automation.
• Pre-Delivered SaaS Metrics: Integrated capabilities providing real-time insights into churn, customer lifetime value, and subscription metrics.
• Cloud and AI Cost Management: ERPs that can track cloud consumption, integrate with AI tools, and offer granular insights into how these costs impact pricing and profitability.
• Risk-Free Environments for Changes (Live Sandboxes): The ability to test changes, run simulations, and conduct what-if analyses without impacting production environments—enabling rapid innovation while maintaining system stability.?

Ultimately, switching ERP vendors is about achieving operational efficiency, financial excellence, and the ability to manage cloud and AI costs. For SaaS companies, the right ERP is not just a tool—it’s a strategic enabler of growth, crucial for scaling and staying competitive in a rapidly evolving market.