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Dealing with Refunds in SaaS Accounting

Dealing with refunds in SaaS Accounting

Refunds always remain a matter of great concern for SaaS companies. If you are looking for a solution to deal with the refunds then you have come to the right place. 

Here is what you are going to learn upon the completion of this article:

  • Cons of frequent refunds
  • Downsides of not handling refunds properly
  • Why you should never say “NO” to customers asking for refunds?
  • How does an accountant deal with the refunds?
  • Acceptable refund rates
  • How to handle Refunds?
  • Whether you should refund a money or not?
  • Why do SaaS companies face cancellations?
  • What could be a win-win situation for both customers and company owners?
  • Why do conglomerates always want refunds?

SaaS startups, particularly those with yearly subscription plans, always have to deal with the customers who claim refunds. Even the customers who pay via credit card sometimes often ask for refunds.

Cons of Frequent Refunds

SaaS companies that have too many refunds are likely to lose their credibility in the market. Furthermore, frequent refunds are poised to disrupt the financial stability of the company. If a company bleeds too much cash in refunds, they won’t have sufficient money to reinvest in their business.

From the business standpoint, too many refunds mean a product is not aligned with the customers’ requirements. Therefore, frequent refunds should be considered as a red flag. Companies that don’t pay heed to the refunds end up with financial upheaval.

Downsides of Mishandling of Refunds

A vast majority of SaaS companies do not pay heed to refunds and they don’t know how to overcome the losses incurred by the refunds. Eventually, they ended up with substantial losses due to the lack of proper handling of customers’ refunds.

Since all SaaS business requires money to finance their operating and running expenses and growth plans, frequent refund claims could have a devastating impact on a SaaS company’s cash flow.

Almost all the SaaS companies blatantly refuse to refund requests. When customers ask for a refund, they deny the signed contract. Customers strongly dislike this attitude from their vendors.

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On the flip side, some SaaS entrepreneur claims they do not care about refunds because they have never experienced them. However, whenever a refund request arises, a lot of their energy and resources are wasted in dealing with refunds.

Many industry experts strongly recommend fulfilling the customers’ refund requests and giving them what they are looking for.

In the early days, well-reputed SaaS enterprises offered an annual subscription plan. However, with increasing demand from the customers, companies switched to the quarterly subscription plan.

Later on, monthly subscription plans have become a norm in the SaaS industry.

This approach to billing has entirely transformed in the past couple of years. Nowadays, SaaS companies, irrespective of their price points and customer base, push their customers to pay for yearly subscription plans in advance.

The monthly payment option, albeit significantly rare, comes with a high cost. To keep that in perspective, let’s say you want to buy the subscription of Grammarly premium for a month.

That being said, yearly subscription plans are more cost-competitive for the customers. On the flip side, an emphasis of the SaaS companies on the pre-paid annual subscription plan gives rise to a tricky question. Do SaaS companies offer a refund policy on the payment of customers who want to cancel their subscription plan amid the year?

Based on your early agreed-upon terms of service, you are unlikely to accept any early cancellation requests. But forcing unsatisfied customers to stick with the product could be devastating for the SaaS reputation.

Consequently, no customer will continue with your product, and the ‘no-cancel’ rule will undoubtedly break.

Why You Should Refund Money to the SaaS Customers?

Here are the reasons you should surrender to the customers’ refund request:

  • You can gain customers’ loyalty and trust in this way. Eventually, customers’ retention rate will likely go up in the foreseeable future. According to the Harvard Business School, if you can retain at least 5% of your existing customers, your business profitability will increase by 95%. Thus, having a good refund policy in place is good for business in the long run.
  • Refunds might hurt your SaaS company’s bottom line in the short run, but at the same time, you are creating brand equity for your SaaS business.

How does the Accountant Deal with the Refunds?

Account record refunds and allowances separately due to the two main reasons. Firstly, they have a negative impact on the company’s income and secondly, a company can later use them for investigation purposes.

Furthermore, SaaS companies that have higher-than-expected refunds have some operational issues that must be resolved. 

While maintaining the company’s book, the accountant credits account receivables by the refunded amount. For instance, if a customer cancelled a subscription worth $200 on which sales tax is 10 percent. Accountant debit refund amount by $200, debit sales tax liability by $20 and credit cash by $220.

Acceptable Refund Rate

SaaS companies should keep their refund rate below 5%. Lower the refund rate, the more traction your product is likely to capture.

How to Handle Refund Requests in the SaaS Business?

 As a growing SaaS company, providing refunds to customers seems complicated except in extreme situations. Even in a severe condition, there was never a full refund but was just pro-rated. As the word ‘extreme’ tells us, sometimes there is no other other other than accepting a refund request.

If your product meets your customers’ highest standard, you are unlikely to receive refund requests too frequently. But it still came out in some cases. At this time, SaaS teams start wondering, “What could be our refund policy?”

Even though refund requests should be significantly lower, it helps design a framework for handling refunds if you want to achieve sustainable growth. 

Should you Refund or Not?

If you have sufficient resources to offset the negative cash flow implications of a refund, do it. However, always keep your cancellation rate low by targeting the right customers and improving the product.

As a SaaS entrepreneur, you cannot afford unhappy customers and a bad reputation for frequent refunds in the market.

If you cannot afford refunds’ negative cash flow implications, we strongly recommend you bill your customers quarterly. Eventually, your company’s bottom line won’t hurt.

To remain profitable and prevent your SaaS Company from insolvency, keep your refunds at the bare minimum. Refunds should be deemed as the red flag. Make sure to resolve all your customers’ problems as quickly as possible before they become exhausted and start asking for a refund.

A Win-Win Situation 

As discussed earlier, go with quarterly billing to mitigate the potential threat of negative cash flow due to rare refunds.

Even though annual pre-paid billing is a good option for a company’s balance sheet and cash flow, quarterly payment is better and safer.

Quarterly payment is equally beneficial for the cash-strapped company and the customer. As a result, customers feel satisfied that they can get the refunds quickly without waiting for an entire year. Furthermore, rebates in the quarterly billing are not very deterrent to the financial health of even the cash-strapped company.

Why do SaaS Companies Get Refunds?

Customers rarely ask for refunds in the pre-paid billing and only abandon the product if their expectations are not fulfilled. Even the most successful SaaS companies experience cancellation of the subscription.

If you have too frequent refunds requests, you should sit with your team and ask them why is it happening? If there are some issues in your product that customers are facing and complaining about, they are not being facilitated by your team.

If that is the case, it needs to be resolved immediately. So, trace out the root cause of refund requests. It could be because customers have wrong expectations with your product, or the product has some functionality issues.

Apart from that, you might be targeting the wrong customers, or your customer support fails to tranquillize customers’ complaints.

Large Customers Expects Cancellation Request in Contract

Some of your high-paying customers will not sign your standard terms and conditions. In stark contrast to that, they want you to sign their Master Service Agreement. MSA comprises cancellation and refund conditions that you need to follow throughout the contract.

However, you can amend the terms and create a win-win situation for you. Always opt for quarterly billing to offset the potential threat of squeezing revenue due to refunds from large clients.

Conclusion 

To sum things up, we would say that refund is a small price that we pay to keep our customers happy and for the long-term benefits of your SaaS Company. It shows our commitment to the customers’ satisfaction.

If we do not have a proper strategy to deal with the consequences of refunds, we still have to give the refunds if customers ask nicely. But that could be devastating for the SaaS company financial health.

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