How SaaS companies make money: 7 types of recurring revenue models

26 July 2022- 22 min read

Saas billing software Subscription platform recurring billing

There are many ways to earn money as a SaaS business. And whether you are just starting out or already have an established subscription business, you can always explore alternative SaaS recurring revenue models to increase profit.

Even the best SaaS product or service will not succeed without a good strategy on how to monetize it. You need a clearly defined recurring revenue model to establish and predict revenue streams to ensure your customer base and your business will grow.

Recurring revenue models come in all shapes and sizes. But before diving into the different types, let’s outline the concept of a recurring revenue model.

What is a revenue model?

A recurring revenue model is a framework for how a company makes money. Recurring revenue models define how businesses should charge customers for services or products to generate recurring revenue. The goal is to set the most efficient way to earn money.

Are business, pricing, or revenue models all the same? For the sake of clarity, we will stick to the following explanation: SaaS business models cover the whole company business strategy, pricing models are more related to determining the best possible price to maximize profits, and revenue models play a role in how customers should pay. Think of it as your very own blueprint for generating income.

Now let’s explore the 7 most common SaaS revenue models and which key metrics to consider when choosing one.

Types of recurring revenue models for SaaS companies

SaaS businesses can monetize their offerings in many ways. We picked out the 7 most common recurring revenue models, but bear in mind that it is not unusual for companies to alternate between the models or even merge a few to cater to diverse customer needs and become more competitive in the market.

 

Freemium

1. Freemium 

Your customers have free access to the basic plan but need to pay for add-ons, such as extra features, more personalization, or an ad-free experience. Freemium works excellent as a warm-up - customers get used to and recognize the value of your product or service.

The freemium model is also valuable for building brand awareness. However, you may lose a chunk of your revenue if users do not switch to paid plans. This means you need to have a large pool of freemium users to succeed – and the more from that pool upgrade to a paid plan, the better.

The freemium model is also valuable for building brand awareness. However, you may lose a chunk of your revenue if users do not switch to paid plans. This means you need to have a large pool of freemium users to succeed – and the more from that pool upgrade to a paid plan, the better.

When a SaaS business is taking its first steps, the freemium model is a good way to get a lot of new users quickly, especially if the product or service provides value only if there is a large user base.

Examples: Spotify, Zoom.

Freemium (2)

2. Free trial

Similar to freemium, free trial means that customers can use your services for free. Just in this case, they get full access for a limited time. They try out your services and decide whether it is worth subscribing to - a trial before a commitment.

Free trials are good for initiating relationships with your customers and showing them the value of your product. This SaaS recurring revenue model allows your sales team to pitch special offers or discounts and incentivize future sign-ups.

For all its advantages, free trials can take a toll on your business if only a small number of customers decide to stay on after the trial is over. Asking for credit card details minimizes the issue, but then you also get fewer sign-ups.

Examples: Adobe, Microsoft

Flat fee

 

3. Flat fee

Flat fee (also known as fixed pricing) is one of the most straightforward recurring revenue models - everyone pays and gets the same. Flat fee revenue model is an ideal scenario for a simple product or if you prefer selling an all-inclusive package. Customers will love it because of its simplicity and clarity.

Flat fee revenue model awards companies with uncomplicated billing and a predictable revenue stream. At the same time, customers want flexibility, so flat fee billing can sometimes be a deterrent. Fixed pricing also makes it challenging to target different buyer personas.

Examples: Basecamp, HoneyBook

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User based

4. User-based

More users - more recurring revenue. In the user-based model, the client will pay depending on the number of people who use your service. The recurring revenue grows as your clients' needs expand and more users are added to benefit from your offerings.

The user-based model comes with clear pricing and is easy to understand for your customers. They can adopt your product quickly and easily calculate their own costs based on team size.

The downside to the user-based model is the risk of user sharing passwords when multiple employees start using the same account, preventing you from generating more revenue.

Examples: Canva, Trello

Usage based

5. Usage-based

Your clients pay for what they use. It’s why this SaaS recurring revenue model is also commonly referred to as “pay as you go.” Some SaaS companies operate using a fully usage-based model, and some have a subscription fee as a base and charge by usage on top of it.

The usage-based model is great for small businesses with increasing demands. Customers also perceive this model as fair because they only pay for what they actually need. But for SaaS companies, this recurring revenue model can mean an unpredictable revenue stream, because they cannot foresee when their clients’ needs will increase.

Examples: Amazon Web Services, Stripe

 

Tiered

6. Tiered

One of the most common SaaS recurring revenue models, tiered billing,based on a few different tiers that each target a specific buyer persona. Your customers move between the different tiers based on fluctuating demands.

The tiers can be based on the number of users, specific features, or how often your customer uses the service. In this model, customers benefit from flexible pricing and a customer-centric approach, while SaaS companies can cater to a broader audience and expand upselling opportunities.

Tiered pricing can, however, be overwhelming to your potential customers. They might pick a subscription plan that does not fit their needs, which could increaseincrease churn

Examples: HubSpot, Salesforce

Hybrid

7. Hybrid

In a hybrid revenue model, any other revenue models can be combined to utilize the pros of each and diversify revenue streams. SaaS companies often adapt their pricing strategies based on market demands to gain a competitive edge and make more money. A diverse revenue model appeals to a broader audience and covers more of the market.

For example, you might use a combination of a monthly subscription fee and a usage-based model. The hybrid approach offers you and your clients lots of flexibility, but it is essential to keep your pricing simple to avoid complexity.

Examples: Zapier, Atlassian

 

Below, you can see the complete overview of the 7 recurring revenue models and their pros and cons:

 

Pros

Cons

Freemium

An excellent way to introduce your products or services to customers


Creates brand awareness


Helps generate a large customer base quickly

Lost revenue if users do not switch to paid plans


Need to have a large pool of freemium users to succeed

Free trial

Helps show the value of your services before customers make a commitment


Initiates better customer relationships


Good conditions to upsell, offer discounts and special offers

Expensive to operate


Hard on the business if only a small percentage stays on after the trial

Flat fee

Simple and straightforward for both the company and the customers


Uncomplicated billing and predictable revenue

Lack of flexibility can deter potential customers


Challenging to target different buyer personas

User-based

Clear pricing, easy to understand for customers



Risk of login abuse resulting in lost revenue

Usage-based

Customers consider it fair: they only pay for what they need

Unpredictable revenue stream: difficult to predict customer needs

Tiered

Flexible pricing and customer-centric approach


Ability to cater to a broader audience


Upselling potential

Overwhelming to new clients


Risk of customer picking a plan that does not reflect their needs


Higher risk of churn 

Hybrid

High degree of flexibility and customization


Targets a broader audience



Difficult to price


Complex billing

 

What metrics to consider when choosing your recurring revenue model

Each of the listed recurring revenue models entails an entirely different cost structure. Consider not just how you will get new customers and retain them but also how much it’ll cost you. This is where Customer Acquisition Cost (CAC) plays a significant role.

Evaluate how each recurring revenue model helps you measure monthly recurring revenue (MRR) or annual recurring revenue (ARR). Consider how these metrics can help you predict revenue and run your business.

To succeed, you will need to keep track of the churn rate, and it will help you measure how much revenue was lost due to cancellations or downgrading. Pick a recurring revenue model best suited to help measure churn rate and assess your operations’ success.

Finally, have a reliable SaaS recurring billing system in place. An all-in-one solution will help you handle pricing and revenue streams no matter which revenue model you decide to go with.

Learn more about the best practices for setting up and managing recurring billing by downloading our eBook.CTA - TRTRB





 

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Piper McKenzie

Piper McKenzie

Piper is our Head of Marketing. He is passionate about delivering business growth through media projects and marketing campaigns. Piper joined the team in February 2022.

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