The SaaS subscription model explained: How it drives growth

SaaS subscriptions have changed the software industry, enabling businesses to build lasting relationships with customers and generate predictable recurring revenue. But how exactly does this model work, and why is it so crucial for growth? In this guide, we'll break down the SaaS subscription model. 

You'll learn:

• The core components of a successful SaaS subscription model.
• How recurring revenue fuels growth and fosters customer loyalty.
• The different pricing models available to SaaS businesses.
• The importance of customer acquisition, onboarding, retention, and renewals.
• How usage-based billing is shaping the future of SaaS subscriptions.

Before getting into the finer details, let’s begin by answering a simple question. 

What is the SaaS subscription model?

The SaaS subscription model is a payment structure where customers pay a recurring fee. Said fee is paid monthly or annually and gives customers access to your SaaS solution and its associated functionality.

The fee covers the software, often including maintenance, updates, and customer support costs.

Keep in mind that while traditional subscription models offer customers the ability to switch between different service tiers, they don’t usually provide the flexibility to scale usage within a billing cycle. However, businesses do benefit from the predictability of recurring revenue.

Recurring revenue: The lifeblood of SaaS

At its core, the SaaS subscription model is built on the concept of recurring revenue. Think of it as a steady stream of money, flowing into your business month after month. 

This predictability allows SaaS companies to:

• Forecast with confidence: Plan for the future, invest in growth, and weather economic downturns with greater ease.
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• Build lasting customer relationships: Multiple touchpoints for engagement and feedback foster loyalty and reduce churn.
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• Unlock upselling and cross-selling opportunities: Happy subscribers will likely upgrade to premium plans or purchase additional products.

Why the SaaS subscription model is key to growth

We’ve explained that the SaaS subscription model is a strategic catalyst for growth. The benefits of SaaS subscription models extend far beyond just financial predictability. Let's explore how this model creates a favorable scenario for both SaaS companies and users:

Refined financial forecasting 

Recurring revenue allows businesses to anticipate their income with confidence. Doing so facilitates accurate financial forecasting and planning. This clarity allows for informed decision-making about investments, expansions, and resource allocation. 

Ease in weathering economic storms 

The consistent cash flow generated by subscriptions acts as a financial buffer. It helps companies navigate economic downturns with resilience and emerge stronger on the other side. 

The SaaS subscription models allow more time for you to focus on long-term goals rather than short-term survival.

Fuel for long-term growth

With a predictable revenue stream, businesses can invest in initiatives that drive growth. This might include improving product development, expanding marketing efforts, or acquiring new customers. 

The SaaS subscription model can propel your business toward its full potential. It can also enable you to seize opportunities as they arise. The best part? You can do so with the assurance of a steady revenue to support these endeavors.

Customer centricity

The subscription model is about cultivating customer relationships that blossom into long-term value. It's about shifting from transactional interactions to building a community of satisfied subscribers. 

With customers paying for access, businesses have more time to focus on client satisfaction and delivering value. It's like having a built-in feedback loop, constantly reminding you to listen to your customers and adapt to their evolving needs. 

Reduced churn and increased LTV

Customers that feel valued and get value from your product are less likely to churn. This translates to higher customer lifetime value (LTV), meaning more revenue over time and a healthier bottom line.

In a best-case scenario, it should feel like you’re turning customers into long-term partners, as the customers who are most invested in your product are the best advocates. 

More upselling and cross-selling opportunities

Recurring customer interactions create a fertile ground for upselling and cross-selling. As you build trust and understand their needs, you can introduce them to premium features, more products, or services. 

Using a SaaS subscription model is like having a built-in sales funnel. This funnel advantage is even better if your SaaS solution can be complemented with additional paid modules or add-ons. By creating these opportunities through a SaaS subscription model, you’ll be better prepared for expansion.

The core components of a successful SaaS subscription model

A successful SaaS subscription model is a carefully constructed ecosystem that balances pricing, acquisition, and retention strategies to foster growth. Let's dive into the core components that contribute to this success:

Subscription tiers and pricing models

The foundation of any SaaS subscription model is its pricing structure. It's where you define the value proposition for your customers and set the stage for your revenue generation. 

A pricing model should cater to diverse customer needs while boosting your revenue potential. 

To give you a bird’s eye view of the options available, here’s a breakdown:

Flat-rate pricing

Flat-rate pricing offers a single, fixed price for access to your SaaS product, usually on a monthly or annual basis. It's a straightforward approach that appeals to customers with predictable needs and budgets.

• Benefits: It’s easy to understand, simplifies billing, and offers predictable revenue forecasting.
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• Considerations: Flat-rate pricing may not capture the full value for larger customers. This shortcoming means you’re potentially leaving revenue opportunities on the table. 

Tiered pricing

Tiered pricing provides multiple subscription tiers with varying features, benefits, and price points. This model allows customers to choose a plan that best aligns with their needs and budget, and it has these advantages:

• Benefits: It offers more flexibility for customers. It also facilitates upselling and expansion revenue and creates a perceived value ladder.
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• Considerations: It requires careful planning and management of multiple tiers. It can also lead to decision paralysis for customers if there are too many options.

Freemium + premium models

This combination of models consists of offering a basic version of the product for free (Freemium). Then, users have the option to upgrade to a paid plan (premium) for extra features and benefits like the following:

• Benefits: They lower the barrier to entry, attract a large user base, and let customers test the product before committing.
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• Considerations: Using these models requires a clear and compelling upgrade path. You’ll need to balance the cost of supporting free users with the potential for conversions.

Pay-per-seat

This model charges based on the number of users accessing the product. Because of how it’s built, it’s suitable for SaaS products where individual user access is critical.

The pay-per-seat model has these pros and cons:

• Benefits: The model scales with your customers' growth. It also offers a clear value proposition tied to usage and provides predictable revenue based on user count.
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• Considerations: It can become expensive for larger teams. It may also require additional SaaS subscription management features.

Customer acquisition and onboarding

In a SaaS subscription model, customer acquisition and onboarding are pivotal. These two elements help in setting the stage for long-term customer relationships and growth. 

A positive initial experience can impact a customer's perception of your product. This impact can directly correlate to their willingness to continue their subscription. Here are some of the key reasons why these two elements are key for a SaaS subscription model: 

• The gateway to recurring revenue: The success of a SaaS business hinges on its ability to turn new customers into subscribers. Acquisition strategies ensure a steady influx of new users, fueling your company’s recurring revenue stream. 

• First impressions matter: A smooth onboarding experience sets the tone for the entire customer journey. It also increases the likelihood of them adopting your product into their workflow.
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• Showing value early on: The SaaS subscription model relies on customers perceiving continuous value from your solution. Effective onboarding showcases this value proposition early on. It should show how your product solves their pain points. 

Customer retention and renewal

With a SaaS subscription model, customer retention impacts your revenue and growth trajectory. Acquiring new customers is just the beginning. The true measure of success lies in retaining them and making sure they renew their subscriptions. 

Here’s why retention and renewal are core elements of a SaaS subscription model:

• The engine of recurring revenue: Customer retention is tied to the continuity of your revenue stream. Each renewal represents a commitment from the client, contributing to the stability of your revenue. High retention rates translate to a growing base of loyal subscribers. These rates drive consistent revenue growth over time.
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• Building a profitable customer base: Acquiring new customers is expensive. Retaining existing customers is more cost-effective and more profitable in the long run. 
  
  The best part? As customers continue to renew their subscriptions, their lifetime value (LTV) increases. This increase can lead to higher overall profitability for your business.

• Advocacy: Loyal customers become brand advocates, spreading word-of-mouth and drawing new subscribers. This organic marketing reduces your acquisition costs and amplifies your growth potential.

How the SaaS subscription process works

The SaaS subscription process is a journey, not a transaction. It's a series of stages impacting customer experience and business success. From initial contact to renewals, each step is crucial for driving satisfaction, retention, and growth. Let's explore the key stages:

Onboarding and activation

The onboarding process is your opportunity to make a lasting first impression. It's about guiding new subscribers through a seamless and intuitive setup. You’ll be showcasing the core features, and providing support to make sure they quickly grasp the value proposition. This initial experience sets the tone for the entire customer relationship. It builds confidence and encourages continued engagement.

Activation marks a pivotal moment in the customer journey. It's when a new user completes a core action that unlocks the promised value of your product. 

This is often called the “aha” moment because it solidifies the connection between the customer's needs and your solution. This connection increases the likelihood of them becoming long-term subscribers.

Invoicing and payment processing

Regular and transparent invoicing is vital for building trust and a positive customer experience. It's about providing clear breakdowns of charges, many payment options, and timely invoice delivery. 

By prioritizing convenience in billing, you reduce friction and keep customers happy.

No-hassle payment processing is equally crucial. It involves integrating with payment gateways, handling recurring billing, and managing payment disputes. A smooth payment experience nurtures confidence in your business and reduces customer frustration.

Renewal and upgrades

Renewal management is key to minimizing churn. This process involves engaging with subscribers throughout their journey. You're providing timely reminders and offering incentives for early renewals. 

By addressing concerns and showing the ongoing value of your solution, you encourage customers to stick with your product. Even better, you help them deepen their relationship with your brand.

Upselling and expansion opportunities are also critical for growth. As your customers' businesses evolve, so do their needs. Find opportunities to introduce them to higher-tier plans or complementary products. 

You need to make sure these complementary products can further enhance their experience. This way, you’re driving additional revenue for your company.

The role of automated billing systems

Managing the challenges of subscription lifecycles with in-house systems can lead to inefficiencies. Automated billing systems simplify the entire process and free up your resources to focus on broader strategies.

From handling signups to managing renewals, these SaaS subscription management and billing systems aim to guarantee accurate billing and tracking. They integrate with many payment gateways, automate recurring billing, and handle dunning.

Plus, they generate detailed invoices and provide insights into revenue and churn metrics. These systems can also help in remaining compliant with accounting standards.

The rise of usage-based billing complements the SaaS subscription model

Traditionally, SaaS companies have relied on fixed subscription models, which provide predictable revenue and simple billing processes. The issue is this model can lack adaptability for customers whose usage fluctuates. 

The result is that some customers feel they are paying for more than they use, leading to dissatisfaction or churn. Enter usage-based billing:

Usage-based billing

Usage-based billing addresses the issues we mentioned by allowing customers to pay based on how much they actually use. 

This billing model introduces flexibility, making it attractive to businesses with variable demand. It also aligns pricing with actual consumption, improving customer satisfaction and retention.

For SaaS providers, usage-based billing offers two key advantages we’ll explain now:

1. Flexibility: Customers can adjust their usage and pricing, paying only for what they use. This model is particularly useful for businesses with changing needs or seasonal demand.
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2. Scalability: As customers increase their usage, revenue grows alongside them. What’s good about this is you’re not forcing them into higher subscription tiers prematurely.

While usage-based billing offers flexibility, it can create revenue volatility. To mitigate this, many SaaS companies are transitioning to hybrid billing models.

These models combine the stability of fixed subscriptions with the flexibility of usage-based pricing. In essence, you’re offering a baseline subscription fee for core services while charging for additional usage.

Hybrid billing models

Hybrid models provide the best of both worlds. They combine predictable revenue for the SaaS company and flexible pricing for customers. 

According to OpenView’s latest usage-based pricing report, a majority of usage-based businesses have a hybrid model rather than pure usage-based pricing. This shift allows companies to meet varying customer needs and reduce the risk of churn. 

The benefits of combining subscription and usage-based billing

In SaaS, businesses are always looking for strategies to attract and retain customers. A hybrid billing approach that blends the predictability of subscriptions with the flexibility of usage-based billing offers a compelling solution.

Let’s put some of the benefits of hybrid models under the magnifying glass:

Tailored pricing for a better customer experience

This hybrid system lets companies craft custom pricing models that align with various customer needs. Customers appreciate the freedom to choose a plan that aligns with their requirements. 

Some value the predictability of a fixed subscription, while others may like the scalability of paying for what they use. By using a hybrid model, businesses promote a sense of control and fairness among users. 

Driving monthly recurring revenue (MRR) growth and minimizing churn

This hybrid model presents a unique opportunity to drive MRR growth while keeping churn in check. The subscription component establishes a stable foundation of recurring revenue. A foundation like that translates into better financial forecasting and planning. 

The usage-based element, on the other hand, introduces a layer of variability. When customer usage fluctuates from month to month, the usage-based portion of their bill will reflect that. Some months may see increased revenue as usage spikes, while slower months might lead to a dip in that portion of income. 

However, because the core subscription remains stable, businesses still benefit from predictable MRR, even as the variable component creates more growth opportunities during higher-usage periods. 

By using a hybrid approach, businesses can capture extra revenue without pushing customers into higher-priced plans prematurely.

How usage-based billing transforms SaaS subscription models

We’ve explained how usage-based billing is changing the SaaS subscription model by aligning costs with customer usage. Below are examples of SaaS companies that have successfully implemented this model. Let’s take a closer look:

Example 1: Twilio

Twilio, a cloud communications platform, is a prime example of a company that has integrated usage-based billing into its model. Twilio charges customers based on how many messages or calls are processed through their APIs. 

Businesses can scale their costs based on actual usage instead of committing to a fixed subscription that may not work for what they need. 

For instance, a startup can send a small volume of messages at lower costs, while larger enterprises pay for the vast volume they need. This flexibility has made Twilio’s model appealing across diverse industries.

Example 2: Snowflake

Snowflake, a data warehousing platform, adopts a similar approach. Instead of a flat subscription, Snowflake offers a consumption-based pricing model. Customers only pay for the storage and computing resources they actually use. A usage-based approach allows businesses to scale up or down based on their data processing needs. As a consequence, they avoid unnecessary costs during low-usage periods. 

Snowflake’s model aligns with its customers’ goals of maintaining cost efficiency while scaling. It enables them to allocate resources in a much more dynamic fashion.

Example 3: HubSpot

HubSpot, a leading CRM and marketing platform, integrates usage-based billing into its subscription model for certain services, such as its Marketing Hub. HubSpot offers different pricing tiers based on the number of marketing contacts a customer manages. 

As the user base grows, HubSpot adjusts the billing, letting companies pay for only the contacts they actually need. This usage-based approach means businesses are not overpaying for services they don't need.

Example 4: Amazon Web Services (AWS)

AWS is a major player in the usage-based billing SaaS space. AWS’s pricing is both usage-based and fixed for many of its services, such as EC2 for computing power and S3 for storage. AWS also offers savings plans, reserved instances, and other fixed-cost options.

Customers are billed based on how much they use, whether it's storage space, data transfer, or server time. AWS’s model has proven to be one of the most scalable solutions. 

They accommodate everything from startups to massive enterprises that need complex infrastructures.

Example 5: Datadog

Datadog is a monitoring and analytics platform for cloud-scale applications. It charges customers based on the number of hosts, containers, or events monitored. 

Datadog integrates usage-based billing into its subscription tiers. So, higher usage of the monitoring system results in higher costs. 

This is particularly useful for companies whose monitoring needs vary over time. This hybrid approach allows them to adjust their spending rather than overcommitting to a fixed-cost plan.

Orb supports the transition to usage-based billing

As we've explored, the SaaS subscription model is changing. The flexibility of hybrid and usage-based billing boosts the growth potential of SaaS solutions. Fortunately, there’s a platform that helps you incorporate usage-based billing into your company’s model.

Orb is the go-to billing platform for hybrid and usage-based pricing, built for both developers and finance teams. It ingests massive amounts of usage data, speeds up product launches, and delivers detailed reporting.

Innovative companies like Perplexity and Vercel rely on Orb. We've helped them build pricing engines that fuel their growth ambitions and meet market expectations.

Here’s how Orb helps you make the transition:

• Effortless usage-based billing: Orb tracks and records every billable event. We help guarantee precise invoices and customer clarity.
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• Pricing that scales: Flexible plan management lets you create and adjust pricing tiers to match your evolving business.
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• Actionable usage insights: Transform raw usage data into actionable insights. This advantage is key for products with intricate usage patterns.
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• Direct Integrations: Connect with popular data warehouses and accounting tools. We help simplify operations by playing nicely with your tech stack. 
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• Customizable metrics: Define your own unique usage metrics and pricing models with Orb's user-friendly interface and custom SQL editor.
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• Real-time data integration: Drive growth with Orb's ability to process product usage data at scale and provide real-time financial reporting.

Ready to give Orb a try? We’re offering a free 30-day trial so that you can give Orb a spin and experience our advantages firsthand.