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Find the best SaaS revenue model for your business. Compare six proven options and get practical tips to choose the right fit for your SaaS company.
Your pricing strategy is much more than a line item on an invoice; it's a core piece of your entire business strategy. It influences who you sell to, how your marketing team crafts its message, and even how your product evolves. A well-designed SaaS revenue model acts as a compass, guiding decisions across your whole company. Getting it right means creating a sustainable path to growth, while getting it wrong can create friction for both your team and your customers. This guide will help you make that strategic choice, covering everything from common pricing structures to the critical metrics that show if you're on the right track.
At its core, a SaaS (Software as a Service) revenue model is how a cloud-based software company makes money. Instead of selling a product one time, these companies sell ongoing access to their software, usually through a recurring subscription. Think of it like a gym membership for a digital tool—customers pay a regular fee to use the service, which is hosted online and accessible from anywhere with an internet connection.
This approach fundamentally changes the relationship between the software provider and the customer. It shifts the focus from a single transaction to a long-term partnership. The company is responsible for maintaining the software, rolling out updates, and ensuring everything runs smoothly, while the customer gets to use a powerful tool without the headache of installation or upkeep. For the business, this creates a predictable and steady stream of income, which is a game-changer for financial planning and scaling operations. It’s a model built on delivering continuous value and building lasting customer relationships.
Remember the days of buying software in a box? You’d pay a hefty one-time fee for a license, install it from a CD-ROM, and that version was yours forever—until a new, better one came out, and you had to buy it all over again. That’s the traditional software model. The SaaS model flips this on its head by separating software ownership from its use. With SaaS, you never actually own the software; you subscribe to it. This means a lower upfront cost and the benefit of receiving all updates and new features automatically as part of your subscription. It’s the difference between buying a DVD and streaming on Netflix.
The engine that powers nearly every SaaS business is the subscription economy. Most SaaS companies generate the vast majority of their income—often between 75% and 90%—from these recurring subscription fees. This creates a stable financial foundation that’s much more predictable than relying on one-off sales. This consistency allows companies to forecast revenue more accurately, invest in growth, and focus on improving their service. Managing this recurring revenue correctly is critical, especially when it comes to ASC 606 compliance, which dictates how and when you can recognize the money you earn from customer contracts.
Choosing a revenue model is one of the most critical decisions you'll make for your SaaS business. It directly impacts everything from your sales strategy and customer acquisition to your ability to forecast revenue accurately. The right model aligns the price of your product with the value it delivers, creating a win-win for you and your customers. While there are many ways to structure your pricing, most SaaS companies use a variation of one of six common models. Each has its own strengths and is better suited for different types of products, customers, and business goals. Let's walk through them so you can find the perfect fit for your company.
This is the model most people think of when they hear "SaaS." Customers pay a recurring fee, typically monthly or annually, for consistent access to your software. It’s straightforward and creates a predictable revenue stream, which is a huge advantage for financial planning and scaling your business. For customers, it offers flexibility and affordability compared to the old-school method of a large, one-time purchase for a software license. This model works best when your product provides continuous value that customers will want to access regularly. The key is to keep delivering that value through updates and support, ensuring subscribers feel their recurring payment is always worthwhile.
Tiered pricing involves offering several different packages at various price points. You might see this structured as Basic, Standard, and Premium plans, with each tier unlocking more features, higher usage limits, or greater levels of support. This approach is fantastic because it allows you to cater to a wide spectrum of customers, from solo entrepreneurs to large enterprises. It also creates a natural path for customers to grow with you. As their needs expand, they can easily upgrade to a higher tier. The main challenge is deciding which features to place in each tier—you want to make every package feel valuable while still encouraging users to move up to the next level.
The freemium model is a popular strategy for attracting a large user base quickly. You offer a basic version of your software completely free of charge, with the goal of converting a percentage of those free users into paying customers for premium features. This model lowers the barrier to entry, letting people experience your product's core value without any financial commitment. However, it’s a numbers game. You need a massive volume of free users to make it work, as the conversion rate to paid plans can be low. Your free plan must be useful enough to hook users but limited enough that your most active users will eventually need to upgrade for more advanced capabilities.
With a usage-based model, customers pay only for what they use. This could be based on the number of emails sent, the amount of data stored, or the API calls made each month. This pricing strategy directly connects the cost to the value a customer receives, which can be very appealing. It’s a great fit for customers with fluctuating needs, as they won’t feel like they’re overpaying during slower periods. The downside is that it can lead to less predictable revenue compared to a fixed subscription. This model also introduces complexity in tracking and billing, making automated revenue recognition software essential for maintaining accurate financials.
Per-user pricing is one of the most common and easily understood models. The cost is calculated based on the number of people, or "seats," on a team that will be using the software. For example, you might charge $20 per user, per month. This makes it simple for customers to calculate their costs and for you to forecast revenue as your clients’ teams grow. The price scales directly with adoption. The main drawback is that it can become expensive for large teams, which might cause them to limit how many people get access or, in a worst-case scenario, look for a more affordable solution.
If your platform facilitates transactions, like processing payments or managing bookings, this model could be a perfect fit. Instead of a subscription fee, you take a small percentage or a flat fee from each transaction your customer makes. Your revenue grows as your customers’ businesses grow, tying your success directly to theirs. This is an attractive option for new customers because there are no upfront costs—they only pay when they make money. The challenge, however, is that revenue can be highly variable and dependent on your customers' sales volumes, which can fluctuate due to seasonality or market conditions.
Picking a revenue model is a strategic choice that impacts everything from customer acquisition to profitability. The right model depends on your product, customers, and business goals. It needs to be simple for customers to understand and flexible enough to evolve as you grow. Let's walk through three key areas to analyze to find the right fit for your business.
Your company's current stage plays a huge role in this decision. If you're an early-stage startup, your primary goal is likely user acquisition. A freemium or low-cost entry tier can be effective for getting people in the door. Many SaaS businesses spend heavily on marketing and sales upfront to attract these initial users, planning to recoup those costs over the customer's lifetime. If you're more established, your focus can shift to maximizing revenue. You have more data to explore tiered pricing or usage-based models that capture the full value you deliver.
Your revenue model should feel fair and logical to your customers. To do this, you need to understand how they use your product. If your goal is wide adoption within a company, a per-user pricing model might backfire by becoming too expensive for large teams. A tiered model could be a better fit. Dig into your usage data to see what features are most valuable. If a small group of power users drives most of the activity, a usage-based model could be a great option. Understanding why customers leave is also key to ensuring your price aligns with perceived value.
Ultimately, your pricing should reflect the value you provide. This is called value-based pricing, and it anchors your price to the benefits your customer receives. Your pricing should scale as the value your customer gets from your product grows. This approach also ensures your business model is financially sound. A key metric to watch is the ratio between your Customer Lifetime Value (LTV) and Customer Acquisition Cost (CAC). A healthy ratio is typically 3:1 or higher. Tying your pricing directly to value helps keep your LTV strong, creating a sustainable path for growth.
Choosing a revenue model is just the first step. To truly understand if it's working, you need to track the right metrics. These numbers tell the story of your business's health, showing you where you're succeeding and where you need to adjust your strategy. Think of them as your company's vital signs—they provide a clear picture of your financial stability and growth potential, moving beyond simple profit and loss statements to reveal the underlying dynamics of your subscription business.
Tracking these key performance indicators (KPIs) is about more than just watching numbers go up or down. It’s about understanding the why behind the trends. Is your customer base growing? Are you retaining your most valuable clients? Are your marketing efforts paying off? The right metrics give you the answers. They help you make informed decisions, build a robust SaaS financial model, and prove to stakeholders that you're on a sustainable path. Without a firm grasp on these numbers, you're essentially flying blind. Let's break down the most important metrics every SaaS leader should have on their dashboard, so you can focus on what truly drives growth.
At the heart of any subscription business are Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR). MRR is the predictable revenue your business generates from all active subscriptions in a single month. It’s a snapshot of your current momentum. ARR simply takes that monthly view and annualizes it, giving you a broader perspective on your company's financial trajectory over a year. Tracking both metrics is fundamental. They smooth out the highs and lows of one-time payments, providing a stable baseline for forecasting cash flow, setting budgets, and making strategic growth decisions.
Sustainable growth isn't just about getting new customers—it's about getting them profitably. That's where Customer Acquisition Cost (CAC) and Customer Lifetime Value (LTV) come in. CAC is the total amount you spend on sales and marketing to acquire a single new customer. LTV, on the other hand, is the total revenue you can reasonably expect from that customer over the entire course of their relationship with your company. The magic is in the ratio between them. A healthy SaaS business ensures its LTV is significantly higher than its CAC, proving that each new customer generates more value than they cost to acquire.
While acquiring customers is crucial, keeping them is just as important. Churn Rate measures the percentage of customers who cancel their subscriptions over a specific period. A high churn rate can be a major red flag, signaling issues with your product, pricing, or customer service. To get a fuller picture, you should also track Net Revenue Retention (NRR). This metric shows how much revenue you retain from existing customers, factoring in upgrades, downgrades, and cancellations. An NRR over 100% is the gold standard—it means your existing customers are spending more over time, creating growth even without adding new logos. This is a powerful indicator of customer loyalty and successful SaaS revenue modeling.
SaaS revenue models can be a game-changer for building a sustainable business, but it's smart to go in with your eyes wide open. Like any business strategy, they come with a unique set of advantages and challenges. Understanding both sides of the coin will help you prepare for the realities of running a subscription-based company and set yourself up for long-term success. Weighing these pros and cons is a critical step before you commit to a specific pricing structure or business model.
The biggest draw for most SaaS companies is the promise of predictable revenue. Instead of relying on one-time sales, subscriptions create a steady, recurring income stream. This consistency makes financial forecasting much more reliable, allowing you to budget effectively and invest in growth with confidence. Because customers pay regularly, you have a clearer picture of your monthly and annual revenue. This stability is a huge advantage over traditional business models and is fundamental to the scalability of SaaS. Once your product is developed, you can often add new customers with minimal additional cost, allowing your revenue to grow much faster than your expenses.
On the flip side of predictable revenue is the constant threat of customer churn. Your churn rate is the percentage of customers who cancel their subscriptions within a certain period, and it's a metric you'll watch like a hawk. A high churn rate can quickly erode your revenue base and signals that customers aren't finding enough value in your product to stick around. Keeping churn low requires a continuous effort to improve your product, provide excellent customer support, and ensure your pricing aligns with the value you deliver. It’s a battle you fight every single month to retain the customers you’ve worked so hard to acquire.
Figuring out how to price your SaaS product is one of the toughest puzzles you'll solve. There isn't a one-size-fits-all answer, and the options—from tiered and per-user to usage-based models—can feel overwhelming. To get it right, you have to deeply understand your unit economics, meaning how much it costs you to serve each customer. Setting a price without this information is just guessing. Pricing is also not a one-time decision; it requires ongoing optimization based on customer feedback, usage data, and market trends. It’s a delicate balance between capturing the value you provide and keeping your service accessible to your target audience.
Choosing a revenue model is the first step, but optimizing your pricing is an ongoing process. Your pricing strategy isn't something you can set once and forget about. As your product evolves, your customer base grows, and the market shifts, your pricing needs to adapt. Fine-tuning your strategy helps you stay competitive, maximize revenue, and ensure your customers feel they're getting a fair deal. It’s about finding that sweet spot where the price reflects the value you provide and supports your long-term growth.
Think of optimization as a cycle of testing, learning, and adjusting. By regularly reviewing your pricing, you can identify opportunities to better serve your customers and strengthen your financial foundation. The following steps will help you build a robust process for keeping your pricing strategy sharp and effective.
The most sustainable pricing strategies are built around the value your product delivers, not just your internal costs. With a value-based approach, your pricing grows as your customer value grows. This means you’re tying the cost of your service directly to the benefits and ROI your customers receive. It shifts the conversation from "How much does this cost?" to "How much is this worth to my business?"
To implement this, you need a deep understanding of your customers' pain points and how your product solves them. What specific outcomes does your software enable? Does it save them time, reduce costs, or open up new revenue streams? Quantifying that value allows you to set a price that feels fair and justified, creating a win-win scenario where customers are happy to pay for a solution that truly helps them succeed.
Your existing customers are your single greatest source of pricing intelligence. You need to "talk to many, many customers. Listen to what they say, especially your best customers." They can tell you which features they value most, what they’d be willing to pay more for, and where they see the most significant ROI. You can gather this qualitative feedback through surveys, interviews, and support conversations.
Combine this with quantitative usage data. Which features are used most frequently? Are there premium features that only a small segment of power users access? This data, often pulled through your CRM and billing system integrations, helps you understand customer behavior at scale. Analyzing these patterns can reveal opportunities to restructure your pricing tiers or identify features that could be part of a new, premium plan.
While you shouldn't let your competitors dictate your pricing, you can't ignore them either. Understanding your competitors' pricing strategies can help you position your product effectively in the market. Look at how they structure their plans, what features are included at each tier, and their core value proposition. Are they competing on price, features, or service?
This research isn't about copying what others are doing. It's about finding your unique place in the market. You might discover a gap that your product can fill, allowing you to offer a different pricing model that better serves a specific niche. A thorough competitive analysis helps you make informed decisions, ensuring your pricing is both competitive and aligned with the value you uniquely provide.
Two powerful levers for optimizing revenue are annual plans and upsells. Offering a discount for an annual subscription is a classic tactic for a reason: it provides you with more predictable cash flow and reduces churn by locking in customers for a longer period. Customers benefit from a lower overall price, making it an attractive option for those who are committed to your product.
At the same time, focus on growing revenue from your existing customer base. It's often more cost-effective to get more money from existing customers through upselling than to acquire new ones. As your customers' businesses grow, their needs will change. Be ready to offer them a seamless path to a higher-tier plan with more features, higher usage limits, or dedicated support. This strategy increases customer lifetime value and strengthens your customer relationships.
Setting your prices can feel like one of the most high-stakes decisions you’ll make for your SaaS business. It’s a delicate balance. Go too high, and you risk alienating potential customers. Go too low, and you might leave money on the table or signal a lack of value. While there’s no single magic formula, there are several common missteps that can hinder your growth. Many founders treat pricing as a set-it-and-forget-it task, but that’s a recipe for leaving revenue on the table.
Getting your pricing strategy right isn’t a one-time decision. It’s an ongoing process of testing, learning, and adjusting as your product evolves and the market shifts. The key is to treat pricing as the strategic lever it is—a tool that directly influences your revenue, customer perception, and overall business health. By understanding where others have gone wrong, you can sidestep these pitfalls and create a pricing structure that not only attracts the right customers but also fuels your company's growth. Avoiding these common mistakes will put you on a much stronger footing, allowing you to build a sustainable revenue model that supports your long-term goals. Think of it less as finding the perfect price and more as building a flexible pricing framework that can grow with you.
Finding the sweet spot for your pricing is a challenge every SaaS company faces. If you price too low, you might attract a high volume of customers, but they may not be the right fit. These users can be more demanding on support resources and quicker to churn, ultimately costing you more in the long run. On the other hand, pricing too high can create a barrier to entry that scares off even your ideal customers. As Stripe notes, changing your price is often the easiest way to improve your business, and sometimes, increasing prices can even attract better customers who see the true value in your offering and are less likely to leave.
It’s easy to get caught up in the thrill of acquiring new customers. That constant hunt for new logos feels like progress, but it’s a critical mistake to prioritize it over keeping the customers you already have. In a subscription model, your existing customer base is the foundation of your revenue. As the team at Maxio points out, while getting new customers is important, keeping existing customers through renewals is just as vital for steady growth. A pricing strategy that ignores retention is like pouring water into a leaky bucket. Instead, structure your plans to reward loyalty and create clear paths for customers to upgrade as their needs grow.
Your pricing strategy can't exist in a bubble. The most successful companies are constantly listening to their customers and keeping a close eye on the market. Your customers are your best source of information on what features they value most and what they’re willing to pay for them. You should be talking to them regularly, especially your best customers, to understand their needs. This feedback is gold, helping you refine not just your product but also your marketing and pricing. At the same time, you need to be aware of what your competitors are doing and how the broader market is evolving so you can position your product effectively.
Your revenue model shouldn't be an afterthought; it needs to be woven into the fabric of your company’s financial plan and overall strategy. Your pricing directly impacts your ability to hit revenue targets, manage cash flow, and achieve profitability. If your goal is rapid growth and market penetration, a freemium or low-cost entry model might make sense. If you're targeting enterprise clients, your pricing needs to reflect a premium, high-value solution. Every decision, from product development to marketing campaigns, is influenced by your pricing. Ensuring your model aligns with your strategic goals is essential for creating a cohesive and successful business. This is where having clear real-time financial visibility becomes a game-changer.
Choosing a revenue model is just the first step. The next, and arguably more complex, part is actually recognizing that revenue correctly. The biggest difference between subscription and non-subscription businesses is when they count money as earned. For SaaS companies, cash in the bank doesn't equal revenue. Instead, you have to follow specific accounting principles to report your financials accurately, stay compliant, and make informed business decisions.
This process is governed by a standard called ASC 606, which sets the rules for how and when to recognize revenue from customer contracts. It’s a five-step framework that ensures companies report revenue consistently, making financial statements more reliable and comparable across different industries. For a subscription business, where contracts can be complex and services are delivered over time, getting this right is absolutely critical for financial health and investor confidence. It’s less about a single transaction and more about managing an ongoing customer relationship financially.
For SaaS businesses, ASC 606 compliance means you can only recognize revenue as you deliver your service—not when you get paid. If a customer pays for an annual subscription upfront, you can't count all that cash as revenue in the first month. Instead, you have to recognize one-twelfth of it each month for the entire year. This principle of matching revenue to the delivery of service is the core of the standard. It ensures your financial statements reflect the true performance of your business over time, preventing inflated revenue figures and providing a clearer picture of your company’s health. You can find more insights on financial compliance on our blog.
In the world of ASC 606, a "performance obligation" is a promise in a contract to deliver a distinct good or service to a customer. For a typical SaaS company, the main performance obligation is providing access to your software over the subscription term. The revenue from that subscription has to be recognized as you fulfill that promise—bit by bit over time. This gets complicated when customers upgrade, downgrade, or add new services mid-contract. Each change creates a contract modification that needs to be accounted for, potentially altering the revenue recognition schedule. Managing these changes manually is prone to error and can quickly become a major headache for your finance team.
When a customer pays you for a service you haven't delivered yet, that cash isn't yours to claim as revenue. It’s recorded on your balance sheet as "deferred revenue," which is technically a liability. Think of it as a promise to your customer; you owe them a service. As you deliver that service over the subscription period, you gradually move money from the deferred revenue account to the recognized revenue account on your income statement. For example, if a customer pays $1,200 for an annual plan, you start with $1,200 in deferred revenue. Each month, you’ll recognize $100 as revenue and reduce your deferred revenue balance by the same amount.
Properly tracking SaaS revenue involves more than just new sales. You also have to account for expansion revenue from upgrades, contraction from downgrades, and churn from cancellations. Each of these events impacts your revenue recognition schedule differently. Trying to manage these moving parts with spreadsheets is not only time-consuming but also risky. A single formula error can throw off your entire financial reporting. This is why automation is so important. An automated system can handle complex calculations, adjust for contract changes in real time, and ensure your revenue is always recognized accurately and on time. With the right integrations, you can connect your billing, CRM, and accounting software to create a single source of truth for your financial data.
The SaaS world doesn't stand still, and neither should your revenue strategy. Keeping an eye on emerging trends helps you stay competitive and meet your customers where they are. As you refine your approach, consider how these major shifts could impact your business. From how you attract customers to the way you price your product, the landscape is constantly evolving. The most successful SaaS companies are the ones that adapt, not just by tweaking their product, but by rethinking their entire commercial strategy. This means looking beyond your current model and asking what customers will expect tomorrow.
Will they want more flexibility? A more personalized experience? A product that proves its worth before they pull out their credit card? These aren't just hypothetical questions; they're at the heart of the trends shaping the industry. Understanding these shifts is the first step to adapting your model for long-term, sustainable growth. It also means ensuring your financial operations can keep up. A cutting-edge pricing model is only effective if you can accurately track and report on the revenue it generates. This is where having a solid system for revenue recognition becomes critical, allowing you to innovate on the front end while maintaining financial integrity on the back end.
More and more SaaS companies are letting their products do the talking through a strategy called product-led growth (PLG). Instead of relying solely on a sales team to demonstrate value, this approach centers on the product itself to acquire, retain, and grow customer accounts. Think of freemium models or free trials—they allow users to experience the product's value firsthand before committing to a paid plan. This method builds a user base that genuinely understands and needs your solution, which can lead to higher conversion rates and stronger customer loyalty. The focus is on creating an exceptional user experience that naturally encourages users to upgrade.
Customers increasingly want to pay for what they actually use, which is why usage-based pricing is gaining so much momentum. This model directly ties the cost of your service to a customer's consumption—whether that's by the number of transactions, data storage, or API calls. It feels fair to the customer, as they can start small and scale their costs as their needs grow. For your business, it aligns your revenue directly with the value your customers receive. This can reduce the barrier to entry for new users and create significant opportunities for revenue expansion as your most active customers increase their usage over time.
Artificial intelligence is becoming a powerful tool for creating highly personalized user experiences within SaaS applications. By analyzing user data and behavior, AI can help you tailor features, content, and support to meet the specific needs of each individual. This goes beyond simply adding a first name to an email. It means dynamically adjusting the user interface, suggesting relevant features, or providing proactive support. A more personalized experience leads to higher user satisfaction and engagement, which are key ingredients for improving customer retention and reducing churn. It makes your product feel less like a one-size-fits-all tool and more like a personal solution.
The demand for SaaS solutions is not slowing down. Projections show that the vast majority of business software will soon be SaaS-based, highlighting a massive opportunity for companies in this space. This rapid expansion is fueled by the need for flexible, scalable, and accessible solutions that can adapt to modern business challenges. For SaaS leaders, this growth underscores the importance of building a solid foundation. A well-chosen SaaS revenue model and a streamlined financial backend are no longer just nice-to-haves; they're essential for capturing your piece of this expanding market and setting your business up for future success.
Choosing the right revenue model is just the first step. The real challenge for many SaaS companies lies in how you account for that revenue. Because subscription businesses earn their money over time, you can't just count cash as it comes in. You have to recognize revenue as you deliver the service, month by month. This method, known as accrual accounting, gives you a much clearer picture of your company's financial health and makes your future income more predictable.
But tracking this across hundreds or thousands of subscriptions is a massive undertaking. Manually managing spreadsheets for different contract terms, upgrades, and cancellations is not only time-consuming but also incredibly prone to error. This is where automation comes in. An automated revenue recognition system handles these complex calculations for you, ensuring your financials are accurate and compliant without the manual grind. It frees up your team to focus on strategy and growth, armed with financial data they can actually trust. For more on financial operations, you can find helpful insights on our blog.
If you’re a SaaS business, you’ve likely heard of ASC 606. These accounting standards dictate how and when you can recognize revenue from customer contracts. A key concept here is deferred revenue—the money you’ve collected from customers for services you haven't provided yet, like an annual subscription paid upfront. You can't count that full amount as revenue on day one. Instead, it sits on your balance sheet as a liability and is recognized incrementally as you deliver the service. Manually tracking this for every single customer is a recipe for compliance headaches. Automation ensures every dollar is accounted for correctly, making audits smoother and giving you peace of mind.
How can you make smart decisions about where to invest in your business if your financial data is always a month behind? You can’t. Real-time visibility is crucial for steering a growing SaaS company. Automated revenue recognition provides an accurate, up-to-the-minute view of your performance. This data feeds directly into your financial models, helping you track key metrics, forecast with confidence, and report to investors or stakeholders. When you know exactly how your business is performing today, you can plan for tomorrow with much greater certainty. If you're ready to see your data clearly, you can schedule a demo with our team.
Your business runs on a stack of different tools—a CRM for sales, a billing platform for payments, and accounting software for your general ledger. An effective revenue recognition solution doesn’t replace these systems; it connects them. By setting up integrations with HubiFi, you can automatically pull data from all your disparate sources to create a single, reliable source of financial truth. This eliminates the need for manual data entry and reconciliation between systems, which saves countless hours and prevents costly errors. It ensures that from the moment a deal closes to the final financial report, your data is consistent and accurate across the board.
Can I change my SaaS revenue model after I've launched? Absolutely. In fact, it's quite common for companies to adjust their revenue model as they learn more about their customers and the market. You aren't locked into your initial choice forever. The key is to manage the transition carefully by communicating clearly with your existing customers. Many businesses "grandfather" their early customers into the old pricing plan to honor their loyalty while rolling out the new model for all new sign-ups.
Why is revenue recognition so much more complicated for subscription businesses? The complexity comes down to timing. With a one-time sale, you earn the money as soon as the transaction is complete. But with a subscription, you earn the revenue over the entire contract period as you deliver the service. If a customer pays you $1,200 for a year of access, you can't count that as $1,200 in revenue on day one. You have to recognize $100 each month. This process, called deferred revenue, becomes a huge challenge to track manually when you have hundreds of customers upgrading, downgrading, and renewing at different times.
How often should I be re-evaluating my pricing strategy? Pricing isn't a "set it and forget it" task. While you don't want to change your prices so often that you confuse customers, a good rule of thumb is to conduct a thorough review at least once a year. You should also revisit your pricing whenever you make significant changes to your product, enter a new market, or notice a major shift in your competitors' strategies. The goal is to treat pricing as an ongoing process of learning and refinement.
My business has both recurring subscriptions and one-time fees. How does that affect my revenue model? This is known as a hybrid model, and it's very common. You might have a core subscription for your software and then charge one-time fees for services like implementation, training, or premium support. The key is to account for them separately. The subscription fees are recognized over the service period, while the one-time service fees are typically recognized once that specific service has been delivered. This approach allows you to capture different types of value but adds another layer of complexity to your financial reporting.
Is a low churn rate always a good sign? While a low churn rate is generally a great indicator of customer satisfaction, it doesn't tell the whole story. It's also important to look at your Net Revenue Retention (NRR). This metric shows you if the revenue from your existing customers is growing or shrinking. You could have low customer churn but still lose revenue if your remaining customers are downgrading their plans. The ideal scenario is an NRR over 100%, which means your existing customers are spending more with you over time through upgrades and expansion, creating growth even without new sales.
Former Root, EVP of Finance/Data at multiple FinTech startups
Jason Kyle Berwanger: An accomplished two-time entrepreneur, polyglot in finance, data & tech with 15 years of expertise. Builder, practitioner, leader—pioneering multiple ERP implementations and data solutions. Catalyst behind a 6% gross margin improvement with a sub-90-day IPO at Root insurance, powered by his vision & platform. Having held virtually every role from accountant to finance systems to finance exec, he brings a rare and noteworthy perspective in rethinking the finance tooling landscape.
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