How to Choose the Best Recurring Revenue Model for SaaS

SaaS companies experience a staggering  15% decrease in user churn rate when users choose monthly instead of one-time purchases.

It’s simple. Recurring revenue reduces user risk with simple commitments and offers flexibility, control of spending, and regular engagement for long-term loyalty.

Each billing cycle acts as a small nudge, reminding them to use the product and integrate it into their routines.

Recurring revenue also acts as steady fuel that keeps Saas businesses running smoothly. It generates consistent revenue, making it easier to plan and grow without worrying about unpredictable sales with higher customer retention and long-term value (LTV). 

It helps SaaS businesses scale by adding new features and reaching more users, ensures economic and sustainable growth through consistent, predictable cash flow, and requires consistent value delivery to prevent churn since acquiring new customers can be costly.

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What is a Recurring Revenue Model?

A Recurring revenue model is a business approach where the customers make regular fixed or predictable payments over time for ongoing access to a product or service. Rather than focusing on one-time transactions, businesses using this model create ongoing, sustainable revenue by providing continuous value, which customers pay periodically, often through subscriptions or memberships.

The one-time sales model follows the traditional "give-and-take" approach, where a single transaction completes the value exchange. However, for SaaS businesses, this model may not be ideal, as continuous product development and the introduction of new features require an ongoing relationship with customers.

Some of the differences between recurring and one-time revenue models are:

Summing up, here are the key characteristics of Recurring Revenue Models

• Predictability – This revenue model ensures a predictable revenue stream for better planning, growth strategies, and product development while maintaining reliable cash flow.
• Scalability – As new customers join, revenue grows consistently, and operational costs increase, businesses can efficiently scale their infrastructure to accommodate demand.
• Customer Retention – Businesses can focus more on customer satisfaction and regular updates to retain existing customers. High retention rates lead to high customer lifetime value (CLV), which reduces the acquisition costs of new customers.

These key characteristics directly contribute to the significant impact of SaaS recurring revenue on business stability and investor interest.

Impact of Saas Recurring revenue on business stability and investor appeal 

• Steady Income: Recurring revenue ensures predictable cash flow, lowering risks and offering investors reliable returns.
• Economic Resilience: Stable revenue protects against market shifts, boosting sustainability and investor interest.
• Ongoing Value Delivery: Saas businesses have to continually provide value in order to justify recurring payments and customer retention.
• Growth & Trust: Rising MRR (Monthly Recurring Revenue) and low churn show success and customer loyalty, enhancing stability and appeal.
• Strong Valuation: Metrics like MRR and CLV (Customer lifetime value) link consistent revenue to accurate valuations, attracting investors.

Now that you have a clear picture of recurring revenue, let’s discuss which type of recurring revenue to choose for your SaaS business growth.

Types of Recurring Revenue Models 

In SaaS, predictable cash flow is important, which makes recurring revenue models essential. These models are not only crucial for building a sustainable business but also for retaining and acquiring more customers.

Some of those recurring revenue models are:-

1. Subscription-Based Model

In this model, customers pay a recurring fee to gain access to a product or service. The fee is typically fixed and charged on a regular basis, such as monthly or annually.

For instance, Netflix charges a monthly fee for users to access a wide range of shows and movies. Along with the auto-renewal system which automatically does the monthly transactions. 

Slack’s freemium model attracted users with free basic features, gradually converting them into paying customers for advanced tools. This strategy ensured steady revenue growth through long-term subscriptions.

Pros: 

• Provides stable revenue, allowing businesses to plan long-term growth without uncertainty.
• It provides predictable cash flow, making financial forecasting and resource allocation more efficient.

Cons:

• Customers may cancel their subscriptions if they don’t see ongoing value 

In the product or service leading to an increase in churn rate.

• Requires continuous engagement, support, and feature improvements to keep users subscribed.

Businesses that can provide regular updates and improvements to their product/services to maintain customer satisfaction and prevent churn should go for this model.

2. Usage-Based Billing (Pay-As-You-Go)

In this model, businesses charge customers based on how much they use a product or service. This can be beneficial for customers who don't use the service heavily.

Twilio’s usage-based pricing lets users pay only for what they use, whether it’s SMS, calls, or API requests. This flexible model keeps costs low and scales as your business grows.

Think about how you pay for Amazon Web Services (AWS) versus Adobe Creative Cloud. With AWS, you’re only charged for the computing power, storage, or services you actually use, with no upfront costs. This makes it flexible for businesses that need to scale up or down.

Now, compare that to Adobe’s subscription model, where users have to pay a fixed monthly fee for access to tools like Photoshop and Illustrator. Even if you use them for less than a month, the cost remains the same. This model provides predictable revenue for Adobe but requires users to commit long-term.

Pros:

• Starting small and scale as the number of customers increases.
• Lower upfront costs make it easier for new customers to adopt the service.

Cons:

• Unpredictable revenue for the business because of customer usage fluctuations.
• It may not provide good value for high-volume customers.

Usage-based revenue models work best for businesses that can easily track usage whether it’s the number of emails/messages/invoices sent, APIs used, or triggers activated.

3. User-Based Billing

In the user-based or per-seat billing model, the customer is billed based on the number of users accessing the product each month or year. The charges scale up linearly with the number of users.

For instance, with Zoom, a small team might start with a free or basic plan, but as more team members need premium features like longer meetings or cloud storage, the cost per user increases.

Similarly, Salesforce charges per user, making it easy for businesses to start small and expand as their team grows. This model ensures you only pay for what you need while giving companies flexibility to scale.

Pros:

• Your customers can start with a low-cost or free plan and add users as their team grows, offering an affordable entry point that’s perfect for startups or small businesses for scaling.
• By providing features to individual users in your team-based software, you encourage broader adoption across their organization while eliminating upfront bulk costs, lowering the barrier to entry, and keeping them engaged as their needs evolve.

Cons:

• Onboarding customers with large user bases can cause issues scaling the infrastructure which leads to an increase in per-user cost to Saas businesses. 
• Customers may end up paying for users who aren’t using the product or service.

This revenue model suits SaaS businesses that offer collaborative or team-oriented products or services.

4. Tiered Billing (Feature-Based Pricing)

In this model, your customers can subscribe to tiered plans, each with unique features, capabilities, or limits at different prices ranging from basic to premium. Unlike flat-rate or per-user pricing, this lets customers pick according to their specific needs. 

Some of the popular examples include Hubspot and Mailchimp. HubSpot offers different tiers: 

• Free for basic CRM, Starter at $20/month for small teams
• Professional at $900/month for automation
• Enterprise at $3,800/month for advanced features

This enables Saas businesses to scale by managing users across different categories of tiers.

Pros : 

• You can target different customer types (e.g., small businesses with basic, large firms with premium tier) with one product.
• As their business and the requirements of customers rise, they upgrade to higher tiers for more features, incrementing your revenue per account.

Cons:

• The high demand for Premium-tier customers may utilize a large chunk of business resources, and shifting from the free tier may lead to customer churn.
• Fixed-tier pricing can cap your revenue from large clients who’d pay more for usage-based or custom plans.

The tiered or feature-based revenue model works best for SaaS businesses like marketing tools, project management, or design platforms, where diverse, scaling customers benefit from clear feature upgrades across tiers.

5. Hybrid Billing (Combination of Models)

Hybrid billing combines multiple revenue models, such as subscriptions and usage-based. It offers your customers flexibility while diversifying your revenue. You can charge a fixed subscription for basic access, then add a premium for extra usage or premium features, which ensures steady revenue with flexible growth.

Adobe Creative Cloud provides recurring subscription fees for access to tools like Photoshop, then usage-based pricing for extra cloud storage beyond a limit or premium stock photo credits. This keeps revenue steady from subscriptions, along with growing the revenue through usage-based pricing.

Pros:

• Your users can pick a base plan and customize it with add-ons, matching costs to their exact needs.
• Your revenue remains stable with subscription income, plus grows from usage of the product.

Cons:

• Customers might not pay add-on fees on top of subscriptions, perceiving it as paying twice and reducing loyalty.
• Supporting a hybrid model demands more customer service effort, demanding more resources and effort.

The hybrid model fits SaaS businesses offering creative tools, cloud storage, API services, customer engagement platforms, or e-commerce solutions, where a base subscription provides core access and usage-based add-ons scale revenue with variable customer needs.

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How to Choose the Right Recurring Revenue Model

Choosing the right recurring revenue models depends on the growth stage of your SaaS company and target users. You should also ensure that the company has achieved product-market fit and decide whether to prioritise profitability or growth.

i) Stage of Growth

• Early-Stage: If you’re just starting, a simple model like per-user or a low-cost tiered plan attracts initial users and keeps costs predictable while you build traction for new users.
• Scaling: As you grow, a hybrid or tiered model with upsell potential supports expansion, capturing more value from established customers.

ii) Customer Type

• B2C: For individual consumers, lean toward affordable, flat subscriptions or freemium tiers (e.g., $5/month) to drive mass adoption and retention.
• B2B: Business clients often prefer tiered or hybrid models that align with team size, usage, and enterprise needs, and offering robust features draws higher spending.

iii) Market Fit:

A usage-based model works when your product’s value depends directly on consumption like storage, API calls, or transactions, since customers pay based on usage. It beats subscriptions if your market has unpredictable usage patterns or if heavy users drive the most revenue, but it may fail in markets expecting fixed costs or minimal variation.

iv) Profitability vs. Acquisition Trade-offs

• Acquisition Focus: In the early stages, offering free or low-cost tiers to attract users fast, gaining feedback, preferring growth over tight margins and delaying bigger profits for a broad user base. This user base can be used for upselling and lead to higher conversion rates.
• Profitability Focus: When a business has a stable revenue and scaling stage, you can switch to hybrid or usage-based pricing to boost per-customer revenue, trading slower acquisition for higher lifetime value, and focusing on profit and increasing revenue through upselling and increasing per-user revenue.

Once you have selected the ideal recurring revenue model for your SaaS company, and now you must know how to build and scale it effectively to drive sustained growth and success.

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How to Build & Scale a Recurring Revenue Model for SaaS

Building and scaling a recurring revenue model requires smart strategies, tackling challenges, and a clear plan.

Follow these simple steps to  build a recurring revenue model for your SaaS:-

• Decide the pricing structure for your product and market
• Set Prices based on customer value
• Plan for early adopters of the product 
• Analyze feedback from users

While following the plan, these key strategies must be considered with priority:

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The Financial Advantages of Recurring Revenue

The selection of a recurring revenue model directly impacts the financial stability and growth potential of saas companies. Understanding these benefits helps you select the best approach for your saas goals.

Predictable Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR) give your SaaS a steady cash flow, making it easier to plan and ensuring stable revenue. Investors like steady revenue because it proves that your business can grow without always needing more money, lowering their risk.

How Recurring Revenue Affects SaaS Valuation & Investor Decisions

Investor decisions about the value of SaaS startups and ROI are evaluated based on financial metrics such as MRR, ARR, and LTV. These metrics reflect the predictable revenue, cash flow, and stability for long-term growth.   

Churn rates and retention rates vary with different revenue models. Based on the market and saas products, monthly plans show higher churn and lower retention compared to annual plans, leading to an unsustainable path for profitability. 

While Annual plans can have long-term retention with higher net revenue retention (NRR) for long-term growth.

Hubspot is a great example of improving valuation with the right revenue model. 

HubSpot’s tiered pricing strategy includes plans tailored to different customer segments, from small businesses to large enterprises, with each tier unlocking more advanced features like analytics or team management tools. This approach drives ARR growth by encouraging upgrades and reducing churn through long-term commitments.

How Should SaaS Startups Fund Growth?

Capital investment is an important decision in shaping the financial strategy and ownership structure in saas startups.

These capital requirements for saas startups can be fulfilled with:  

• Debt Financing:  offers a non-dilutive path, allowing founders to secure capital through loans or credit lines while retaining full control, though it requires consistent cash flow for repayments. This approach can be feasible for businesses with stable recurring revenue for repayments without losing valuation or ownership.
• Equity Investment:  Raising funds through venture capital or angel investors, for rapid scaling by diluting equity ownership, is a strategic decision for saas growth. This often shifts the strategy  towards aggressive growth and customer acquisition over immediate profits 

Depending on the type of capital secured, SaaS startups adopt different approaches, strategies, and decisions that significantly impact their growth and profitability.

For instance, a VC-backed saas company uses large investments to fuel rapid growth and inflate recurring revenue through aggressive customer acquisition, often sacrificing short-term profits.

While bootstrapped saas companies use their limited resources and capital to grow sustainably by generating profits and reinvesting those profits to achieve operation efficiency, customer retention and organic growth.

Saas startups with consistent recurring revenue and debt financing can be viable alternatives for raising capital.‍

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Finally, which pricing model should you choose?

The best pricing model for your SaaS business should evolve as the company grows and your customer base changes.

Evolution stages of the Saas startup:

• Early Stage: Use low-cost plans to attract early adopters and build traction.
• Growth Stage: Adopt tier or segment-based pricing to meet diverse needs, introduce updates, and increase revenue as you scale.
• Maturity Stage: Shift to usage-based or flat-rate pricing to maximize value and appeal to a wide customer base.

SaaS businesses should continuously optimize their pricing strategies to stay competitive and align with evolving customer needs. Regular testing, using user data and feedback, ensures these strategies maximize revenue and retention effectively.

Selecting the optimal pricing model is crucial for SaaS founders to drive growth and profitability. Here are concise, actionable tools and resources to guide this decision:

Key Tools for SaaS Pricing Models:

• Pricing Calculators: Indie Brands’ Calculator is a free tool to estimate revenue across pricing models.
• Benchmarks: Hyperline’s Explorer is real-world pricing examples from top SaaS businesses.
• A/B Testing: Google Optimize is a tool for free testing of pricing pages.
• Guides: OpenView’s Guide for Pricing Strategies,  SBI’s Price Intelligently Expert advice.
• Analytics: Chargebee tracks pricing performance, and Maxio monitors revenue impact.

If you’re looking for long-term stability and expert guidance for your saas startup, our team at Inkle is here to help. Get in touch today for specialized support.

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Frequently Asked Questions

1. What is a recurring revenue model, and why is it important for SaaS businesses?

A recurring revenue model involves generating consistent income through regular payments from customers, such as monthly or annual subscriptions. It ensures predictable cash flow, enhances customer retention, and supports long-term business scalability.

2. What are the key types of recurring revenue models?

Common models include subscription-based billing, usage-based billing (pay-as-you-go), user-based pricing, tiered pricing (feature-based), and hybrid models. Each has unique advantages depending on the product and customer base.

3. How can SaaS startups reduce churn and improve customer retention?

Strategies include improving onboarding processes, offering value-driven pricing, maintaining regular product updates, and using tools like AI-driven subscription management to personalise user experiences.

4. What metrics should SaaS startups track to measure recurring revenue success?

Key metrics include Monthly Recurring Revenue (MRR), Annual Recurring Revenue (ARR), Customer Lifetime Value (LTV), churn rate, and the CAC : LTV ratio to evaluate profitability and growth potential.

5. How do investors evaluate SaaS startups based on recurring revenue?

Investors focus on metrics like MRR growth, ARR stability, churn rates, and LTV. Startups with predictable revenue streams and low churn are more appealing for funding or acquisition opportunities.