Look at any modern SaaS company, and you’ll likely notice that they operate under a  subscription-based business model. With subscription-based payment plans rapidly replacing the traditional software license approach, modern SaaS companies must make several operational changes to accommodate this change in how customers expect to pay for products and services.

As both B2C and B2B industries become more customer-centric, the subscription model meets these changes by allowing customers to discover and try out new software products easily.

The traditional SaaS subscription model also enables businesses to create predictable monthly and annual revenue, make iterative changes to pricing, and give users more control over their product experience. In the long term, subscriptions create lasting relationships and stronger bonds with customers, which is great for client retention and your bottom line.

For SaaS companies, adopting a subscription finance model is all but inevitable at this point, so here’s what you need to know:

A SaaS subscription is a method of purchasing online software services where payments are made on a periodic basis, usually monthly, quarterly, or annually. This definition includes a couple of key components:

• Software is being purchased as a service hosted and delivered online rather than hosted locally
• Payments are made periodically rather than on a one-time basis
• The subscription continues on a recurring basis, providing access to the user as long as the membership is valid.

SaaS subscriptions stand in contrast to software licensing models, where a one-time payment is made to purchase perpetual use of software installed locally. SaaS subscriptions typically include software maintenance and customer support along with the right to use software, whereas license costs often only include the right to use software, with maintenance and support requiring additional fees.

Subscription business models revolve around a simple concept: receiving a monthly or annual payment for your product or service. Essentially, the subscriber pays a periodic bill. This bill usually gets invoiced and billed automatically on a monthly or annual basis.

In return for the payment, the subscriber can access the software through a web browser, app, or one-time download. Maintenance and updates are administered from the provider’s end rather than requiring on-premise visits. Support also can be accessed remotely through means such as chatbots, email, and phone calls.

This business model focuses on acquiring customers and then providing enough value via the product, user experience, and customer support to retain their business month over month. By ensuring a single customer pays on multiple occasions for long-term access to a specific service or product, you can nurture a stronger and more profitable relationship built on providing consistent value.

There’s a reason the subscription-based business model has become so pervasive. It gives customers the flexibility they crave while allowing SaaS businesses to remain agile and keep up with the ebbs and flows of customer and market demand. Investors love the subscription revenue model as well because it paints a clear picture of a SaaS company’s future earnings based on its current revenue, churn, NRR, and other SaaS-specific metrics. This pricing strategy seems ideal, then, for many reasons, and as long as that recurring fee continues, stakeholders tend to benefit.

A SaaS subscription billing model is a way of collecting payments for SaaS subscription services. Different subscription SaaS models may vary in terms such as:

• Pricing amount (freemium vs. premium)
• Fixed vs. tiered fees
• Charging based on the number of users
• Charging based on customer usage
• Frequency of billing (such as monthly vs. annual subscriptions)

Some SaaS subscription models combine features from two or more subscription models into hybrid billing packages. Others are customized to meet the needs of individual customers.

There are two core billing frequencies that are applied in SaaS Subscription businesses—monthly and term. Each of these relies on automated, recurring payments, usually via credit card payment, on a regular basis as follows:

• Monthly billing: The monthly subscription model typically renews each month. Some monthly subscription businesses do offer annual or quarterly payments, which allow the customer the option of canceling at any time and receiving a refund for any unused portion of the subscription.
• Term billing: Term billing typically has a contract agreeing to a subscription for a specific length of time, with or without provisions to cancel at any time and renew. Payment terms may be flexible and include monthly, quarterly, annual, or agreed-to-schedule terms to fit the pricing structure desired.

For both of these options, the actual billing amounts of subscription pricing agreements can range widely based on the product or service being sold.

The subscription software model umbrella covers several different types of subscription models. Some of the most common types of subscription models include:

1. Freemium
2. Fixed fee
3. Tiered fixed fee
4. Pay-per-seat
5. Pay-as-you-go
6. Hybrid
7. Custom

Let’s take a closer look at what each of these types of subscriptions involves.

1. Freemium

The freemium model is a subscription billing model where you allow customers to use a basic version of your SaaS for free and then charge them if they want to upgrade.

Advantages of the freemium pricing model

Evernote’s CEO Phil Libin even said, “The easiest way to get 1 million people paying is to get 1 billion people using.” Essentially, Libin followed a three-step plan to freemium success that involved bringing in millions of free users, slowly converting them to premium status over time, and keeping costs down throughout the process.

If your company can acquire over a million free users and convert enough of them to paid users over time while keeping your costs under control, then it might make sense to experiment with the freemium model and see whether it works for your business.

Drawbacks of the freemium pricing model

In general, free plans attract individual users for whom the basic functionality is often more than enough, as well as those who can’t afford to pay for your premium plans, which means that converting enough free users to paid users can be a complicated process.

If your product is too niche to attract enough free users or too resource-intensive to support them, then the other subscription billing models discussed in this article might be a better fit.

Freemium pricing examples

MailChimp, an email marketing company that offers a free plan, is an excellent example of a successful implementation of the freemium model.

Back in 2009, MailChimp introduced its Free Forever plan that allowed people to use MailChimp for free until their email list reached 100 subscribers. According to Sumo, the co-founder and CEO of MailChimp Ben Chestnut said that in one year, it helped them:

• Grow their user base 5x (from 85,000 to 450,000)
• Increase their number of paying customers by over 150% (despite offering a free product)
• Hit several days of 2,000+ new user signups (when they’d been averaging about 1,000 new user signups daily before then)

As another example, Spotify, a streaming service with a large catalog of music, also includes freemium subscription offerings in its revenue model. Spotify’s freemium plan is ad-supported, including advertisements that play frequently throughout the listening experience. Once their customer base makes Spotify streaming part of their normal routine, they’re able to justify the premium upcharge to move up to a paid, ad-free listening experience.

2. Fixed fee

The fixed fee model is a billing subscription model offering a single monthly plan with a fixed price.

Advantages of the fixed fee pricing model

The main advantage of this model is that the revenue is very predictable. All you need to know to do the math is the monthly price, the number of customers, and the churn rate, plus the number of new customers you should expect each month.

Drawbacks of the fixed fee pricing model

You might miss out on potential revenue by not offering a more complex pricing option, such as usage-based pricing or pricing tiers. Offering multiple pricing tiers has an anchoring effect which can help you charge more.

Fixed fee pricing example

Amazon Prime is a simple fixed-fee subscription model. Its customer base pays for access to Prime benefits, most notably including lower costs and faster shipping, on an annual or monthly basis. This subscription offering is one example of Amazon’s options, though it may offer additional plans for various services that align with business services.

Another example is Basecamp, a well-known company that successfully implemented the fixed fee subscription billing model, which sells product management and team collaboration software for $99/month.

This pricing is a competitive advantage because similar companies that don’t have all the functionality of Basecamp are charging per user. The cost of all these separate tools adds up as your business grows.

In fact, on their pricing page, Basecamp explains that their software can replace 4-5 apps that all charge per user. And they demonstrate it by comparing their product to other products you would need to get the same functionality.

It’s probably safe to say this competitive edge is the main reason the fixed fee model works well for Basecamp. Consider implementing a fixed fee model if you see a similar opportunity to offer a better deal than your competitors.

3. Tiered fixed fee

The tiered fixed fee model is a subscription billing model which offers several plans with a fixed monthly price. This is a popular subscription billing model used by companies such as CrazyEgg, Drip, Netflix, and ConvertKit.

Advantages of the tiered fixed fee pricing model

The main advantage of this model is predictable revenue. Having only a few options for the customer to choose from makes it easy to calculate revenue projections.

It seems when we compare the freemium model with a tiered fixed fee model, what it ultimately boils down to is the quantity vs quality of customers (at least when we’re talking about similar products).

Drawbacks of the tiered fixed fee pricing model

Some customers might want to tailor their chosen plan to their specific needs and dislike the lack of flexibility that comes with strictly defined pricing tiers.

Tiered fixed fee pricing example

ConvertKit, an email marketing software company, offers three plans with a fixed price and one where the price is calculated individually based on the number of subscribers the customer has.

It’s interesting to compare ConvertKit’s approach to subscription billing to MailChimp’s, since they’re both selling email marketing software. On the one hand, ConvertKit is probably designed for more advanced users since they charge a substantial monthly fee from the very beginning. However, MailChimp probably has much lower customer acquisition costs because when you’re just starting out, a free plan is more attractive than paying $29/month.

4. Pay-per-seat

The pay-per-seat model is a billing model which charges for each user that has access to that particular account.

Advantages of the pay-per-seat pricing model

The main advantage of this model is that revenue is somewhat predictable, although not as predictable as with fixed fee and tiered fixed fee models, because it’s harder to calculate how many new users you can expect each month. You might want to consider this model if you have a product where one account can have several users who each need personal access to the software.

Drawbacks of the pay-per-seat pricing model

As customers’ teams and their needs increase, the costs start to add up. That might make them look for more affordable options. Still, this subscription billing model can work well if it makes sense for your product.

Pay-per-seat pricing example

Groove, a customer support software company, has three plans with a different price per seat. This works for Groove because charging per agent makes sense for a customer support product.

Adobe is another insanely well-known and successful subscription business. It offers several different apps and platforms, many of which feature team pricing plans. The more access a company needs, the more seats or licenses they pay for, increasing the overall subscription fee.

5. Pay-as-you-go

The pay-as-you-go model (aka usage-based pricing) is a subscription billing model where you charge the customer based on their usage of your product.

Advantages of the pay-as-you-go pricing model

This model is attractive to customers since they only pay for what they use, which means they can be sure they’re getting the most value for their money. It also makes sense for businesses such as hosting providers and payment processors, where it’s logical to charge based on usage.

Drawbacks of the pay-as-you-go pricing model

Customer usage of your product might turn out to be sporadic, which makes it hard to predict future revenue.

Pay-as-you-go pricing example

Twilio mostly uses pay-as-you-go pricing, where they charge their users per minute or message and offer them volume and committed usage discounts.

6. Hybrid

The hybrid model is a model which combines two or more other subscription billing models.

Here are some conventional approaches:

• Tiered fixed fee + custom
• Tiered fixed fee + per user
• Tiered fixed fee + pay as you go

There are other variants of this model, such as the Dutch model, where the user pays a one-time fee to buy software and then a subscription fee for updates, but they are less common.

Advantages of the hybrid pricing model

The main advantage of this model is it provides customers with extra flexibility because they can tailor their plans to their specific needs.

The hybrid model makes sense if you have a product where the usage of a resource-intensive feature might vary a lot on a month-to-month basis. If so, your customers might appreciate the option of purchasing extra usage when they need it.

Drawbacks of the hybrid pricing model

A hybrid model might be somewhat confusing to users, especially if they forget about the per-usage charge and then are surprised by it.

Hybrid pricing example

For example, Zapier uses a hybrid freemium model, charging $299/month billed annually or $448.50/month-to-month for their Teams plan. But they also charge per usage for extra tasks.

Birchbox is another example of a hybrid model. The company offers a flat-rate subscription box starting at $13 per month, but users are able to log into their profile and review which physical products are available that month, select their favorites, and even pay upcharges to receive full-size products instead of sample sizes.

7. Custom

The custom model is a subscription billing model where instead of having a set price that applies to all customers, your offer is customized to each customer based on their needs.

Advantages of the custom pricing model

The main advantage of this model is it attracts high-quality customers that want a solution tailored specifically to them and are willing to pay for it. You should consider the hybrid model if you have a sophisticated product that requires complex pricing to fully capture the value it offers to your customers.

Drawbacks of the custom pricing model

It takes more effort to sell a customized product, which means you may need to hire more salespeople.

Moreover, it might scare away potential customers who might otherwise have purchased the product but assumed that it was too expensive for them without reaching out to find out the price.

Custom pricing example

We use this model at Maxio because every SaaS business has different needs when it comes to billing, so it makes sense to tailor our solution to each customer. On our pricing page, we used our decade of experience to design a fully customizable offer that caters to the ever-changing needs of SaaS businesses.

Improving your approach to subscription management is the best way to build a revenue-positive SaaS financial model. By focusing on managing long-term relationships with your subscriber customers, you can eliminate the issues that a subscription business model presents.

Your subscribers will naturally make regular changes to their accounts throughout your customer-vendor relationship. Every change they make has the potential to cause issues when it comes to reconciling your revenue. Your accounting and finance teams need to ensure the subscriber is invoiced correctly and that financial reporting is accurate and meets GAAP/IFRS requirements and revenue recognition standards.

Need help managing subscription-based revenue? Get a demo to see how using the right SaaS subscription management software can make your billing procedures easier, more efficient, and more profitable and improve customer relationships while you do so.