Seventy per cent of business executives assert that subscription models are vital for their future success. And no wonder why.
Subscription-based models (commonly known as recurring revenue models) have helped to streamline business operations for decades. For Software-as-a-Service (SaaS) startups, however, this model is more than just a useful tool — it is the foundation of the business.
Why is it so?
Nobody likes sporadic sales. Inconsistent revenue streams introduce financial instability and uncertainty. For SaaS startups, where initial expenses are often steep and profits slender, recurring revenue forms a stable financial base that maintains operational fluidity, enables planning and investing, and jumpstarts growth.
With the subscription model, customers pay a regular fee, providing a steady income stream for the business.
Here lies the true genius behind the recurring revenue model—it transforms an occasional, transactional customer-business relationship into a sustained one.
Here’s a quick guide to understanding the recurring revenue model for SaaS startups.
Just like it sounds, recurring revenue is a type of income that is expected on a regular basis — typically monthly or annually.
Businesses built on this model generate steady earnings by providing continuous value to their customers.
Instead of a one-time payment, customers are charged at regular intervals for access to a product or service.
This is particularly advantageous for businesses like Software as a Service (SaaS) startups. With the recurring revenue model, these businesses can have a steady and predictable income which aids in their planning, investment and expansion.
Moreover, it builds customer loyalty as they opt into a service agreement rather than a one-time purchase.
Recurring revenue models offer businesses around the globe the opportunity to create sustainable, long-term relationships with their customers.
These models come in a variety of forms and functions and can meet customers ' needs and consumption habits while also providing businesses with a more predictable revenue flow.
Let’s take a look at some.
Customers pay a fixed, recurring fee to access a product or service. This is usually done on a regular basis, e.g. monthly or annually. Examples are Netflix and Spotify, where consumers pay a monthly fee for unlimited content.
This model charges customers according to usage, which is beneficial for light users. For instance, cloud computing services like AWS or Azure operate on this model. Users are billed on the basis of the computing resources consumed, ensuring they only pay for what they actually use.
The freemium model involves providing a product or service for free while charging for premium features or upgrades. It is used to acquire a large user base with the free product, then convert part of them to paying customers. For example, Dropbox offers basic storage capability for free and charges users who require more storage capacity.
Customers pay a recurring fee for a membership, which gives them access to exclusive benefits, services or products. For example, Amazon Prime's members pay an annual fee to enjoy free two-day shipping, access to streaming content, and other benefits.
Customers subscribe to a service and pay a recurring fee. For instance, a lawyer or consultant might operate on a retainer model. In this case, businesses or individuals essentially 'retain' professional services on a continuous basis, giving them immediate access to expert advice and assistance when needed.
Under this model, customers are charged for the license to use a product or service, usually on a yearly basis. Software companies like Microsoft, use this type of model. For instance, businesses might pay an annual fee for using Microsoft Office, entitling them to routinely updated versions of Word, Excel, PowerPoint, and other software under this package.
Related reading: The Complete Guide To Accounting for SaaS Companies in 2023
Now, let's discuss the advantages of implementing recurring revenue models.
Non-recurring revenue models create uncertainty for many businesses due to fluctuating sales throughout the year. This makes budgeting difficult and reduces the accuracy of predictions for future sales and revenue. The Recurring Revenue Model offers more certainty and predictability due to regular payments from customers. This makes it easier to grow and scale a business and accurately predict future growth.
Customers in the Recurring Revenue Model are less likely to "churn" than those in non-recurring models. This is because it is easier to keep paying for existing services than searching for new ones. Therefore, this model allows companies to retain more customers and focus on bringing in new leads. It also increases cross-selling and upselling opportunities.
The recurring revenue model simplifies accounting and financial processes by utilising user-based billing, a single payment method.
This means no need to juggle multiple payment methods and no extra work for teams in your organisation. Tracking data for future marketing and sales campaigns is easier since the funds are collected via one source.
One good performance indicator for a recurring revenue model is the Monthly Recurring Revenue (MRR).
MRR is a calculation of the total amount of predictable revenue that a company expects on a monthly basis. This includes monthly recurring revenue your company can count on, excluding one-time payments or other variable fees.
In 2021, in a Salesforce and CFO Research survey, 52% of companies currently get 40% or more of their revenue from recurring models. In the next five years, 55% of businesses anticipate that 40% of their revenue will come from recurring sources.
Other metrics like Customer Acquisition Cost (CAC), Customer Lifetime Value (CLV), Churn rate, and Average Revenue Per User (ARPU) also play a significant role in understanding and analyzing the performance of a recurring revenue model.
With Inkle Books, you can track your transactions and expenses, switch from cash to accrual accounting methods, and view Inkle's clear charges.
It also includes intercompany accounting, such as transactions between related entities, as well as a dashboard for transfer pricing, foreign direct investment, and intellectual property license royalties.
This ensures that your recurring revenue model is managed in a transparent manner so that you can focus more on managing your business and less on paperwork.
Meet us on LinkedIn.