Subscription revenue guide: Do SaaS companies depend on it?

First off, yes, most SaaS companies depend heavily on subscription revenue. Recurring payments make it possible to predict future revenue, model churn, and make long-term bets with confidence.

That stability is one reason why subscription-based pricing has become the standard across SaaS, replacing older one-time sales models that couldn’t support modern product delivery or customer retention strategies.

What is subscription revenue?

Subscription revenue is the recurring earnings a company makes from users who pay at regular intervals for continued access to a product or service.

For SaaS companies, this model forms the backbone of financial planning, helping firms forecast revenue through metrics like monthly recurring revenue (MRR) and annual recurring revenue (ARR).

Subscription vs. transactional revenue

Unlike transactional models that rely on one-time purchases, subscription revenue creates a consistent stream of revenue. This predictability lets SaaS companies plan better and fund long-term growth.

Transactional or usage-only models can lead to revenue swings, making it harder to manage resources or scale. SaaS companies also benefit from stronger user relationships with subscription models.

By engaging users continuously, they gather better insights, improve retention, and often see higher user satisfaction. These deeper relationships are harder to establish when interactions are limited to one-time transactions.

Why subscription revenue is valuable for SaaS companies

Here’s why subscription-based revenue models offer such a strong foundation for SaaS businesses:

• Predictability: Recurring payments lead to stable and consistent cash flow. That makes budgeting and long-term planning far more reliable.
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• Retention: SaaS companies benefit from constant customer engagement, which increases satisfaction and reduces churn over time.
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• Customer lifetime value (LTV): Long-term relationships mean each customer delivers more value over time. Even small improvements in retention can significantly raise total LTV.

Remember: These advantages also play a big role in SaaS subscription revenue recognition, helping companies accurately report recurring earnings and comply with accounting standards.

The subscription revenue model explained

The subscription-based revenue model shifts the focus from one-time sales to long-term value, which aligns the success of both the business and the customer. Let’s now put revenue models under the lens.

Flat-rate vs. tiered vs. hybrid models

Let’s break down the most common pricing strategies SaaS companies use to generate subscription revenue:

• Flat-rate pricing: One fixed price for all users, regardless of usage or features. It’s simple to manage and easy to explain, but it may leave money on the table by not scaling with high-value users.
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• Tiered pricing: Different price points for different levels of service. Each tier includes a mix of features, usage limits, or support levels. This approach helps companies serve different customer types and encourages upgrades as businesses grow.
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• Hybrid pricing: Combines flat-rate or tiered models with usage-based charges. Customers pay a base subscription plus additional fees tied to consumption or advanced features. It’s often the best of both worlds, supporting predictable revenue while still scaling with value delivered.
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• Usage-based pricing: Charges based entirely on how much of the service is used. This model is gaining traction, especially in AI and infrastructure tools, where usage can vary greatly from user to user. It aligns price with value, but it can present revenue variability.

Examples of SaaS pricing strategies

Here’s how some well-known SaaS companies apply these models in practice.

HubSpot

HubSpot layers its pricing through clearly defined tiers (Starter, Professional, and Enterprise). Each plan includes progressively more features, user seats, and support.

Add-ons like advanced reporting or AI tools offer further customization, letting businesses tailor their subscription to their growth stage.

Slack

Slack follows a freemium model with optional paid tiers like Pro and Business+. Users start free, then upgrade for more features like unlimited message history, group calls, and enterprise security. It's a classic example of tiered pricing that supports user growth from small teams to large organizations.

AWS (Amazon Web Services)

AWS follows a purely usage-based model. Customers are billed based on compute time, storage, and data transfer. This model fits technical audiences who want maximum control and cost alignment, and it's relevant in AI pricing, where workloads can vary widely.

These examples highlight how SaaS companies use different pricing structures to support customer needs and drive subscription revenue across segments.

How to forecast subscription revenue

SaaS companies rely heavily on recurring income. That’s why forecasting subscription revenue is a key part of financial planning. Good forecasts help teams project growth, manage churn, and plan resource allocation more accurately. Here’s how to do it.

Start with MRR and ARR

MRR and ARR are the building blocks of any SaaS forecast. MRR gives a real-time view of monthly income from active subscriptions. ARR extends that to a yearly perspective, which helps companies set long-term revenue targets.

Tracking both allows SaaS operators to monitor changes, spot warning signs, and test the impact of pricing experiments.

A sudden drop in MRR, for example, might signal a spike in churn or a poorly received plan update. ARR offers a longer lens that is helpful when aligning revenue goals with hiring or product investment.

Model churn, expansion, and contraction

To forecast accurately, companies need to account for more than just new signups. The three biggest levers are:

• Churn: Lost revenue from canceled subscriptions. Even small changes here can ripple across forecasts.
• Expansion: Additional revenue from upgrades, add-ons, or usage surges.
• Contraction: Lost revenue from downgrades or lower consumption.

Each one affects the shape and slope of your revenue forecast. Forecasting models should include assumptions for how each factor moves over time. These assumptions can then be stress-tested with scenarios to see how resilient your revenue stream really is.

Use historical data and customer segmentation

Looking at past performance can reveal seasonal patterns, pricing sensitivities, or customer lifecycle trends. Segmentation adds even more value. For example, high-LTV enterprise customers often behave very differently from small teams or self-serve users.

Segmenting by plan type, industry, or usage level helps refine projections and identify where most of your growth or churn is happening. Combining that with product usage data creates a powerful model that doesn’t just project future revenue, but also shows where it's coming from.

Forecasting with real-time revenue tools

Manual forecasting can only take you so far. Tools like Orb go a step further. They give teams access to real-time revenue visibility, simulate pricing changes, and even model how future expansion or churn could play out.

For SaaS teams that want to create recurring revenue with a subscription app, platforms like Orb offer a done-for-you infrastructure that handles billing, metering, and forecasting in one place. That saves time and reduces risk.

Accounting for subscription revenue: The basics

Accounting teams need to distinguish between cash flow and earned revenue, handle deferrals, and follow industry standards like ASC 606. Let’s break down what that looks like in practice.

Revenue vs. cash flow

It’s common to receive cash up front, but that revenue isn’t earned all at once. Accounting teams recognize revenue over time as the service is delivered. This gap between cash collected and revenue earned can lead to confusion if not tracked properly.

Accurate accounting for subscriptions helps avoid that. It confirms that internal reports and external filings show a true picture of how much revenue was actually earned in a given month.

Understanding deferred revenue

Deferred revenue refers to payments received in advance for services yet to be delivered. These are treated as liabilities until the corresponding portion of the service is fulfilled.

For example, if a customer pays $1,200 for a year of access, only $100 is recognized each month. The remaining balance sits on the balance sheet as deferred revenue. As each month passes, it moves from deferred to earned revenue.

This model supports monthly revenue recognition, making it easier to report results, track performance obligations, and remain compliant.

What ASC 606 requires

SaaS companies must follow ASC 606, the revenue recognition standard that outlines how and when revenue should be booked. It requires businesses to:

1. Identify the contract.
2. Define the performance obligations.
3. Set the transaction price.
4. Allocate that price across obligations.
5. Recognize revenue as each obligation is satisfied.

It sounds formal, but it’s actually practical. It aligns with the way most SaaS products deliver value, month over month, through active service delivery. ASC 606 makes sure your reports reflect that cadence accurately.

Note: Subscription models are only one side of the story. Many SaaS companies also offer usage-based pricing, where revenue depends on consumption. For a full breakdown of how these models compare, check out our article on usage-based revenue vs. subscription revenue.

5 common challenges of managing subscription revenue

SaaS companies often encounter roadblocks that, if left unchecked, hurt revenue accuracy, reporting, and customer satisfaction. Here are five of the most common challenges:

• Mid-cycle plan changes: Adjusting billing and revenue recognition for changes that happen mid-term creates accounting headaches. Without proper systems, firms risk overcharging, underbilling, or failing to align service delivery with the financial record.
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• Billing proration: When a customer switches plans mid-month or adds new users mid-cycle, the billing system has to calculate charges for the partial period. Prorated billing is technically simple in theory, but hard to execute accurately without automation.
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• Manual tracking of deferred revenue: Deferred revenue must be recognized over time. Many still rely on spreadsheets to track this manually. That approach doesn’t scale, and it increases the risk of missed revenue, double-counting, or reporting errors.
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• Forecasting churn and revenue leakage: Passive churn, such as expired cards or failed renewals, can go unnoticed. Revenue leakage also happens when pricing changes aren’t implemented correctly or upsell opportunities aren’t billed in full.
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• Complex pricing models: As companies add tiered or usage-based pricing, the billing system must reflect that complexity. Without automation and clear performance metrics, the connection between what’s sold and what’s earned can break down.

5 best practices for managing subscription revenue

Managing subscription revenue is as much about process as it is about pricing. The right systems and workflows make billing easier, improve retention, and reduce risk. These five practices can help you keep your revenue engine on track:

• Automate as much as possible: Manual billing leads to delays, errors, and inconsistent records. Use automated tools for invoicing, proration, credit handling, and monthly revenue recognition. Platforms like Orb can reduce human error.
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• Align billing events to actual value delivered: If a user doesn’t see value until onboarding is complete or the product is actively used, billing should reflect that. Charging too early risks churn, while billing too late delays cash flow.
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• Use segmentation to track performance across pricing models: Enterprise clients might prefer flat-rate plans for budget stability, while startups may opt for usage-based billing. Segment by size, industry, or behavior to see which groups are profitable, which are at risk, and where your pricing hits or misses.
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• Test new models before deployment: Rolling out a new pricing model to your full customer base without testing is risky. Use pilot groups, A/B testing, or simulations to model how a change will impact revenue, churn, and support volume.
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• Track revenue leakage early: Revenue leakage happens when customers use more than they’re billed for, or when billing errors go uncorrected. Regular audits, strong usage tracking, and clear billing rules help surface these gaps before they snowball.

Use cases: Flat-rate vs. usage-based subscription revenue

SaaS companies choose pricing models based on their product, customer behavior, and revenue goals. Two of the most common approaches are flat-rate and usage-based pricing. Each has strengths and tradeoffs, but let’s start with a definition of each.

What flat-rate and usage-based pricing mean

Flat-rate pricing charges a single, fixed amount for a product or service. Customers know exactly what they'll pay each month or year, regardless of how much they use it.

Usage-based pricing, sometimes called metered billing, ties cost directly to how much the customer consumes. This could be based on API calls, storage, active users, or minutes used. Here are the pros and cons of each.

Flat-rate pricing: Pros and cons

Pros:

• Revenue is predictable, making it easier to forecast and plan budgets.
• Billing is simple and clear, which reduces disputes and support requests.
• Customers appreciate knowing what to expect, especially smaller teams.
  

Cons:

• Heavy users may get more value than they pay for, hurting margins.
• Light users may churn faster if they feel they’re not using what they paid for.
• The model can cap revenue growth unless upgrades are aggressively packaged.

Usage-based pricing: Pros and cons

Pros:

• Customers pay based on value received, making pricing feel fair and aligned.
• The model scales with customer growth, unlocking higher revenue potential.
• It works well for infrastructure-heavy tools or AI-powered services with variable usage.

Cons:

• Revenue becomes less predictable, which makes planning harder.
• Customers may hesitate to use the product due to cost uncertainty.
• Accurate metering and real-time billing require serious system support.

Why some SaaS companies combine both

Many modern SaaS companies use a hybrid model. They charge a flat monthly fee for baseline access and layer usage-based charges on top. This gives customers stability while allowing companies to scale revenue with increased product engagement.

It also makes it easier to create recurring revenue with a subscription app while still aligning pricing with customer growth.

How Orb supports subscription revenue management

Flat-rate pricing creates predictability, but scaling it demands more than a basic billing engine. Orb gives SaaS and GenAI companies the tools to manage flat-rate pricing while unlocking the flexibility to evolve toward hybrid and usage-based models as their business grows.

Here’s how Orb helps you manage flat-rate billing today and prepare for what comes next:

• Price with clarity, adapt with speed: Orb Simulations uses your historical data to simulate how different pricing models affect your revenue, without requiring engineering or complex spreadsheets. Use real historical usage to model the impact, preview revenue shifts, and refine strategy before changes go live.
• Bill flat-rate or hybrid, without tradeoffs: With Orb RevGraph, usage data is decoupled from pricing logic, so invoices remain accurate and up-to-date as you evolve your pricing plans.
• Track value beyond the flat fee: With Orb’s customer-level dashboards and built-in analytics, you can monitor adoption, understand engagement, and make better decisions about packaging and pricing.
• Connect pricing to revenue, not just systems: Orb integrates directly with your financial systems. Tools like Orb Reporting and Orb Invoicing offer support for monthly revenue recognition, audit trails, and usage-based accounting, giving finance teams exactly what they need to report accurately and operate with confidence.
• Grow with an expert partner: Orb provides expert guidance at every step, from dedicated onboarding to pricing reviews and data modeling. Orb helps teams navigate pricing changes with less guesswork and more insight.

Ready to bring precision to your flat-rate pricing and scale beyond it? Explore Orb’s flexible pricing tiers to find the right fit for your growth stage, product strategy, and monetization roadmap.

FAQs

How do SaaS companies forecast recurring revenue?

They forecast recurring revenue by modeling MRR, ARR, churn, expansion, and contraction. Historical data, product usage trends, and customer segmentation are also used to improve accuracy.

What is ASC 606, and why does it matter?

ASC 606 is the accounting standard that governs how and when SaaS companies recognize revenue. It provides consistency in reporting by requiring revenue to be recognized as performance obligations are satisfied.

How does usage-based pricing affect subscription revenue?

Usage-based pricing ties revenue to how much customers actually use the product, making revenue more variable and harder to predict. While it can increase LTV and scale with customer growth, it requires accurate tracking and metering.

What’s the difference between MRR and ARR?

MRR tracks recurring revenue earned each month, while ARR represents the yearly equivalent. Both help SaaS companies monitor growth, churn, and forecast revenue. MRR is more granular, whereas ARR gives a broader view.

Can you mix flat-rate and usage-based billing?

Yes, many SaaS companies use a hybrid model that combines flat-rate pricing with usage-based charges. This course of action offers predictable base revenue while capturing additional value from customer growth or feature usage. It balances stability with scalability.