SaaS Revenue Model

This simple ARR forecast template is ideal for when you want to forecast your revenue based on the health of your customers. We designed it for companies with a subscription service revenue model.

To calculate your ARR forecast, this model uses a list of your existing customers, the current annual subscription amount, the customer terms and overall customer health. In turn, the template provides you with a simple recurring revenue projection.

This new recurring revenue projection then becomes your new top-line forecast, which means you'll have a strong idea of where the business is headed.

We designed this model to calculate each account's chance of expansion, contraction and churn. Color-coded flags (green, yellow or red) give you quick and easy at-a-glance information.

A few more details:

• The account health drivers table calculates the weighted average of the different health ratings (i.e., 68 of 80 accounts are green, so green health has an 85% weighting).
• We input assumptions for churn, expansion, and contraction (sheet: data, column I).
• The starting MRR value on the data tab includes new sales as part of its calculation (i.e., new sales revenue are including in starting MRR the month after their term starts).
• The starting MRR value on the data tab includes churn as part of its calculation (i.e., new sales revenue are including in starting MRR the month after their term starts).

The end result is a projection of recurring revenue of your subscription business that can then be used to drive sales to a forecast that is based on clear metrics.

One of the best ways you can capitalize on opportunity and mitigate risk is to practice proactive future vision. Consistently looking at what you expect to happen and making the appropriate adjustments will keep you on track to meet—or surpass—your goals.

It’s in the name! SaaS (software-as-a-service) revenue is generated from a subscription pricing model. Many SaaS companies will have products and tiers and then vary their pricing per account based on features, data usage, user licenses, or integrations. It’s also common for companies who have subscription products to generate revenue from non-subscription sources, such as consulting and professional services.

Additionally, leveraging a subscription revenue model not only provides a steady and predictable income stream for SaaS businesses but also helps build long-term relationships with customers. The recurring payments allow companies to scale efficiently while focusing on customer retention and satisfaction.

The SaaS revenue model is a software delivery system where customers pay recurring fees at set intervals to access software instead of purchasing a one-time license. SaaS companies typically host the software and all of its data in the cloud and charge users using tiered pricing plans.

As a result, customers always have access to the most updated version of the software—and don’t have to worry about manual updates or expensive upfront costs.

The SaaS revenue model has specific components that shape how businesses generate and sustain revenue. Consider the following SaaS business model examples as you decide which components are best for your company.

SaaS pricing models

Choosing the right SaaS pricing model is key to aligning your revenue strategy with customer expectations and profitability goals. These are some of the most popular SaaS pricing models.

Tiered pricing: A tiered pricing model allows companies to offer multiple plans at different price points. Each plan provides a set of features tailored to varying customer needs and budgets. Customers can choose the plan that fits their usage or budget, and then upgrade as their needs grow.

Flat-rate pricing: With flat-rate pricing, you offer a single product with a single set of features at a single price, regardless of usage or number of users. This straightforward model works best for simple, all-in-one SaaS products aimed at a clearly defined target audience.

Usage-based pricing: Also known as pay-as-you-go pricing, the usage-based pricing model charges customers based on how much they use the product. They pay for metrics like the number of emails sent, API calls made, or gigabytes of data used. It’s ideal for cloud services or tools with unpredictable usage patterns.

Per-user pricing: One of the most popular SaaS pricing models, per-user pricing charges customers based on the number of users or licenses they need. The model works well for collaboration tools and platforms with a user-based structure. It’s simple to calculate and scales directly with the customer’s team size.

Active user pricing: With per-user pricing, new customers might pay for hundreds of seats up-front with no guarantee they’ll actually use them all. Enter active user pricing: This model encourages prospects to sign up as many users as possible, but with the understanding they’ll only be billed for the seats in use by their employees.

Per-feature pricing: Per-feature pricing is one of the more flexible SaaS pricing models. Customers are only charged for the features they access, giving them more control over their spending. This model is great for products with modular functionality, where users have a variety of different needs.

Transaction-fee pricing: The transaction-fee pricing model is exactly how it sounds—customers pay a fee for each transaction processed through the platform. Fees are either a percentage of the transaction or a flat rate. This model is commonly used in e-commerce or payment processing platforms.

Freemium pricing: Freemium pricing provides a basic version of the software for free, with the option to upgrade for advanced features. Free tiers are limited in scope in order to entice users to upgrade—usually, by hiding certain features behind a paywall or limiting daily usage until you subscribe to a paid package. It’s a low-stakes way to attract users and helps build brand awareness.

Avoiding these common missteps ensures that your SaaS revenue model template remains a reliable compass that steers your business toward sustained growth.

Ignoring variable costs

Overlooking variable costs, such as customer acquisition expenses or server costs, can result in inaccurate financial projections. Ensure all aspects of your expenditures are accounted for in your template.

For example, how much does each customer acquisition cost versus what they’ll pay you? How much cloud storage will be required to accommodate an increase in customers and/or an increase in customer usage?

Underestimating churn rates

Revenue churn—the percentage of customers who cancel their subscriptions—is one of the most important SaaS KPIs to keep tabs on. A miscalculation in churn rates can throw off your revenue forecasts. Be realistic and factor in potential customer attrition to maintain a more accurate projection of your subscription-based revenue.

Overlooking seasonal trends

Seasonality refers to predictable patterns in data that tend to repeat at specific times every year. Forgetting to incorporate seasonal trends can lead to skewed predictions. Analyze historical data and adjust your template to accommodate any recurring patterns in your SaaS revenue. (Our free SaaS revenue model template makes it easier to compare periods, spot seasonal patterns, and boost the accuracy of your financial forecasting models.)

Disregarding customer segmentation

Treating all customers alike in your template might mask valuable insights. It can also dilute user experience and impact customer retention. Implement customer segmentation to tailor your revenue model, considering different subscription tiers, pricing plans, and customer demographics.