SaaS Recurring Revenue Model Explained
SaaS recurring revenue model is the primary way of operation of any subscription-based software-as-service provider. Analysis of recurring revenue allows a SaaS or any other company to detect the key trends in the business’s lifecycle. Recurring revenue management largely relies on the results of this analysis. Analytical data allows the management to finetune the SaaS company’s operations in order to maximize the value of existing subscriptions, attract new customers, and respond to existing challenges.
In this article we will describe the SaaS recurring revenue model and its main components.
What is Recurring Revenue Business Model for SaaS?
Many SaaS companies get their revenues from recurring payments. That is, customers pay for products and services on a regular basis, according to specific subscription plans. A subscription plan is, essentially, a commitment of the subscriber to pay fixed amounts at regular intervals. Examples of recurring payments include utility bills, as well as payments for swimming pool attendance or Internet access. A SaaS company, servicing a network of fitness centers is a typical candidate for SaaS recurring revenue model implementation.
So, what is recurring revenue?
Recurring revenue is the value of all subscriptions normalized by the length of a time interval. Usually, it is a month or a year. SaaS and other subscription-based companies often use monthly recurring revenue to define customer value, expected revenues and selling prices.
Businesses with recurring revenue need to analyze two key aspects. Technical aspect includes the factors, related to payment processing. Business aspect includes factors, related to recurring billing process.
Now let us briefly describe both these aspects.
SaaS Recurring Revenue Model: Billing-related Factors
Modern recurring revenue models rest on four major factors. Three are positive and one is negative.
- Expansion monthly recurring revenue is the value of subscription plan upgrades.
2. Reactivation monthly recurring revenue is the value of reactivated subscriber accounts.
3. New monthly recurring revenue is the value brought by new customers.
4. Churn monthly recurring revenue is the value of downgraded and canceled subscriptions.
While revenue growth is induced by the first three components, the fourth one is no less important.
Businesses with recurring revenue should pay attention at all four factors and analyze changes within each of them. Thus, they will be able to detect the strong and weak points of the chosen recurring revenue models and strategies. Moreover, they will see the reasons behind customer churn and take steps to prevent it.
SaaS Recurring Revenue Model: Processing-related Factors
This group of factors depends on the reasons and numbers (absolute and relative) of transaction declines.
Declines in recurring revenue model tend to happen over and over again, often for the same reason. Common reasons are as follows.
- Insufficient funds. In such cases transactions should be reattempted using decline recycling logic.
- Invalid card number or expiration date. This often happens when the card stored on file expires. For such cases recurring revenue SaaS companies should have account updater logic in place.
- Incorrect formatting of transaction. For instance, many transactions are declined simply because transaction description format does not include “recurring” flag.
If analysis indicates that there are some common reasons behind transaction declines, then the company might be able to deal with issues, causing these declines.
Analysis of Declined Transactions
So, what information regarding the nature and common reasons of declines can we obtain from analysis?
- Most common types of declines.
- Types of declined transaction which require reattempting.
- Common cases when the company has to verify or change cardholder details and notify customers about it.
- Typical scenarios when the company needs to apply account updater logic.
As a result, the company will be able to reduce transaction decline rate and increase revenue from existing subscriptions.
Processing costs
Transaction pricing is one of the most important factors when choosing a payment gateway or processor. It also applies to SaaS recurring revenue model. Small-sized merchants, usually, have to accept processing terms (and fixed prices) that large providers offer them. At the same time, for larger SaaS companies, relying on cost plus model, it makes sense to analyze the amounts and components of interchange fees they pay. For instance, processing of some recurring payment types is too expensive. In such cases it might be reasonable to persuade customers to switch to other payment types.
Conclusion
A SaaS company that needs to ensure efficient recurring revenue management for itself and its customers has to analyze both business and technical aspects of the process. Understanding the most common reasons of transaction declines, account freezes, and customer churn is the cornerstone of any effective SaaS recurring revenue model. Both SaaS companies and recurring revenue businesses represent important segments of our customers. Our flagship product, UniPay Gateway, even features a special solution (UniBill) for smooth processing of recurring payments. So, you are welcome to get in touch with our experts at UniPay Gateway and find out how SaaS recurring revenue model can work for your specific business case.
For more information on various aspects of recurring billing, check out our respective article series on Paylosophy.