What is recurring billing? 7 Examples for SaaS businesses

The SaaS industry is booming. In fact, Gartner predicts that SaaS spending will grow 20% to a total of $247.2 billion in 2024. One of the key drivers of this growth? Recurring billing.

In this article, we'll explore the ins and outs of recurring billing in SaaS. We'll define what it is, why it's so important, and how it can benefit your business.

You'll also learn:

• The key advantages of recurring billing for SaaS providers
• 7 popular recurring subscription billing models and how they work
• Real-world examples of recurring billing in action
• How to choose the right billing model for your SaaS business

Let’s get started by explaining what recurring billing actually means.

What is recurring billing?

Recurring billing is the backbone of many modern businesses, especially in SaaS. It's a system where a business automatically charges customers for goods or services on a pre-defined schedule.

Think of it as setting up a payment that takes care of itself – monthly, quarterly, or even annually.

Recurring billing meaning

The recurring billing meaning is pretty straightforward. It simply refers to an automated process of charging customers regularly.

Recurring billing payment

Similarly, the recurring payment meaning focuses on the payment itself. Funds are automatically deducted from the customer’s account.

To make this happen, the business needs to get the customer's payment information and permission upfront. Once that's in place, the recurring charges happen without needing further approval each time, making it convenient and predictable

Recurring billing in SaaS

In SaaS, recurring billing is often tied to subscriptions. Customers subscribe to software, gaining access to features and updates, and their accounts are billed automatically.

It's a win-win for both parties involved. Customers get seamless access to the software, and businesses enjoy a steady stream of revenue.

Advantages of using recurring billing for SaaS companies

Recurring billing has become incredibly popular in SaaS. Six years ago, a report by Global Banking & Finance said that 70% of business leaders think subscription business models will be key in the years to come. This has been reflected in the way the SaaS market has evolved.

There’s a good reason for that. Recurring billing offers many benefits that traditional, one-time payments just can't match. Let's break down why it's so beneficial for SaaS companies:

• Predictable revenue: Imagine knowing roughly how much revenue is being brought in each month. That's the power of recurring billing. It creates a stable, predictable revenue stream, making it easier to forecast, plan, and invest in growth.
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• Less churn: Recurring subscription billing often means customers are in it for the long haul. They sign up once and keep receiving value, reducing the likelihood they'll jump ship. You’re building a loyal user base that sticks around month after month.
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• Better cash flow: With recurring billing, the money flows in steadily. This consistent cash flow makes it easier to manage expenses, invest in new features, and keep the business running. It's like having a financial engine that runs smoothly and reliably.
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• Automated efficiency: Recurring billing automates much of the billing process, freeing up time and resources. Think of all the hours saved that can be used to build solutions and delight customers.
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• Scalability: As your SaaS business grows, recurring billing grows with it. It can easily handle a surge of new customers without adding a ton of extra work. The goal is to have a billing system that scales with you, no matter how big you get.

Top 7 recurring subscription billing models

Different billing models cater to different needs and business goals. We’ll now explore seven of the most popular recurring subscription billing models used in SaaS. Let’s kick off our list with flat-rate billing:

1. Flat-rate billing

Flat-rate billing is the epitome of simplicity. It involves charging a single, fixed price for access to your software. Customers pay one recurring fee and get access to all features and functionality.

This model works well for SaaS providers with a clearly defined product offering and a target audience that values predictability. It's particularly useful when the value proposition is consistent across different types of users.

Example

A project management tool offers a single monthly subscription fee of $20 per user. Paying this fee gives users access to all the features, from task management and collaboration tools to reporting and integrations.

Advantages:

• Easy to understand and implement
• Predictable recurring revenue
• Simple pricing structure can attract customers

Disadvantages:

• May not be suitable for businesses with varying levels of service
• Can be challenging to scale pricing as the product evolves
• Teams may leave money on the table if some users are willing to pay more for premium features

2. Tiered billing

Tiered billing offers different subscription levels with varying features and pricing.Each tier caters to different needs and budgets. This way, you’re allowing customers to choose the plan that best fits them.

This model is ideal for SaaS providers with a diverse feature set and a customer base with varying needs and budgets. It allows you to cater to a wider audience and capture more revenue by offering premium features at a higher price point.

Example

A social media management tool offers three tiers:

• Basic ($50/month): It includes scheduling, basic analytics, and community management.
• Pro ($100/month): This tier adds advanced analytics, competitor analysis, and custom reporting.
• Enterprise ($250/month): The highest tier includes everything in Pro, plus dedicated account management and priority support.

Advantages:

• Caters to a wider range of customers
• Allows for upselling and revenue expansion
• Provides flexibility to offer different levels of service

Disadvantages:

• Can be more complex to manage than flat-rate billing
• Requires careful consideration of features for each tier
• May lead to customer confusion if tiers are not clearly differentiated

3. Usage-based billing

Usage-based billing charges customers based on their consumption of the service. Basically, the more they use, the more they pay.

This model is well-suited for SaaS providers whose value proposition is directly tied to usage. Think cloud storage, email marketing platforms, or API providers. It aligns costs with consumption and can be very attractive to customers who only want to pay for what they use.

Example

A cloud storage service charges $0.10 per GB used per month. Customers only pay for the storage they actually consume, making it a cost-effective option for those with fluctuating storage needs.

Advantages:

• Fair and transparent pricing model
• Encourages efficient use of resources
• Can be highly scalable as usage grows

Disadvantages:

• Can be unpredictable for both the customer and the provider
• Requires accurate usage tracking and metering capabilities
• May not be suitable for all types of SaaS products

4. Per-user/seat billing

Per-user billing charges customers based on how many users access the software. Each user "seat" incurs a recurring fee.

This model is common in SaaS products designed for teams and collaboration. Think project management tools, CRM systems, and communication platforms. The underlying principle for monetization is that it’s fair to charge based on the number of people benefiting from the software.

Example

A CRM tool charges $50 per user per month. A team of 10 sales representatives would pay a total of $500 per month to access the CRM.

Advantages:

• Easy to understand and calculate costs
• Scales well with team size
• Aligns costs with the number of users

Disadvantages:

• Can become expensive for large teams
• May discourage adding new users even if they would benefit from the software
• Requires a system to manage user accounts and access

5. Freemium-to-paid billing

Freemium-to-paid billing offers a free version of the solution with limited features or usage. Think of it like a free trial that never expires. Customers can upgrade to a paid plan for access to premium features or increased usage limits.

This model is great for SaaS providers looking to attract a large user base and convert free users into paying customers. It allows users to experience the value of the software before committing to a paid plan.

Example

A video conferencing tool offers free basic meetings with up to 10 participants and a 40-minute time limit. Users can upgrade to a paid plan for larger meetings, longer durations, and additional features like recording and transcription.

Advantages:

• Large user base and potential for viral growth
• Allows users to experience the product before paying
• Provides a natural pathway for upselling

Disadvantages:

• Requires a compelling free offering to attract users
• Conversion rates from free to paid can be low
• Balancing free and paid features can be challenging

6. Hybrid billing

Hybrid billing combines elements of different billing models. This approach allows for more flexibility and customization in pricing.

This model is suitable for SaaS providers with complex offerings or those who want to cater to specific customer needs. It allows for a more tailored pricing structure that can better reflect the value provided.

Example

A marketing automation platform offers a base monthly fee plus extra charges for exceeding email sending limits or for add-on features like landing page builders or advanced reporting.

Advantages:

• Highly flexible and customizable
• Can cater to specific customer needs
• Allows for a more nuanced pricing strategy

Disadvantages:

• Can be complex to manage and explain to customers
• Requires careful consideration of the different billing components
• May lead to customer confusion if not implemented clearly

7. Annual/upfront billing

Annual or upfront billing involves charging customers for an entire year of service upfront. Think of it like paying your rent a year in advance. It often includes a considerable discount compared to monthly billing.

This model is ideal for SaaS providers looking to improve cash flow and reduce churn. It encourages long-term commitments from customers and provides a predictable revenue stream.

Example

An online course platform offers a 15% discount for customers who pay annually instead of monthly. This incentivizes users to commit to a full year and provides the platform with upfront revenue.

Advantages:

• Improved cash flow and financial predictability
• Reduced churn and increased customer lifetime value
• Can offer significant discounts to attract customers

Disadvantages:

• Higher barrier to entry for some customers
• Requires more upfront sales effort to close annual deals
• May not be suitable for all types of SaaS products

How Orb can help build your very own custom billing model

We've shared what recurring billing is in the SaaS world and why it's so important.

However, choosing the right billing model is only half the battle. You also need a billing platform that can support your chosen strategy, whether it's recurring billing, usage-based billing, or something completely unique.

That's where Orb comes into the picture.

Orb is a done-for-you billing platform. It gives you the flexibility to design and implement your ideal billing model, no matter how complex or unconventional it may be. Here's how Orb helps you build a custom billing model that aligns with your business:

• Track every billable event: Orb's robust tracking infrastructure confirms that every billable action is captured accurately. We give you a single source of truth for your billing data. No more revenue leakage or billing disputes.
  
  
• Design flexible pricing structures: Orb's plan versioning features allow you to create and manage a wide range of pricing models. We cover everything from simple flat subscriptions to intricate usage-based tiers. You can even experiment with different pricing strategies and adjust them on the fly as your business evolves.
  
  
• Make data-driven decisions: Orb provides detailed reports that offer key insights into customer behavior and revenue trends. This data allows you to make informed decisions about pricing, product development, and customer success initiatives.
  
  
• Automate your billing workflows: Eliminate manual errors and simplify your operations. Orb integrates with popular data warehouses and accounting software, automating your billing processes and reducing the risk of costly mistakes.
  
  
• Tailor your billing to your exact needs: Orb's intuitive interface and custom SQL editor give you the power to define your own usage metrics and tailor your pricing models to perfectly match your unique business requirements.

Ready to break free from cookie-cutter billing solutions and build a billing model that truly reflects the value you provide?

Discover how we can help you achieve your billing and revenue goals. Consult our flexible pricing options to find a plan that works for your business.