“SaaS,” “subscription” and “recurring revenue” are often used synonymously when describing business operating practices. While there is some overlap between the three, each describes a different system.
SaaS, subscription and recurring revenue are all business models you can leverage, but while subscription and recurring revenue refer to how a company obtains revenue in exchange for its offering, SaaS describes how a company’s product is structured.
SaaS vs. Subscription vs. Recurring Revenue
Understanding the differences between the three starts with knowing the definition of each term.
- SaaS (software as a service): A business model in which a cloud-based software"based on one set of common code and data definitions that is consumed in a one-to-many model” is delivered either on a pay-for-use basis or as a subscription. The hallmark of a SaaS product is that it can be leased as opposed to bought on-prem.
- Subscription: A business model in which “a customer must pay a recurring price at regular intervals for access to a product.” Subscription is a much older business model that has its origins in 17th century publishing. Magazine and newspaper publishers still use the model, but it has also been adopted by other industries like utilities and software.
- Recurring revenue: A business model where the products or services are offered in a way that generates revenue that is “predictable, stable and can be counted on to occur at regular intervals going forward with a relatively high degree of certainty”
There are many overlaps between the three business types, but they’re not identical.
A subscription business model is a type of recurring revenue model, but recurring revenue also encompasses business types like long-term contracts and retainer services that wouldn’t necessarily be subscriptions. Similarly, many SaaS companies are also subscription companies, but SaaS companies can also be pay-as-you-go or one-time-use.
For example, a cloud-based tax filing software that’s pricing is based on the specifics of a user’s taxes that year would be a SaaS product but not a subscription, and whether or not it’d have recurring revenue would depend on if it re-marketed to customers to try and get them to leverage their product year after year.
On the other hand, a point of sales system could be SaaS, subscription and recurring revenue by charging a subscription for use of its software and a transaction fee on each purchase. But, if it chose to offer the software for free and just take transaction fees then it’d be SaaS and recurring revenue, but not subscription.
The differences between each business model is clearly manifested in how each one operates.
Recurring revenue businesses generate repeated revenue from their customers through renewals or long contracts.
While customers will pay for a product or service period after period, the amount they pay and what they receive can shift. For example, utility companies like water departments charge customers on a monthly basis, but the price can fluctuate depending on how much water is used. Similarly, a retainer service like a lawyer may charge the same price for a given amount of hours each month but how those hours are leveraged can change.
That flexibility means that revenue is less predictable and creates more room for negotiation during the sales process.
Additionally, because resource requirements can change period to period, recurring revenue businesses can be less scalable than SaaS and subscription companies.
Subscription businesses generate recurring revenue through auto-renewals and contracts.
The price customers pay and the product or service they receive are nearly identical period to period, and subscription offerings are both scalable and replicable.
For example, a gym membership is a type of subscription where users pay a monthly price for access to a gym’s facilities, equipment and programming. What’s available to the customer every period stays consistent and the same membership can be sold to as many people as the gym can safely fit.
SaaS businesses can generate revenue using subscriptions, recurring revenue or pay-per-use.
The product offering is identical customer-to-customer because it’s a software, and it’s infinitely scalable since the only resource requirement is server space.
What Companies Can Learn from the SaaS Model
The reason subscription and recurring revenue have become synonymous with SaaS is because of how much value SaaS companies have gained through using those models.
“There is a level of data-driven rigor within best-in-class SaaS businesses in the way they scale and in the way they operate that is different from a traditional recurring revenue business,” Vipul says.
By the nature of their product, SaaS companies have more access to customer data, and they utilize that data to inform their product offering and marketing and sales efforts.
“There are data-driven motions and operational motions both of which have been refined within SaaS businesses because they have to scale that way,” Vipul says.
SaaS companies as a whole have figured out how to:
- Affordably serve smaller businesses
- Offer simplified, well-packaged products
- Access and leverage customer data
- Be programmatic and process-driven about everything across their entire operations from marketing to customer success.
Similar principles and concepts can be applied to non-SaaS companies.
Take a look at your customers and hone in on what the value you provide is that keeps them working with you. What does the initial experience need to look like for a customer to be retained? What is the core value you provide to your customers and how can you make it as replicable as possible?
On top of that, Vipul says the strength of many SaaS products is that they offer something companies would never want to insource.
If you can package your product or service in a way that makes it replicable while still providing your customers with value that they couldn’t obtain on their own, your company will be more scalable, and your revenue will be more predictable.