Looking for a subscription revenue model template? Here we’ll discuss everything you need to know to craft one for yourself.
Trust us; it’s not rocket science.
So without further ado, let’s get started with template creation.
What is a Subscription Revenue Model?
With a subscription revenue model, SaaS businesses generate recurring revenue by charging customers at regular intervals to avail of products/services.
The subscription revenue model is built to help enterprises establish long-term relationships with their customers.
This revenue model is popular and successful because it benefits both companies and customers. Companies enjoy revenue assurance and deeper relationships with their customers, allowing them to scale confidently.
Whereas the customers enjoy the convenience of auto-renewals and a higher value proposition. Additionally, it gives them flexibility with their contracts for subscription.
Moreover, companies can offer products/services at a lower cost when they can save on customer acquisition costs.
Deciding on the subscription fees and forecasting revenues requires you to create a subscription revenue model.
Here we’ll discuss creating a subscription revenue model template with customer churn calculation.
How to Create Subscription Revenue Model Template for SaaS
The rise of SaaS businesses has triggered the growth of subscription revenue models in the B2B environment.
However, creating a subscription revenue model template for SaaS businesses requires you to forecast cash flow and customer acquisitions.
Hence, to create a subscription revenue model template for your SaaS business, let’s begin with a customer acquisition forecast.
1. Forecast Customer Acquisition
Forecasting the number of customers you might get is crucial for every subscription revenue model template. You can start by putting the expected number of subscribers for every month in a spreadsheet.
You can even break down the subscribers’ monthly count into the following categories in your template:
- Retained Customers: Customers who renew their contract and will continue to avail of your services.
- New Customers: Acquired customers in a given period.
- Churned Customers: Customers who terminate or don’t renew their contracts and stop using your services.
- Upgrades/Downgrades: Subscribers who have switched among your paid plans (assuming that your pricing plans have more than one option).
In your subscription financial model template, you should also include customers using the free version of your services and not just the versions you’re monetizing.
Moreover, if your subscription model offers different pricing plans, you can split your customer acquisition column to include all of them.
2. Forecast Customer Churn
In order to calculate the correct value of total customers every month, you need to forecast the customer churn along with the new customer acquisition rate.
Customer churn rate measures the number of customers who have stopped doing business with you and stopped using your services.
To calculate your customer churn rate, just sum up the number of users that unsubscribed in a given period and divide that figure by the total number of users in that particular period. Multiply the result with 100 to get the customer churn rate.
To ensure the success of your subscription revenue model, you can track customer behavior using the following subscription metrics:
- Inactive Users to Unsubscribers Rate: You can include those users that haven’t availed of your services during the given period.
- Monthly Churn Rate: The percentage of customers that churned for a given month.
- Sign-Up Retention Rate: Calculated as the number of customers that stayed or renewed their subscription after their sign-up or trial period.
Although these three subscription metrics correspond to customer behavior, you have to track them separately in your template.
The pre and post-sign-up behavior differ in intensity, whereas inactive users count is very useful to predict customer churn.
With ample customer behavior data, you can calculate inactive users to unsubscribers' rates and other intelligent indicators that can help you develop a foolproof subscription revenue model template.
3. Forecast Subscription Revenues
Not every user is a paying customer. And given that you offer several pricing contracts, it isn’t possible to calculate or predict total revenue in your template by just multiplying the subscription rates with the total customer count.
You need to categorize your customers as per their subscription plans and then multiply their counts with their related subscription fees.
If you’re planning to reduce your subscription prices in the future or modify your offerings on them, include that in your template by putting a separate column for discounts and subtracting it from the subscription rates.
This would help you figure out the potential monthly revenue generation from the paying customers.
4. Include Direct Customer Costs
You need to include your expenses in the subscription revenue model template too.
The customer cost and acquisition cost calculation should be linked to the subscriber prediction and reflect the cost of providing them with the services.
You can divide the customer expenses into two sections in the template:
One-time Customer Cost: Costs that occur once, like customer acquisition cost, signing-up, and verification costs.
Recurring Customer Expenses: Here, you need to include the expenses directly related to your service to customers like hosting, operating expenses, revenue share, licensing fees, third-party integration fees, etc.
The recurring costs can be further divided into fixed and per-customer expenses.
You’d need help from your finance team to get this step right. They can calculate the direct customer costs and further break them down into fixed and variable ones.
5. Calculate Customer Lifetime Value
With all the data you’ve gathered for your subscription revenue model, it is now easy for you to calculate the customer lifetime value (CLV), one of the most important SaaS metrics.
You can use the customer churn and financial business models to calculate how much an average user will contribute to your cash flow.
If it sounds complex to you, here is how you can calculate your customer lifetime value in your template:
- Calculate customer lifetime using post-sign-up retention rate and monthly churn. For instance, if your post-sign-up retention rate is 80% and monthly churn is 10% this is how you can calculate your customer lifetime:
0.80 ÷ 0.10 = 8 Months
For this hypothetical situation, the customer lifetime is eight months. The sign-up retention rate is considered for the first month, whereas only the customer churn rate is enough for the rest of the period.
- Calculate gross customer lifetime value by multiplying the customer lifetime with relevant subscription fees. Assuming that the organization didn’t charge any fee for the first month (the trial period), the gross customer lifetime value will be calculated for 7 months.
For the previous hypothetical situation the gross customer lifetime value is: [(80 users) x (7 months) x ($200 monthly subscription fees)] / 100 (total users) = $1120
- Reduce direct customer cost (per user) from the gross customer lifetime value to get the net value.
6. Add General Expenditures
You can also include general and operating expense forecasts to make your subscription revenue model template more intelligent.
Get the expenditure information from your cash flow and income statement showcased in your financial projections.
7. Summarize Your Subscription Model
You’ll be continuously using and adding information to your subscription revenue model template.
Hence, it’s mindful to include a summary where you can compare your current month's revenue stream with your projections.
Also, don’t forget to add insightful graphs to the template, summarizing your financial plans for the upcoming months.
FAQs1. What is the formula for the revenue of a subscription-based SaaS business?
To calculate net revenue in a subscription-based revenue model every month, you can use the following formula:
[(customers subscribing to your services) x (subscription fee of every customer)] - total direct customer cost2. How does a B2B subscription revenue model function?
Generally, B2B subscription revenue models are based on customers subscribing to your services for a recurring cost every month/year.
However, the functionality of a subscription revenue model in a B2B environment depends on the contract the business sign with its customers.3. What is a subscription-based revenue model?
With a subscription revenue model, SaaS businesses generate recurring revenue by charging customers at regular intervals to avail of products/services.4. What are the three essential steps critical in developing a subscription-based revenue model?
The three most crucial elements of every subscription-based revenue model are:
- Forecasting customer acquisition and churn
- Calculating direct customer costs, including discounts
- Calculating customer lifetime value
5. How do you forecast subscription revenue?
Forecasting subscription revenue is not rocket science.
Here are the steps you can follow to forecast your subscription-based revenue model:
- Forecast customer acquisition
- Forecast customer churn
- Forecast subscription revenues
- Include direct customer costs in your revenue model template
- Calculate customer lifetime value
- Summarize your subscription revenue model
Managing a subscription-based SaaS business isn’t a cakewalk. You need to put financial and marketing brains together to roll out the best subscription revenue models.
In this post, we’ve discussed how to create a subscription revenue model template.
But, if you need help in managing your entire cycle of B2B customer subscriptions without managing a template, feel free to contact Younium.
You can book a free demo of our platform and embark on your SaaS journey while ensuring that you’ve got all the metrics under your watch.