What is a subscription-based business model?

A subscription-based business model charges customers recurring fees for ongoing access to your product or service. Here's when it works, which types to choose, and how to implement it without billing headaches.

What a subscription-based business model really means

A subscription‑based business model is a pricing approach where customers pay a recurring fee (monthly, quarterly, or annually) to access a product or service.

The model suits SaaS, digital media, membership communities, and many subscription-based services where access matters more than ownership.

Do you know how much the subscription economy is growing? According to a recent study, subscription economy revenue was about $593B in 2024, and they project it to approach $1T by 2028. It should come as no surprise that most SaaS products nowadays work with a subscription-based business model.

More importantly, should you use it in your SaaS business too?

Let’s look at what to consider and the best ways to implement one.

Why use a subscription-based business model?

You should use a subscription-based business model if you want to get benefits that traditional models simply can't match:

• Predictable revenue: Recurring payments improve revenue visibility and planning. Teams can forecast hiring, roadmap, and cash needs around monthly recurring revenue (MRR) and retention.
• Closer relationships: Frequent product touchpoints support engagement and loyalty. Ongoing value delivery lowers churn when the experience stays strong.
• Upsell paths: Clear plan tiers create natural upgrade routes as customers grow.
• Lower friction to try: Entry pricing reduces upfront commitment, especially for subscription model businesses that gate value by access or usage.

These points are all the ways subscription-based business models are changing how businesses work with their customers.

Note: Want the mechanics behind recurring revenue and invoicing? Read our guide to subscription billing.

Is a subscription-based business right for your SaaS company?

Use this quick fit‑check to see if a subscription-based business is right for you:

• Usage pattern: Do customers need ongoing access or frequent replenishment?
• Value cadence: Can you ship value often (features, content, capacity, or service)?‍
• Retention engine: Do you have onboarding, support, and lifecycle messaging in place?‍
• Cancellation clarity: Can customers pause or cancel easily and compliantly in target markets?

Types of subscription-based models

Subscription-based models are far from a one-size-fits-all solution. They come in various flavors, each catering to different business needs and customer preferences.Common types of subscription models include freemium, tiered pricing, and pay‑as‑you‑go.

Let's dive deeper into three popular types.

1. The freemium model

The freemium model is like offering a delicious appetizer before the main course. It provides a basic version of a product or service for free, allowing users to experience its value firsthand.

The goal is to hook them on the taste and entice them to upgrade to a paid subscription for the full feast of features and benefits. Let’s weigh out the pros and cons.

Pros

• Widening the net: By removing the initial cost barrier, the freemium model casts a wider net. It's designed to attract a larger pool of potential customers who might hesitate to commit to a paid subscription upfront.
• Word-of-mouth: Satisfied users of the free version often become enthusiastic advocates. They spread the word about your SaaS product and help organically grow your customer base.
• Risk-free trial: The freemium model allows potential customers to "try before they buy."This reduces their perceived risk and increases the likelihood of conversion.

Cons

• The conversion conundrum: Attracting users can be easy, but converting them into paying customers might not be. It requires a well-crafted strategy to show the added value of the premium version and gently nudge users toward an upgrade.
• Balancing act: Striking the right balance can be challenging. You need to walk the tightrope between a free version that attracts users and a premium version that offers enough value to justify the cost.

2. Tiered pricing model

The tiered pricing model offers multiple subscription levels. Each has its own set of features, content, or usage limits. This approach acknowledges that customers have diverse needs and allows them to select the plan that suits them. Here are some pros and cons to consider.

Pros

• Broad appeal: By catering to a wide range of needs and budgets, tiered pricing attracts a broader customer base than a single-price model.
• Upselling engine: The tiered structure provides a natural path for upselling. Customers can easily upgrade to a higher tier to access more features or benefits as their needs evolve.
• Value perception: Offering multiple tiers can enhance the perceived value of the premium tier. Thus, it makes them more attractive to users who might be willing to pay more for additional benefits.

Cons

• Complexity overload: Managing multiple tiers with different features and pricing can be complex. It requires careful planning and administration.
• Decision paralysis: Too many options can overwhelm potential customers. This could lead to decision paralysis and potentially lost sales.
• Cannibalization: Lower tiers might inadvertently cannibalize sales of higher tiers. This often happens if the price difference isn't justified by a significant difference in value.

3. Pay-as-you-go model

The pay-as-you-go model is the one that offers more freedom and flexibility to the customer.

Instead of a recurring fee, customers receive bills based on their actual product or service usage. This model appeals to those who don't need consistent access but still want the option to use the SaaS product on demand.

Let’s take a look at the pros and cons of this model.

Pros

• Cost efficiency: Users only pay for what they consume, making it an attractive option for those with fluctuating needs or those who use the product frequently.
• No strings attached: The absence of a long-term commitment appeals to users who want to avoid being locked into a recurring subscription.
• Reduced churn: Since users are not tied to a recurring payment, they are less likely to cancel the service due to lack of use.

Cons

• Revenue rollercoaster: Income can be unpredictable. It often fluctuates based on usage patterns, making financial forecasting challenging.
• Underutilization risk: Users might not fully use the product or service, resulting in lower overall revenue compared to subscription business models.

Note: Building in SaaS? Here’s a deeper walkthrough of the SaaS subscription model with real‑world patterns.

How to implement a subscription-based model

Embarking on the subscription model journey is a strategic move. However, it requires careful planning and execution. Here's a practical and quick step-by-step:

• Pick the model that matches your value: Map customer jobs to the model (access, curation, replenishment, freemium, tiered, or hybrid with usage). Choose the value metric you will meter or limit (users, projects, API calls, storage).
• Develop a pricing strategy: Balance willingness to pay with margins. Start with clear tiers and add usage where value scales. Test annual discounts to lift retention and cash flow.
• Design onboarding and lifecycle moments: Guide new users to first value fast. Add in‑product tips, email nudges, and help docs. Plan upgrades for when users hit limits.
  
  
• Handle payments and compliance: Offer common payment methods and simple cancellation. In the U.S., make sure offers and checkout align with ROSCA requirements: clear terms before billing, explicit consent, and an easy cancellation mechanism.
• Choose the right billing platform: Pick a tool that matches your plan structure, metering needs, and data accuracy requirements. See “Why Orb” below.
• Track core metrics: Define MRR (monthly recurring revenue), churn rate, LTV (lifetime value), CAC (customer acquisition cost), and payback period. Review them monthly.

Note: Evaluating gateways, retries, and dunning? Start with subscription payment processing. Before you price, compare common SaaS billing models with examples.

Challenges and solutions with subscription-based models

While subscription-based models offer a wealth of benefits, they also present their fair share of challenges. Let’s take a look at those challenges and how to overcome them.

Fighting to keep churn rates down

The dreaded churn rate is the rate at which customers decide to part ways with your service.

High churn rates can quickly drain your hard-earned revenue and stall your growth. This can happen for various reasons, such as a lack of engagement, dissatisfaction with the product or service, or simply finding a better deal elsewhere.

Solutions: Focus on strategies to keep users engaged, like offering exceptional customer support.

You can also gather feedback and improve your offerings based on what your customers truly want. Also, include as much transparency about the charges as possible in order to build trust with clients.

Consider implementing loyalty programs, exclusive perks, or personalized communication. This makes your subscribers feel valued and appreciated.

Note: Debating usage‑based vs. subscription revenue? See when usage‑based revenue wins and when it doesn’t.

Maintaining SaaS product quality

Your SaaS product must consistently deliver value to keep customers coming back for more. This means staying ahead of the curve, innovating, and adapting to changing customer needs.

Otherwise, your offering might become stale, and users might start looking for greener pastures.

Solutions: Embrace a culture of continuous improvement. Regularly gather feedback from your subscribers and use it to refine your product or service. Monitor industry trends and competitor offerings closely to ensure you're not falling behind.

Invest in research and development to stay ahead and surprise your customers with new and exciting features or benefits. Remember, the goal is to make your offering so indispensable that customers can't imagine life without it.

Adapting to market changes

Markets are dynamic, constantly evolving with new trends, technologies, and competitors. What works today might not work tomorrow.

Subscription-based businesses must be agile and adaptable, ready to pivot and evolve as the market dictates. Failure to do so can lead to irrelevance and a dwindling customer base.

Solutions: Stay informed about market trends, monitor your competitors, and be willing to experiment with new ideas. Don't be afraid to make changes to your pricing, features, or even your entire business model subscription approach if necessary.

Engage with your customers regularly, listen to their feedback, and be open to their suggestions. Remember: flexibility and adaptability are key to survival and success in the SaaS business.

Note: Need tooling to pivot faster? Compare subscription management software features and trade‑offs.

Why teams pick Orb for subscriptions and hybrid pricing

Armed with an understanding of subscription-based business models, the next step is implementation. However, setting up the technical infrastructure to support a recurring revenue model can be daunting.

Challenges like tracking customer subscriptions, managing renewals, and accurate invoicing can become overwhelming.

This is where Orbsteps in as your trusted billing tool.

Orb is a billing platform designed to simplify the complexities of subscription-based services. Here's how Orb helps your business:

• Accurate metering: Orb ingests and tracks every raw event at scale and with high accuracy. Get a full audit trail for every invoice.
• Pricing control: Orb makes it easy for anyone to define new billing metrics using SQL or a visual editor. Build new pricing plans without rewriting code.
• Separation of concerns: With Orb RevGraph, usage data is decoupled from pricing logic, so invoices remain accurate and up‑to‑date. Even as you evolve your pricing, invoices are automatically recalculated in order to remain accurate.
• Hybrid ready: Seat‑plus‑usage pricing offers a combination of predictable and scalable revenue, provided the right systems are in place.
• Plan confidently: Orb Simulations uses your historical data to simulate how different pricing models affect your revenue. Use Orb Simulations to test and predict the impact of pricing changes risk‑free before deploying them live.
• Scale safely: Its scalable API ingests high‑volume event data. The platform performs calculations on raw data, ensuring pricing updates are accurate on invoices.

Learn how we can solve your subscription-based billing by checking our flexible pricing options.