The Subscription (SaaS) Business Model: How to Calculate Pricing, MRR and Churn
In a subscription model the real question is not “how many customers did I win” but “how many stay and how much value does each produce.” We explain MRR, churn, ARPU, LTV and CAC with formulas and an example, and pricing models with their pros and cons.
In brief: The subscription model means offering a product or service for a regular (monthly/annual) fee instead of selling it once; SaaS (Software as a Service) is its counterpart in software. Its advantage is predictable, cumulative revenue; its drawback is that you have to keep convincing and retaining customers. Five numbers show the health of this model: MRR (monthly recurring revenue), churn (the rate of customer/revenue loss), ARPU (revenue per customer), LTV (a customer's lifetime value) and CAC (customer acquisition cost). The general logic of a profitable subscription business is this: the revenue you earn from a customer over time (LTV) must be clearly larger than what you spent to win them (CAC), and customers must not disappear quickly. There is no single right pricing; you choose, by testing, the model that fits your product from per-user, usage-based or tiered-package models.
Last updated: October 2026
Why subscription?
With one-time sales you start from zero every month. With a subscription, a customer brings revenue every month; as the customer base accumulates, revenue stacks up. What this brings:
- Predictable revenue: You forecast the revenue of coming months better.
- Customer relationship: It requires you to keep improving the product and build a long-term bond with customers.
- Low entry barrier: The customer starts with a small monthly fee instead of a large upfront payment.
In return comes:
- Retention pressure: Each month the customer asks “is this still worth it?”
- Continuous cost: Server, support and development costs continue for the life of the subscription.
- Cash-flow lag: Customer acquisition cost comes up front; payback takes months.
For the architecture of your product as SaaS, see our how to build a SaaS platform article.
Core metrics and formulas
MRR and ARR
- MRR (Monthly Recurring Revenue): The sum of the monthly fees of active subscriptions. Add annual plans by dividing by months (annual fee ÷ 12).
- ARR (Annual Recurring Revenue): MRR × 12.
Breaking MRR into new, expansion, contraction and churned parts shows where growth comes from:
Net new MRR = New MRR + Expansion MRR − Contraction MRR − Churned MRR
- New MRR: Revenue from new customers.
- Expansion MRR: An existing customer moving to a higher plan or adding users.
- Contraction MRR: A customer moving to a lower plan.
- Churned MRR: Revenue lost from customers who cancel.
One-off payments and one-time setup fees are not included in MRR; recurring revenue must be kept separate.
Churn (loss rate)
- Customer churn = Customers cancelling in the period ÷ customers at the start of the period
- Revenue churn = MRR lost in the period ÷ MRR at the start of the period
The two can differ: if small customers cancel a lot and large ones stay, customer churn is high and revenue churn is low. Net revenue retention (NRR) also includes expansion: (Starting MRR + expansion − contraction − churn) ÷ Starting MRR. NRR above 100% means that revenue from existing customers grows even if you win no new customers.
ARPU
ARPU (Average Revenue Per User/Account) = MRR ÷ number of active customers. You see the effect of pricing and packaging in this number.
LTV (customer lifetime value)
A simple approach:
LTV ≈ ARPU × gross margin ÷ monthly customer churn rate
A monthly 2% churn means an average customer lifetime of about 1 ÷ 0.02 = 50 months. Taking gross margin (revenue minus direct service cost) into account makes LTV realistic.
CAC and payback
- CAC (Customer Acquisition Cost) = Sales and marketing spend ÷ new customers won in the same period
- LTV/CAC ratio: The value earned per customer relative to the cost of acquiring them. In practice an acceptable level varies by sector and stage; what matters is that the ratio is clearly greater than one and improves over time.
- CAC payback period (months) = CAC ÷ (ARPU × gross margin). It shows in how many months the spend to win a customer is recovered.
Worked example (hypothetical)
The figures below are made up only to show the method. Calculate with your own data.
An appointment-software (SaaS) scenario:
- Active customers: 200
- Average monthly fee (ARPU): TRY 1,500
- MRR = 200 × 1,500 = TRY 300,000
- Cancellations this month: 6 customers → customer churn = 6 ÷ 200 = 3%
- Gross margin: 80%
- LTV ≈ 1,500 × 0.80 ÷ 0.03 = TRY 40,000
- Marketing + sales spend this month: TRY 90,000, new customers: 15 → CAC = TRY 6,000
- LTV/CAC = 40,000 ÷ 6,000 ≈ 6.7
- CAC payback = 6,000 ÷ (1,500 × 0.80) = 5 months
Reading: Each customer recovers acquisition cost in about 5 months and stays on average 33 months (1 ÷ 0.03). With these assumptions the model looks healthy. But if churn rises from 3% to 6%, LTV halves and the ratio drops to 3.3. So churn is the number to watch most.
Pricing models
| Model | How does it work? | Advantage | Watch out for |
|---|---|---|---|
| Flat fee | One price for everyone, all features | Simple, understandable | Small and large customers pay the same; value from big customers slips away |
| Tiered packages | Packages such as Starter / Pro / Enterprise | The most common; appeals to different segments | Package limits must be chosen well |
| Per seat | A fee per number of users | Revenue grows as the customer grows | Customers may share accounts to cut cost |
| Usage-based | By amount of usage such as transactions, storage, messages | Proportional to value; perceived as fair | Revenue predictability falls; can cause bill shock |
| Hybrid | Base fee + usage | Both predictability and scaling | Adds complexity |
| Freemium | A free limited plan + a paid plan | A broad user base | The cost of free users and conversion rate must be managed |
Questions to ask when setting pricing
- What value does your customer get? (Time saved, revenue growth, reduced risk.) Price should move toward value, not your cost.
- What is the unit that best measures that value? (User, branch, transaction, storage, report…) When price is tied to that unit, revenue grows as the customer grows.
- How much are competitors and alternatives (Excel, manual process, ready-made tools) convincing people to pay?
- Which customer segment are you targeting? A small business wants a simple, cheap package; an enterprise customer pays more for security, support and integration.
- Will I give a discount for annual payment? An annual plan improves cash flow and retention.
Practical advice: Do not try to make your first price perfect; test and adjust. Applying a new price to new customers while keeping existing customers' prices (price grandfathering) lowers risk. To evaluate a product at the idea stage, you can try our SaaS Idea Review tool.
8 ways to reduce churn
- Improve the first experience (onboarding). If the customer does not see value in the first week, the chance of staying drops; speed up the first value (“aha moment”).
- Monitor usage. Customers whose usage drops are prone to cancel; intervene early.
- Manage failed payments. Card expiry or insufficient funds create “involuntary churn”; set up automatic retries and reminders (dunning).
- Encourage the annual plan. Annual customers generally stay longer than monthly ones.
- Collect feedback. Ask for cancellation reasons and group them into categories.
- Invest in support quality. Fast, solution-oriented support is an important factor in preventing cancellation.
- Keep improving the product. Regular improvements that fit the customer's needs renew the value.
- Offer a pause option. “Freeze the subscription” instead of cancelling keeps some customers you would otherwise lose.
What a subscription model needs on the product side
A subscription business is not only “taking payments;” the software also needs these components:
- Billing and payment: Recurring collection, invoices, VAT and e-invoicing processes.
- Plan and permission management: Which feature is open on which plan?
- Usage metering: Precise counting for usage-based pricing.
- Trial and upgrade/downgrade flows.
- Multi-tenant architecture: Securely separating the data of multiple customers.
- Admin panel and metric screens: To see numbers such as MRR, churn and usage.
Some of these pieces can be kept simple at the start. For the approach of keeping the first version small, see our MVP roadmap article.
Are subscription e-commerce and SaaS the same?
The logic is similar: recurring payment and retention. But subscription e-commerce (physical products such as coffee, maintenance packages, box subscriptions) requires logistics, stock and delivery management; SaaS is access to software. In both, MRR, churn and LTV are tracked similarly. For physical-product subscriptions, see our subscription e-commerce service.
A measurement plan for the first 90 days
| Week | What to do |
|---|---|
| 1–2 | Collect MRR, active customers and new/cancelled counts in one table. Record your baseline values. |
| 3–4 | Calculate monthly churn and ARPU; start collecting cancellation reasons. |
| 5–8 | Calculate CAC by channel; which channel's customers stay longer? |
| 9–12 | Calculate LTV/CAC and payback; plan price and package tests. |
7 common mistakes
- Counting one-off revenue in MRR.
- Tracking churn only as one percentage, not separating customer and revenue churn.
- Setting price from cost, ignoring the customer's perception of value.
- Opening a free plan without measuring its cost.
- Neglecting onboarding.
- Not managing failed payments.
- Doing complex pricing too early. Keep it simple at the start and improve as you learn.
Subscription products with Aktaş Digital
For subscription-based software products we provide end-to-end SaaS platform development, including multi-tenant architecture, plan and permission management, billing integration and metric dashboards. We recommend testing the idea first with a small first version, setting up the measurement infrastructure from the start and growing the product with user feedback. We also have subscription e-commerce solutions for physical-product subscriptions. You can use our quote form to describe your project.
Frequently Asked Questions
What is a good churn rate?
There is no universal number; it varies a great deal by customer segment (small business / enterprise), price and product type. What matters is tracking your own history, segmenting it and bringing it down over time. Churn is generally lower among enterprise customers and higher among small businesses.
What should the LTV/CAC ratio be?
As a general rule the ratio needs to be clearly greater than one; but the target value depends on your sector, growth rate and cash position. Look at the CAC payback period together with the ratio.
Should I offer an annual or a monthly plan?
Offering both is common. An annual plan improves cash flow and retention; a monthly plan lowers the entry barrier. Giving a reasonable discount on the annual plan steers the customer.
How long should a free trial be?
As long as it takes the customer to see first value. A longer period suits a complex product, a shorter one a simple tool. An onboarding that shows value quickly matters more than the length.
Should I make cancelling a subscription harder?
No. Making cancellation hard worsens user experience, reputation and legal risk. Ask the reason, offer alternatives (pause, a lower plan), but keep the path to cancel open.
How much investment does it take to start a SaaS business?
It varies a great deal with scope, team and marketing approach. Starting with a small first version and progressing with real customer feedback lowers risk. Clarifying the scope is the best start for a quote.
Conclusion
The success of a subscription model rests on MRR growth, low churn and LTV clearly exceeding CAC. Launch with simple pricing, track the five metrics regularly, invest in onboarding and retention and improve prices and packages as you learn. The first thing you can do today: write your active customer count, monthly revenue and the last three months' cancellations into a table and calculate churn and ARPU.
