How to Build Automated Revenue Waterfall for Hybrid Pricing Models

As someone deeply involved in revenue recognition, I can tell you that managing waterfall revenue in enterprises—especially with hybrid pricing models—is no small feat. Combining fixed-price elements (like subscription fees) with variable elements (like usage charges) creates an intricate web that can be a real headache for finance teams. Traditional methods, mainly manual revenue waterfall calculations, often lead to inefficiencies, errors, and risks in IFRS 15 and ASC 606 compliance.

I’ve spent a lot of time thinking through these challenges, and in this blog, I’ll walk you through use cases for revenue waterfall, potential pitfalls if calculated manually, and how automating the process can solve it.

What is a SaaS revenue waterfall?

To put it simply, a SaaS revenue waterfall is a model that helps track how revenue is recognized over a period of time. For example, I’m often asked: "What is contracted revenue, and how much am I going to realize each month?"

• It’s about tracking contracted revenue and spreading it over time—say, across 12 months if it’s an annual contract.
• It’s also about figuring out how much of that revenue gets recognized each period based on the agreement with the customer.
  

I’m sure fellow accountants have been in this scenario—you're manually tracking and updating these numbers every month, but it’s prone to errors, especially when managing multiple revenue streams, pricing models, or products.

Use cases for revenue waterfall in hybrid pricing models

1. Managing mixed revenue streams in a single contract

Use case: 

Allocating subscription vs. usage-based revenue across reporting periods.

Problem: 

Manually separating multiple revenue streams, when dealing with both subscription-based and usage-based charges, leads to incorrect allocations of revenue in the wrong periods.

Example:

• Fixed revenue (subscription): $9,000 for 3 months
  
• Usage-based revenue: $3,000 over the 3-month period
  

If the finance team is manually splitting these, they might mistrack the $3,000 usage and assign it incorrectly across the wrong months.

Result:
This leads to misalignment between actual revenue and revenue recognized. For instance, if the system recognizes $9,000 for the first month and then $2,000 for the next two, it overstates the first month’s revenue and underreports the subsequent months.

2. Reducing errors in revenue data entry

Use case: 

Preventing misallocation due to incorrect subscription periods or pricing inputs.

Problem: 

A small error, such as inputting the wrong subscription start date or price, can lead to an entire waterfall calculation being off.

Example:

• Wrong subscription period: Let’s say the subscription is for 12 months, but the team accidentally inputs a start date of March instead of February.
  
• Revenue impact: This could cause $9,000 in subscription revenue to be recorded in the wrong months, with $3,000 allocated to the wrong periods.

This table shows the correct allocation of revenue if the correct start date (April) is used. However, if the wrong subscription period is entered, such as March instead of April, the entire monthly revenue could be misreported, impacting future months.

Result: 

Inaccurate data calculated manually like this can lead to over-reporting or under-reporting revenue.

3. Accounting for overage

Use case: 

Capturing excess usage beyond contracted terms to ensure full revenue recognition.

Problem:
Take the scenario of renewing a contract—if the finance team does not raise an invoice for overage (which is based on actual usage), the revenue waterfall calculation becomes skewed.

Example:

• Contract: $9,000 fixed revenue (subscription) + $3,000 usage-based revenue
  
• Mistake: If X has additional usage charges beyond the subscription (for example, $500), and the finance team fails to raise the invoice for overage, the total revenue calculation will miss out on the excess usage. In this case, the $500 in usage charges would be omitted, impacting the total recognized revenue.
  

Result:
The finance team has to actively monitor the usage data and manually adjust it. Errors in this process can lead to significant discrepancies in revenue reporting. And this can create ASC 606 compliance issues.

4. Handling negative revenue recognition events

Use case: 

Adjusting revenue when refunds flow mid cycle or voided invoices occur.

Problem:
Manual processes often fail to properly account for negative recognized revenue, such as when refunds, disputes, or invoices marked as uncollectible affect the revenue waterfall.

Example:

The implementation period runs from April to September, with revenue recognition starting from October 25. The customer has a 60-day credit period to make the payment. However, they have indicated that they do not wish to continue using the product from December 1 onward.

Result:
Your reported revenue can be skewed if the manual process doesn’t promptly reflect credits, refunds or disputes. 

5. Recognizing revenue net of taxes

Use case: 

Ensuring tax exclusions are properly reflected in booked revenue.

Problem:
The total amount of the invoice doesn’t necessarily equal booked revenue because taxes are excluded from revenue recognition.

Example:

• The invoice amount: $35,000
  
• The tax: $4,000
  

The booked revenue will only include $31,000, excluding the tax amount, because taxes aren’t recognized as part of revenue.

Result:
If this distinction is overlooked, it can lead to discrepancies between what’s reported as booked revenue and the total invoiced amount. This is crucial for compliance and accurate reporting.

6. Reconciling invoice amounts and recognized revenue

Use case: 

Accurately reporting revenue when invoice payments are partial or split.

Problem:
Even though the invoice’s due amount may differ from the recognized revenue, it’s important to recognize the full invoice amount when determining recognized revenue, not just the amount due.

Example:

• The total invoice amount: $31,000
  
• Paid by customer balance: $10,000
  
• Due amount: $21,000
  

Even though the invoice is partially paid with the customer balance, the recognized revenue will still be the full $31,000, not just the remaining due amount. This ensures that the revenue reported matches the invoice amount, not the amount paid.

Result:
This nuance is often overlooked in manual calculations, leading to inconsistent revenue reporting, especially when payments and balances are not accounted for correctly.

7. Tracking multiple performance obligations in hybrid contracts

Use case: 

Separating and recognizing one-time fees, subscriptions, and variable charges correctly.

Problem:
Hybrid pricing models often involve several obligations that need to be tracked separately. For instance, if a customer has a contract with both a fixed subscription fee and variable usage charges, manually tracking the performance of each obligation is time-consuming.

Example:

• Contract: $9,000 fixed revenue (subscription) + $3,000 variable usage charges
  
• Contract length: 12 months
  
• Setup fee: $1,000 (one-time revenue)
  

Result:

For the setup fee, you recognize $1,000 immediately. For the subscription, you spread the $9,000 over 12 months. But for the usage charges, you must track monthly usage (which could vary), and this makes manual tracking difficult.

If performance obligations are tracked incorrectly, revenue may be recognized too early or too late. This misalignment between actual and recognized revenue is a common challenge.

How to create an Excel revenue waterfall chart for hybrid pricing models 

Let’s take a fixed plus usage-based model. For example, you have a subscription platform fee of $9,000 for three months. This would be recognized evenly across the 3 months. So, each month, you recognize $3,000.

➡️Now, let’s add usage-based revenue. Let’s say the usage-based component is $3,000. But instead of recognizing it all upfront, you’ll recognize it over the months as the usage happens. For example, in the first month, maybe they use $1,000 of usage, so you recognize that $1,000 in the first month.

➡️Now, for the tier-based pricing model, let’s say the customer is billed based on usage. If they exceed the first usage tier, then the price increases. For instance, if the contract has a $12,000 annual fee, but they go over the initial 1,000 units, then you recognize $500 more based on that excess usage.

➡️Next comes the add-on services, like additional licenses. If they purchase two licenses in June, each license costs $1,000, so for June, you would recognize $2,000.

➡️Now, if you have a renewal contract where, say, the subscription is renewed for $10,000, you track that as well. If there’s a usage threshold crossed after the renewal, then you need to make sure you're accounting for that extra usage revenue, say $500 for every additional unit used after the threshold.

So, in Excel, you’d build out waterfall revenue by separating fixed and variable components—put the fixed subscription in one column and spread it over the months. For the usage, track it month by month based on actual usage and recognition, and for add-ons and renewals, treat them as new entries when they happen.

You would also need to track the total revenue for the contract, so each month you would add the subscription, usage, and add-on services to see the total revenue recognized in that month. You have to make sure to adjust it if any overage or adjustments are made.

It’s easy to miss something or misallocate when inputting this data in Excel, which can throw off your entire revenue picture.

Automate revenue waterfall reporting with Zenskar

Don’t stop short at using spreadsheets. If you’re ready to unlock your business’s true strategic value, Zenskar can help you go beyond spreadsheet-based waterfalls.

Zenskar’s revenue recognition system automates the entire revenue waterfall reporting for hybrid pricing models. 

Reporting and analytics

Zenskar’s revenue waterfall engine handles complex cohort-based models, ensuring period-over-period revenue recognition is accurate, audit-ready, and fully ASC 606 compliant—without the need for spreadsheets. You also get access to key financial and operational KPIs out of the box.

Real-time revenue tracking 

Zenskar tracks both subscription and usage-based revenue in real-time, ensuring that fluctuations in customer usage, billing cycles, and contract terms are immediately reflected in the revenue waterfall. This helps ensure that revenue is recognized as it is earned and in alignment with the terms of the contract.

Automated deferred revenue waterfall

Zenskar automates the deferral of revenue, particularly in situations where customers prepay for services. For example, in the case of annual subscriptions or upfront payments for multi-year contracts, revenue is deferred and recognized over time as services are delivered.

Performance obligation management

Our RevRec system is designed with a decoupled architecture, meaning that the revenue recognition process is separate from the billing process. This allows for greater flexibility and accuracy in how revenue is recognized.

• Revenue recognition is not tied to when invoices are generated or payments are received. 
• Revenue schedules can be customized to reflect how services are delivered and when performance obligations are satisfied, according to ASC 606 or IFRS 15.
• Zenskar automates the management of these obligations, ensuring that each obligation is met before revenue is recognized. 
• This ensures that revenue is recognized when earned, not when billed, which aligns with the accrual accounting principle.
• The decoupled approach allows for a more accurate reflection of financial performance. This can help avoid revenue leakage and ensure that the income statement accurately reflects revenue earned.

Automatic refunds and adjustments

Zenskar’s automated system ensures that refunds and credit notes are immediately reflected in the revenue waterfall. When a customer requests a refund, for example, the system automatically reverses the recognized revenue and adjusts the deferred revenue balance accordingly. 

Read how Zenskar’s fully automated billing and revenue system eliminated most manual billing, accounting, and AR tasks for Yembo, helping them save 90% of their finance team's bandwidth and collecting 50% of revenue earlier.

Contract modification tracking

Zenskar tracks contract modifications in real-time, automatically adjusting the revenue waterfall to reflect changes in terms, such as additional services, discounts, or changes in usage thresholds. 

Read how Indigov recognizes revenue for all active contracts in one batch job even with contract variability, reducing the revenue recognition processing time from days to hours.

Compliance with revenue recognition standards

All adjustments, including refunds, credit notes, and changes to performance obligations, are made in line with ASC 606 and IFRS 15 standards. Zenskar ensures that these adjustments are accurately captured, documented, and reported, providing a clear audit trail for compliance.

Conclusion

If you’re still manually tracking your revenue waterfalls, especially for hybrid pricing models, it’s time to consider automation. 

By automating your revenue waterfall with Zenskar, you’re not just saving time—you’re creating a more reliable, scalable, and efficient revenue recognition process. This will allow your finance team to focus on strategic decision-making rather than getting bogged down in the complexities of manual revenue calculations. 🙂

Ready for a demo of Zenskar? Reach out and schedule time for a personalized walkthrough or take an interactive product tour to see us in action.