What are some major advantages of annual vs. monthly subscription billing for SaaS?

This post is by Jason Lemkin from SaaStr

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I think the “advantages” of pushing annual billing over monthly are mostly an illusion. With some potentially large significant downsides. At first blush, annual billing seems better:
  • Churn is lower, since the earliest a customer can churn in month 13, by definition; and
  • Can help cashflow a bit; getting all the cash up front can help with cashflow, no doubt; and
  • Billing is sometimes easier with annual payments, since it’s one billing cycle and process vs. 12; and
  • Modelling, finance and administration is often easier, at least in the early days, since it is much easier to model out fixed annual deals.
For this reason, especially when times are challenging and the team needs a boost (less nominal churn) or folks are overwhelmed with supporting monthly deals, the team will push to get rid of monthly billing. Forcing SMBs to pay annually is generally a mistake.
? Well, yes, in the short-term nominal churn may decrease. But:
  • Deferring churn doesn’t help. It is still there, and real. Just deferred a tiny bit. If a customer is going to leave in month 6 because they can, vs. forcing them to leave in month 13, it doesn’t really matter or help. They will fall off your ARR base anyway.
  • You can close more customers if you let them buy the way they want to buy. Many SMBs want to pay monthly. Look at Zoom. 26% of its customers pay monthly. Do you want to make it harder for those 26% to use, buy, and promote you?
  • You take friction out of a buying process with a monthly option for SMBs. Related to the prior point, but you want to close customers fast. The fastest way to to make it easy. If monthly is easier for a prospect, let them do that. The #1 best way to close more is to close faster.
  • You can charge “more” for monthly. All leaders in essence charge more, often around 20%, to pay monthly. Yes, this is packaged as a discount for paying annual, but that’s the same thing.
So let customers buy the way they want to, and you’ll close more customers, faster. If your customers include SMBs, that probably means having a monthly option. If your sales team or support team disagrees … up to a point that’s OK. But if they push back too much, that may be a sign you need a team that can … support all your customers. Not just some. More here: 5 Interesting Learnings From Zoom. As It IPOs. | SaaStr View original question on quora The post What are some major advantages of annual vs. monthly subscription billing for SaaS? appeared first on SaaStr.

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