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.
? 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.