The False Choice of Prepaid vs. Monthly Contracts

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In scaling the cash-flow side of SaaS, there’s almost nothing more powerful than annual contracts combined with prepaid cash.  It’s just such a huge benefit. You get all the cash up-front, and your churn almost by definition goes down. Because the earliest chance the customer has to churn is 12 months hence.

So get pre-paid annual deals whenever possible 😉

At Adobe Sign / EchoSign, half the reason we went cash-flow positive at about $5m in ARR was prepaid annual and multiyear contracts.  Combine that with 100% or greater annual growth, and once you hit a few million in ARR, prepaid annual contracts bring in a lot of extra cash ahead of time.   Cash you can use especially to make those accretive hires (more on that here).

Our KPI here in fact was to bring in at least 120% of our monthly MRR in cash, each month.  We usually hit it.  More on how here.

But … to go to annual pricing or not … 

It’s a bit of a false choice for most vendors.  Because the world already works certain ways here based on the context:

Bigger companies want to sign annual contracts, especially in exchange for discounts.  At least, once you have enough of a mini-brand to be trusted.  It’s how big company procurement and budgeting processes work. Nothing is a bigger headache in a Fortune 500 company that having to go back to procurement every single month to get an invoice approved.

and … Most small businesses and individuals generally want to pay monthly on their credit cards.  Even if you provide an annual discount.  Not all – but most.  Think about yourself as a consumer. Very small businesses often buy more like consumers than large enterprises.  How often do you yourself prepay annually? Probably only for a subset of services you are confident you want for the long term.

So there is a natural continuum of how customers like to pay, and how they are comfortable paying.

A great example is Zoom.   As Zoom use exploded during Covid, even more SMBs needed Zoom.  And as a result, even more chose monthly subscriptions.  Zoom monthly billing exploded to 50% of ARR as SMB use grew 5x during Covid!  More on that here.

If you offer bigger companies a natural incentive to sign up annually, they will. At least, once you have a brand and they know they can trust you on Day 0.  And later, you can even force them to and make it the only option. But if you ask tiny businesses and individuals to pay for a whole year upfront, they will hesitate.  At least the vast majority.  So offer them a discount to do so (often 20%, a la the WP Engine above).  And some, but not most, will.

Figure out who you sell to, and why, and offer the options each customer segment wants.  And don’t push prospects to where they don’t want to go.  Get the deal done.

And lastly, be flexible in the beginning. Once you have a brand that customers trust, more will prepay annually. In the beginning, at a minimum, you may need to do more paid trials and proofs-of-concepts, or quarterly/monthly deals.  I know no one likes POCs and such, but you have to earn your right to skip them.

(note: an updated SaaStr Classic post)

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(Cross-posted @ SaaStr)