Annual pre-pay and marketing budgets
longform.asmartbear.com
longform.asmartbear.com
1. It allows you to run a higher EBITDA metrics because financing costs are backed out of EBITDA.
2. You record the non-discounted revenue for the customer, which is a truer representation of where the business could be one day when it’s no longer playing the pre-payment game to generate cashflow.
Generally speaking, it’s a good idea to generate cash from pre-payments, but don’t treat it as free no-risk money. You can get over your skis quickly, run out of cash, and then be in a world of hurt when you’re unable to service those customers.
“Unearned revenue” is a common account on any company’s balance sheet and is standard best practice.
You sign a 12 month deal, and it immediately hits your books as a liability because the revenue isn’t “earned” until your company provides the service, so each month 1/12 of the contract moves from the “unearned” revenue account to an income account.
But the 2nd idea of treating sales discounts as a financing charge sounds like some questionable financial engineering to me. If your sales guy offers a “10% end of quarter discount if you sign in the next week” you shouldn’t be booking that discounted 10% as financing income because, simply, that’s money you’ll never receive.
I’ve never heard of “non-discounted revenue” as a serious SaaS metric. Sure it will inflate your revenue (as will booking discounts as revenue) but those practices won’t pass the sniff test when any outside VC or auditor looks at your books.
But 100% agree with the first part of your comment: from an accounting perspective, prepaid contracts are typically booked as a liability or debt on your balance sheet, and gradually moved over into your Income/Earned Revenue account in 1/12 increments (or equivalent) over the upcoming year.
I work at a B2B SaaS company that sells $50k contracts, and we don’t offer monthly billing and we’ve done quarterly billing maybe once (for a premium). I could imagine the way you’re thinking being helpful if you offer monthly billing and you have lock in to the point where you know people won’t churn so there’s no major benefit to locking people in for a year.
A deal isn't closed until both parties have done their part, and, as you aptly describe, until one has done the delivery any payment is akin to a debt, and hence it's a liability or risk until the customer got what they signed up for.
Access to the system could be included or a much smaller platform fee.
This should be accounted for. Say you sign a customer for $100 for a year. You should be able to estimate up front that it will cost you $5 in service costs, $15 dollars in support, $5 in ... then you can book the $75 as expected profit. Some of that can be put back into marketing in a short loop.
The main difference from monthly is that it takes N months for that revenue to be captured. However you are more certain about it. (Especially in pay-after where you can subtract actual support and infrastructure costs from the revenue.)
And yeah, the blog's advocacy of spending unrecognized revenue is indeed risky, and how to do that safely is an interesting q...
However, lifetime subscriptions seem to be almost worthless, as I have yet to encounter a company that doesn't redefine "lifetime," to mean the lifetime of the subscription, which ends, whenever they want.
No, the only place that does lifetime products right is the financial services industry, because a pension is necessarily a lifetime product.
Hitting a bet on the appsumo startup casino can be fun.
I have a few tools quietly that have remained lifetime, like brain.fm.
Supporting what you think will win, early is a risk and an opportunity.
My time is valuable, too. Every second not spent deleting reminder texts, is a second I can use for other stuff.
Don't delete them then. Inbox Infinity.
I'd suggest to make it possible to gift someone x years of your service, because that's something many people will happily do. The only thing to avoid here is any kind of automatic retention. One year is one year, period.
If I give someone cash [1], then they might just spend it on their power bill or rent or groceries or just let it live in a bank account. This is “fine”, but it doesn’t really feel like a “gift”.
If I buy them a gift card to Best Buy or something, they’re kind of forced to buy themselves something fun. You can’t really pay your rent with a gift card, it can’t sit in a bank account, you’re kind of forced to get yourself something you’ll enjoy.
I am not saying it’s the best gift or anything, I just think “idiots” is harsh.
[1] and assuming that the person is in an economically alright position
Gifts are about having thought about somebody, and cash is the equivalent of saying I couldn't be bothered. Hence, gift cards. I thought about you for half a second longer and gave you money to spend at a store off my choosing. Under that framing, calling people idiots because they give gift cards indicates an inability to grasp or accept that cultural norm.
So, it makes it easy when someone telegraphs their mental shortcomings to you.
That half second costs me far more time and effort to keep track of a gift card, especially if a balance remains on it. Either get the actual gift you want to give the person, or give cash.
A gift card only benefits the merchant who gets to hold onto cash and earn interest.
Or give something like an Amazon gift card which really is more or less like cash for most people. (Though Amazon knows this and their conversion rate is generally worse than most retailers who are more specialized.)
That said, I'm not a huge fan of gift cards. It's one more thing to keep track of but, hey, they're probably better than some gift you don't want and cash just isn't really acceptable in all cases.
A gift that can change her life.
Hey Dad, I'm pregnant.
I find most services now are extremely overpriced. Your "pay us $coffee$ per month", is absolutely not going to happen because your service is one of dozens or hundreds I randomly find kinda somewhat interesting in a given day. Ok If the service was a couple of pennies, i might consider it.
Every single little app/service now thinks they are indispensable utility provider and by such are entitled to x% of my monthly salary. Get lost!!
Seems like engineers rarely do the math on their productivity.
A tool that costs $100/month and saves an hour or two can still be worth it.
On the value of your time side, the metric that I’ve seen people always use is the average value of a person’s time. However, the real relevant metric is the marginal value of someone’s time.
So,for example, if you are an engineer earning a fixed salary that works out to $100/hr, saving a few more hours will not earn you any more money. If, for example, it saves you some time, the real question is what’s the value of the time you saved. If it saves company time, then the answer is close to $0 with the only benefits being an earlier delivery (which may even be a negative in many workplaces for you personally). This may be a reason for the company to pay for the tool but not for you as an individual. Alternatively, if those 2 hours saved means you’re gonna earn an additional 2 hours of free personal time, then the question is what you will do with that personal time. If the answer is watch Netflix for 2 hours then the value of those 2 hours is likely much lower than $100/hr and in some cases may even be negative.
Then there’s an incomplete analysis on the other side as well. If I save 2 hours by paying a freelancer $20 to setup my servers, I may be losing some educational value that I would have gained it by doing it myself. And for some there may also be entertainment value attached. Personally, there are several projects I can outsource that I enjoy doing myself. Paying Google to manage my emails and calendars (at least the less important accounts) is actually taking away from the enjoyment I get in setting up, tinkering with, and maintaining my NextCloud instance.
In fact, excluding the very well known tools (e.g. LLMs) I think I've found maybe 3 in my career and I only use one of them sporadically (a $20 one-time Excel add-in). The other two cost 4-5 figures and were provided by my employer at the time.
In B2C I think subscriptions are over used since products do not provide value over time but in B2B that should not be the case.
Software that supports your business may be used be a daily basis, and the value can be translated into a dollar figure of time saved versus the alternative.
As a customer, you’re committing for a year to get a discount. If you can cancel at any time and get that money back, why are they getting a discount?
I know there’s the underlying benefits for cash flow but the customer is undoing this by getting a refund.
To be clear, I’m talking about the 1-1 transaction between seller and buyer, not the overall business model.