SaaS companies can grow faster by asking customers to prepay | Hacker News Reader

SaaS companies can grow faster by asking customers to prepay

tomtunguz.com

38 pointssoneca21 comments

As someone who works at a SaaS company, the annual prepay has one downside: it narrows the middle portion of the funnel (qualifying leads) compared to month-to-month.

Of course, the biggest selling point of SaaS over licensed software is service: not having to manage your software (and often hardware) is a huge pain reliever for the buyer.

The other selling point is lack of financial commitment (at least with month-to-month): you do not have to buy into the service for the next whole year. Instead, you can try and see how it fits into your business. If you see no fit or can't get value, you can cut the loss and move on. You cannot do this with the annual prepay model.

Time and again, I've been surprised how customers who were unwilling to commit to a year ended up prepaying for a year when the time for renewal came. If you are forcing the annual prepay model to your customers, you are kicking this type of "cautious at first but eventually valuable" customers off your sales funnel.

A popular way to combat this is free trials (anywhere between two week and ninety days). This is a decent solution, but I've seen first hand that whether one is paying for a SaaS strongly influences usage/penetration into the customer organization.

edit: minor edits for clarification

I like the approach Jason Cohen describes in his MicroConf talk from 2013 (http://vimeo.com/74338272) -- offer the annual plan, and encourage it by baking in a discount, but give people the option of choosing monthly if they'd rather pay a bit more for the option of leaving. That, combined with a money back guarantee, seems like it could be the sweet spot for a lot of SaaS businesses.

Thanks for sharing this. I think the truth lies somewhere between annual prepay and month-to-month. Most SaaS companies end up offering a mix of the two =)

I was planning on saying exactly this. There is no reason not to offer both plans. I suspect most people will find that people will start monthly, but if they are happy with the service and you offer the yearly in the right ways they will switch over time. (just send periodic emails saying hey here is a slight discount if you pay for a year is likely enough)

A good point there. I've noticed over the past few years a few SaaS companies offering both monthly and yearly. I think the pre-pay could be a good idea if the LTV doesn't reach 1 year with most people so by having that pre-pay of a year, you might actually increase your LTV and thus more profit. But doing it this way exclusively over month-to-month might drop your customer signup rate.

Interesting topic and I'd love to see data around this.

We have seen this at ERPNext too. There are other benefits to annual payments:

1. Greater buy-in: Since the amount is more, users will also invest more time in setting up the product.

2. More opportunity to talk with customers: Customers on an annual plan will more typically want to talk with you over chat / email. This also increases the engagement and the relationship.

If people are willing to give you an interest free loan it's probably a decent indicator that you could charge more per month.

Since cash is vitally important for startups you should certainly encourage as much up front as possible. It probably makes sense to use the "behavioural trick" of having an offer like X per month, Y<(12*X) per year, Z=Y+free month per year where Z/13 is what you intended to charge per month in the first place to nudge customers in the right direction (even though I'm somewhat meh on the idea and would personally prefer very simple options with no trickery)

As an aside it's a great validator for your business model if a lot of people are willing to pay a year up front.

> If people are willing to give you an interest free loan it's probably a decent indicator that you could charge more per month.

I'll second that. As a customer given the option of paying $1 a month or $12 a year, I'll chose the former unless I've had a stroke. Yearly prepayment is wasteful, that money could be put to use for me instead of you.

So, if a customer agrees to pay me annually the same they'd pay monthly rather than staying monthly or leaving if that's not an option, I've made a mistake in valuing my product. Moreover, by replacing apples with oranges, I'm risking turning away customers for whom the price is right but not the structure in exchange for income statement foofaraw (and I still haven't addressed my original mistake.)

> As an aside it's a great validator for your business model if a lot of people are willing to pay a year up front.

That or the sales context is one where rational thought is …limited; candy bars at kid height in the checkout aisle. And, now I'm imagining buying a giant box of a years worth of candy. Time to go outside.

The customer shouldn't view paying for the service in advance as an "interest free loan", they should view it as "purchasing the service", up front like most other things they buy. It's one thing to acknowledge that most customers prefer to starting with a smaller amount, but if they're perceving the annual price as a "loan" to help you develop the product then you have an image problem

The reality for a B2B product in the $250-$1000 per month range is generally more along the lines of monthly advance CC payments vs annual payments via 30 day invoice which take more time and effort to close the deal, and often time and effort to get them to pay (which might well still be late). This makes the payment tradeoff look a little different; the rationale for allowing the monthly payments is minimising friction that comes when potential clients start subjecting the cost to the greater scrutiny and level of paperwork that comes with higher up front amounts. Whether a stream of monthly payments starting NOW is better for your cashflow than a 12 month lump sum in approx two months' time depends a lot on the specifics of your startup. Regardless, it's still worth offering the small annual payment discount for those that want it and trying to persuade existing monthly customers to switch.

I can't fathom why any business, least of all a startup business, would consider "annual post-pay" as a payment option.

How does this affect renewals? If I'm on autopilot with monthly credit card charges, I don't think much about a service from month to month.

But if, in the 11th month, I have to think about a renewal and its cash outlay, you are forcing me to think about the value of your service, and what your competitors have come up with in the last year.

That's true. But the opposite could be true too. Being constantly reminded of the cost every month might move you to reconsider paying for the service.

There are many benefits to this approach and it is likely worthwhile.

Another downside is that you have a long cycle when it comes to assessing your churn. Yes, you'll see customers effectively churn by stop using your product, but when your customers are monthly, they are de facto making a purchasing decision every month. If they are annual, you aren't getting that re-purchase decision until the 12th month, when they have much more information about your service than pre-sale.

This is assuming that changing the billing structure has no negative impact on signups. The author acknowledges this in the comments:

> Most of the time, the conversion rates fall slightly, but the benefit of the upfront cash outweighs this.

That's a mighty big generalization. Unless there're data to back this up from at least several services that switched pricing models, I'm going to chalk this up as another over-generalized article that isn't very useful.

I've never heard of any case of a company doing yearly postpay. Every single case is prepay. This just sounds a like a made-up concept. Any concrete cases?

Unless you're selling to established businesses (who presumably have a solid accounting department with a payables clerk), why would you bill at the end of a period? You're increasing your risk if a customer is unable to pay their invoice.

I am pretty sure I would spend that money right away and not have much down the line for operations.

Well... maybe you're not very good at running a business? :)

Stop wasting your time with blog posts like this and just read Behind the Cloud: http://smile.amazon.com/Behind-Cloud-Salesforce-com-Billion-...

We changed the title to make it less linkbaity.

I submitted this, but I am in no way related to the author. But as I browsing through HN I kept an eye on the points after the title change.

There were 7 points before the change, and minutes after that it went up to 9 - I imagine readers finishing the post they were sent to with the original title and upvoting it. Then it stood there for the next 20 minutes (for now).

My point is there is a lot of gray area between a practical title and linkbaity one. And I think a little friendly, curiousity driven title might be a good thing. Even at HN.

Maybe less people is being directed to the article with this bland title, and less people are realizing it is indeed a good point. I see thousands of AB tests when growth hacking posts here, but none growth through payment method. So it was surprising for me.

Just a thought I had about a little fanciness being a good thing for a title. Just as a good communication is good for a startup. Just like naming it "heartbleed" was a good way to use a fancy name.

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