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