Should a new SaaS company have annual plans?
While researching for my SaaS product which I'll be launching in 1 month, I was stuck on deciding between monthly and yearly.
While yearly is good and gives a lot of capital, what if I'm unable to service the user after a few months?
What if my costs go up due to new features and it is no longer feasible to service at the original price?
What if the customer wants to cancel on month 3?
Wanted to know from experienced people, what would you do and why?
Of course.
You receive higher cashflow that can be reinvested in the business.
'What if my costs go up due to new features' - it's your business, will your cost go up due to new features? And is it such a problem that some customers (the ones who believed in you and paid a fledgling startup an annual subscription) are grandfathered on a cheaper plan if you raise prices?
If the customer wants to cancel you refund them or don't according to the terms clearly displayed at subscription time.
If people want to give you money for an annual plan, you really ought to let them.
"If people want to give you money for an annual plan, you really ought to let them."
My thoughts exactly. Trying to figure out how to balance the benefits to the risks!
Thanks for your neatly laid out points.
I'd definitely second what Mike said.
One I am considering is bi-annually which allows them to feel more comfortable, get a discount from the monthly price, and you are not in a one-year commitment. However, I have not A/B tested this.
From previous experience, these yearly plans can be very helpful to bring in the necessary cash-flow to move your company forward so you can be around next year.
You're welcome :)
I would add:
With the notion of higher cash flow, I would be careful. The customer prepaid not only the profit but also the expenses. The expense part needs to be put aside and can't be spend today. Otherwise, there is a significant risk of running out of money further in the year.
And what will happen to those customers when you close up shop 5 months in? Best you can do is refund them for the remainder of the year; but even then you're essentially screwing them over, as they were expecting to receive a full year of service on which they could be depending.
Depending on how you have declared your terms of service, you could very well find yourself in legal trouble as well if you decide to shut down the service without honoring those yearly commitments.
All of his/her customer's lose if they shut up shop - higher cashflow is one way of ensuring that they don't.
T&cs should always allow for the possibility of things going wrong. If a Saas company can offer 'lifelong' subscriptions - as many do - then annual should be fine.
The bigger point, of course, is don't limit your potential before you set out. Take quarterly subscriptions if you need to.
Still a bad idea.
Sinply offering really subscriptions is not going to magically increase cashsflow. One could even easily argue that in the early days of a startup, monthly subscriptions provide a more sustainable cash flow modal compared
to yearly subscriptions.
Lifetime subscriptions are even worse.
Not offering yearly subscriptions is by now means “lmiting your potential”. It’s simply matter to starting out with a business model that is better suited for an early stage startup.
Final point; you will find that a lot of payment providers will either disencourage or flat out prevent new businesses from doing yearly plans; simply because they know this poses a huge risk and they will be on the hook if something goes wrong, which appearently it often does. That should tell you something.
Why not offer both?
Because of the dilemmas I've stated in the post!
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Monthly is king. I didn't purchase Basecamp 3 until they added a monthly plan.
Why exactly?
1.- Cash flow
2.- I don't want to make long-term commitments with any platform
Try to make your calculations and see if you could potentially offer the service for a full year, even if you would need to cut your salary or worst case, start working on something else.
Unless you can't do that, I would also suggest to start with a Monthly plan.
There are a lot of services, which advertise with X$ forever...but how can you say that? I don't think it is correct towards the customer.
Usually, when offering yearly plans and a customer wants to quit half way through, there are 2 ways to to it, which you should have laid out upfront:
a) the customer stays on the yearly plan until the already end period, then he is downgraded
b) the customer is downgraded right away and receives a credit for his unused portion of time.
Not only my payment provider (Braintree, of which I'm a now relatively new customer) probably wouldn't allow yearly plans right away, I wouldn't feel comfortable providing yearly plans for the very reasons you stated in your questions.
This is the critical part:
Exactly, what then? I've already said this before on IH, but I'll say it again - accepting payments is like taking a line of credit. Your payment processor has to weight the risk - what if you allow yearly plans, then take all the money and run? The payment processor will be liable for the service you stopped providing and will have to refund those people. Of course I'm sure you wouldn't do that, but I'd say unless you have solid cash reserve in the bank to keep the lights on for a year (or at least that's the time I'd feel comfortable with), don't offer yearly plans.
Regarding:
You update your prices (but not to customers who have already paid for a year, obviously).
YESSSS
Any SaaS company must have a very clear pricing strategy and annual subscription plan is very important for it. Many user find discounts in annual plan that's why they opt for annual plan.
In fact I also suggest to offer freemium plan for limited amount of time.
To get idea you can refer to https://lambdatest.com/pricing
I say go for annual plan as a whole but to keep track of your work you can also make monthly plane. You can do all these with the help of a project management software like ProfitBoard.
No. A bootstrapped business just starting out should, in most cases, NOT offer yearly plans. You do not want to be on the hook for a yearly contract that early in your business' life. You simply do not know for sure if you'll be around in six months.
Even refunding customers when you go bust is not doing them justice; they paid for a yearly and can reasonably expect the product or service to be around for that full year.
If you are starting you should stick with monthly. It is very hard to get users to commit with a new product for one month, imagine for one year.
Sounds like you've answered your own question with the risks you've stated. I would just start with a monthly plan and then you can add an annual plan when you are more confident that it makes sense.
What price point are you targeting? In my experience, unless you have an amazing set of case studies and press coverage proving your value and expertise, or a crack squad of enterprise sales reps, or a proven track record of building world-class enterprise software, no one is going to trust you with a year's worth of payment upfront. Stick to monthly for now.
The price point is between $149-$299/mo
Yea - in that case you're building a low/no-touch sales & marketing operation. You can't afford steak dinners and a fancy sales team with that ARPU. And it's very hard to sell annual without a higher-touch sales process. There are some exceptions to that rule, but they tend to be very well-established businesses. Stick to monthly for now!