May 15, 2019

SaaS founders who added a discounted annual payment option, what were the results?

Gene Maryushenko @genemachine

If possible, please touch on overall revenue, b2b or b2c, churn & quality of customers.

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    I provide a ~20% discount for annual billing (B2B SaaS). I've considered and re-considered this many times and I always come to the conclusion that this is exactly the right discount. It simplifies billing/accounting, somewhat alleviates churn (my customers are mostly small businesses and some go bankrupt during the year), moves cash flow earlier in time, and provides value for customers.

    The billing can only be selected at signup time, afterwards changing it requires E-mailing and manual switchover. This happens, but is rare.

    I see a 50/50 split between monthly and annual plans. I think many customers choose monthly because:

    • they are not sure if they can trust the software yet
    • they are not sure if they will want to keep using it
    • very small businesses might simply not have the money for the full year
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      Jan thanks for sharing! I'm curious how you determined what to price by? Right now it looks like you are pricing by the number of users. Have you thought about pricing by some other metric (value-based)? I wonder if pricing by the number of parts being tracked would translate into more revenue for you? There are some interested cases where companies price based on value provided instead of number of users (unless that number is really high ie. enterprise) and they see more revenue as a result. Chargebee and Transistor come to mind. I plan on writing a post about that soon.

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        I am in the process of transitioning from user-based pricing to feature-based pricing. It's mostly done, and these days most customers choose the plan with the features they need.

        As for users, you can actually get additional users at $10/month, but I don't advertise that fact yet. I'm still on the fence whether to make this prominent or not. I'll probably advertise it once I add more features that clearly separate plans.

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    My company is in the B2B hosting space, targeting development teams.

    We added annual billing as an option a few years ago. Unfortunately, we don't make it easy for folks to switch. So they have to choose annual or monthly when they register. Then, we have an bimonthly automated email that goes to all of our monthly customers asking them to switch to annual to save about a month of fees. (We should do like Noko and make the verbiage more about filing one expense report vs 12!)

    The result: something like 50% of our non-Enterprise recurring revenue is on annual plans. I'm pretty sure this reduces our churn and makes our revenue a lot more predictable. We've been around a while, and our average customer tenure is probably in the 3+ year range, with some customers being >10-year-old accounts.

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      Thanks for sharing. 50% sounds good. It kind of makes sense in hosting space. It's not like you're going to switch hosts easily once you sign up! I'm curious if you can somehow push that beyond 50% even. What is your website? I'd love to take a look to see what you guys are doing! One idea I had... was to put emphasis on the yearly plan by showing the discount but also pre-selecting it as most popular.

      I recently wrote an interesting post about how statuspage does their onboarding and they have this clever feature where they make you set up your page first and THEN they recommend pricing based on what they selected. Of course, I am not sure how to apply this to annual tiers, but it would make for an interesting experiment between different types of plans within the same subscription timeframe.

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        Remember that each annual plan represents money out of your pocket as a discount! Given that, I'm pretty happy with the 50% annual/50% full price split. It's sort of half the customer base is essentially locked in with lumpy cash flow, while the other half is potentially less locked but pays more and has a regular cash flow.

        Thanks for sharing what StatusPage does for onboarding. Our customers are programmers, and as a rule they hate pricing games. So I'm not sure the StatusPage on boarding thing would be a good idea for us.

        Two other things. First, we tried plans in the 3 & 6 month range. For our customers (B2B) and pricing (relatively low), it didn't make sense given the complexity of managing more plans (some of this is pre-Stripe, but even now more plans is more work).

        Second, you really need to have annual plans for Enterprise accounts. Have a higher list price for Enterprise so you can discount somewhat (although not all the way back to your normal pricing). You can segment Enterprise accounts by features (single sign-on & activity auditing are common Enterprise asks in my experience). And/or you can segment on payment features: do they need to pay with a PO, wire, check? Then they are Enterprise and subject to the more expensive Enterprise pricing. It sounds ridiculous, but it is indeed more work to collect payment via PO than Stripe. Also, you will often end up doing vendor on boarding and a bunch of other out-of-band work to get paid. So just charge more for the privilege of accepting payment via PO.

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    Most of our customers love having annual payments. We currently offer a 1-month discount when paid in advance. Most of the time this is a 10k/yr ish value. Contracts above 10k/yr will prefer monthly in our customer base.

    We do pretty much outbound sales so the quality is good. We are b2b doing 250k+/yr.

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      Same here. We do 1y in advance with 1m off. We are selling hosting to micro-SaaS businesses. Our customers typically churn if they go out of business. We are also selling different products to Fortune 500. They insist on 3 to 5 years contract, payable annually. Stability matters incredibly to them because of the investment in training they make.
      My experience is that monthly invoicing/billing is mostly for b2c, or products/services that can be easily replaced.

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        Thanks Sebastien. Have you guys always offered annual plans or was there a point where you introduced them? The churn point makes sense, especially for B2B. I'm curious how that has impacted overall conversions and revenue for you? I see many people saying you "should have" annual plans, but nobody seems to talk about what impact that has had on their SaaS. I don't know if they are not measuring it, or just ran with annual pricing from the get-go.

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          I forgot. With annual pre-payment, ACV ends up above $2K. As a result, we are more in a logic of physical checks and ACH instead of Credit Card processing. That changes the collection and reconciliation process, with different kind of constrains (physical deposit to bank) and risks (no chargeback).

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          Interestingly we started as a dev shop cleaning up the payment and accounting systems of SaaS companies.
          So when we started, it was clear we were going to implement flexibility and options to pay annually at a discount from the get-go.
          As a bootstrapped company we have always offered both, monthly plans paid annually and annual plans because, as others wrote, cashflow is king. Also once you start to understand taxation in accrual accounting, deferred revenue, etc. you never come back to monthly billing unless forced to by the market :).
          Conversion rate is the same. We do not force customers to sign yearly plans (They can choose monthly plans - paid monthly or annually at a discount - if they want to).
          Revenue is not impacted because it is still recognized as the service is delivered.
          As we sell longer term contracts, the balance sheet shows a significant liability (aka deferred revenue for services we committed to deliver to customers in the future); but the bank account shows cash, here, right now, that can be used to finance growth.

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            Awesome, thanks for sharing! I looked around on your site and didn't see the annual option - is that for Enterprise only?

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              There is no annual plans per se. At checkout, we give the option to pay 3months, 6months or a year in advance. On renewal we can also incentive subscribers to buy periods in advance if necessary.
              Because DjaoDjin is so integral to its customers business, it mostly happens they will talk to someone here (most often me) before making any purchase decision. That's how we end-up with physical checks in the mail :).

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                Interesting. So, people call you, you make the "sale" and they send you a check? Is this something you prefer? Is the percentage of web sign ups so low that you don't bother including the annual option on the pricing page?

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                  On an ACV of $60k, the customer often prefers to sent one check. We had to adapt.
                  Until recently, every time the number of sign ups has jumped up, these were bots that found a way to pass the Turing test :). People often contact us first, then sign up after becoming customers.
                  We also have a quarterly option. I am not really sure why we don't advertise the quarterly and annual options on the pricing page. It is a very good question.

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      Did you always have that in place or added it at some point? What was it like before and after for your revenue & conversion rate?

  4. 1

    We are in between B2B/B2C (we call it "pro-sumer). 500k ARR. Added discounted Annual plans in Nov 18:

    Churn down from 11.5% to 9-ish
    Annual plans make up about 12% of subs since Nov.
    ARPU hasn't changed much.
    MoM growth rate is up 2%
    Not much of a change in quality of customer

    Obviously, we don't have the full picture yet but hopefully this helps see near-term impact.

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      11.5 to 9% churn is not bad! I'm curious if you tested adding displaying savings on your pricing page? "Save 20%" for example, above annual toggle and in the pricing table.

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        We do that within the app pricing. Should probably add it to the website as well.

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    Cash is king.

    Annual deals should be implemented so much more than they are.

    It sounds like you are worried about the implications of adding an annual option? If you let your customer choose between the two what is the concern?

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      What has your experience been with this?

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        Really interested to know.

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