In recent discussions with founders and CEO’s of SaaS companies we have discussed the advantages and disadvantages of asking customers to prepay their subscription annually. When drilling into the why, it is often due to a motive to improve conversion rates. I feel this is a mistake…
My opinion is that a customer who is willing to prepay for the year was likely to convert anyway. Alternatively, offering a prepay discount of some sort to a renewing customer likely will not keep them if they were already planning to leave.
Annual prepayments should not be done to improve retention and conversion rates. If that’s the case, then when is it appropriate to offer annual prepayments? Here are two thoughts…
- In the early stages of your business, an annual prepayment offer can be successful to test “product-market fit”. If you did not build the “right product” for the “right customer” they will not prepay.
- In all stages of your business obtaining annual prepayments will fill the cash void. With a traditional SaaS business model, you pay to acquire the customer on day one and only recover acquisition cost over time as you collect subscriptions. Meaning that your ability to grow is going to be limited by your abilities to fund that cash gap.
When you receive payment upfront, there is no cash gap unless your acquisition cost is higher than one year’s subscription revenue. I would not recommend such an aggressive customer acquisition spend until the company is further into the growth stage and is unquestionably well funded and you can show enough historical data in it’s unit finance and acquisition channels to be satisfied about investing aggressively in growth.
If you are a startup or established business with a SaaS model we would like to talk to you about improving your finance model. Contact us today we would love to talk with you.