Subscription plans with monthly billing are the lifeblood of most SaaS startups. They make it easier to convert leads and trial users into paying customers while delivering a predictable amount of monthly recurring revenue to help grow your startup.
However, it can be hard in the beginning to get monthly recurring revenue up to a level to cover operating expenses. This is especially true for bootstrapped SaaS startups. One of the best ways to overcome this challenge is by selling subscriptions with annual billing rather that monthly billing.
Though it might be a little more challenging to sell customers on annual billing, it has a ton of benefits for your startup if you can make it work. Here are the four big benefits of annual billing for your SaaS startup.
1. Cash Flow
Cash flow is key for any startup. While monthly billing is great for cash flow when you achieve a level of scale, it can be a challenge to cover operating expenses until that scale is reached. This is especially true if your price point is in the tens to hundreds of dollars per month.
By going with an annual billing plan, you receive an entire year of revenue upfront. This makes it much easier to cover operating expenses and provides more capital for growth and product development.
Let’s look at a hypothetical SaaS startup that sells an average monthly subscription for $200. If they aim to generate $10k a month in cash flow to cover expenses that would require 50 new customers per month. However, an annual billing model only needs 5 new customers per month to add the same monthly cash flow.
Every time you add a new customer, it is going to impact operations. As you acquire more customers, your team will need to expand more resources and time on providing support. This means on-boarding new customers, answering support questions, fixing bugs, building additional infrastructure and all the other miscellaneous activities and expenses.
With annual billing, you’ll need fewer customers to hit your monthly cash flow goals than with monthly billing. This means less resources and expenses dedicated to customer support and more time to focus on product development.
3. Customer Churn
Churn is one of the challenges that most SaaS startups face. When your product is still new, the interface is clunky and the feature set is limited, it can sometimes be hard to retain customers. This results in spending countless hours on on-boarding customers and providing great support only to lose those customers within a couple months.
With annual plans, churn is much less of an issue. The hours and expenses involved in on-boarding and supporting a customer is covered by a year’s worth of cash flow. It also means that you have an entire year to improve your product, make it more intuitive and build out the feature set to retain those customers.
4. Product/Market Fit
Achieving product/market fit is a challenging and iterative process. It can take considerable time to build, collect feedback, and improve time and again.
Monthly billing makes it really easy for customers to “kick the tires” and try out your product with little commitment. Getting more customers is great, but it also means that you’re more likely to have customers that might not be a very good fit for the product and problem you are trying to solve. This can lead to confusing product feedback that can derail you from achieving product/market fit.
With annual billing, you’re more likely to get customers that really value the problem your product is trying to solve. When they signup, they are going to be around for a year and will be more likely to give you valuable feedback. This helps ensure you stay focused on achieving product/market fit for the right customers to solve the right problem.
As a SaaS startup, annual billing might be a more effective solution to achieve your goals. Though a more challenging sale, annual billing provides more cash flow, less customers to support, and valuable product feedback.
If you’re struggling to attract new customers and closing annual or monthly deals feel free to reach out to SalesEngine for help.