Robust cash flow is a big deal for growing SaaS companies, as are ongoing client relationships. It’s savvy to get ahold of more of your customers’ money upfront and to find ways to ensure they stick around for a while.
The annual subscription model with upfront payments is one good way to achieve both of these ends. Below we explain why and how SaaS businesses should pursue more annual subscriptions with upfront payments.
Why Pursue Annual Subscriptions
Having customers pay for 12 months at once puts useful money in your pocket to recoup customer acquisition costs and confidently approach upcoming operating expenses. Even a small portion of your customers paying upfront can be a lifesaver for your business.
Additionally, longer subscriptions reduce customer churn — in fact, there’s an inverse correlation between percentage of customers on annual contracts and amount of churn. Companies that have three-quarters or more of their customers on annual contracts lose half the number of customers than do companies that don’t have any annual subscriptions.
While the benefits of annual subscriptions are real, there are also pitfalls and drawbacks to this approach. The stability of annual contracts can disguise lack of growth or even a shrinking of your customer base. Much of your cash on hand and management effort may have to be plowed into making sure existing customers remain happy and engaged — and likely to renew — leaving you little funding and bandwidth to focus on your sales pipeline.
But as long as you remain alert to its management challenges, an annual subscription model may still be a winning approach to growing your SaaS business.
How to Encourage Annual Subscriptions
If you decide an annual subscription model is right for you, how do you implement it?
Here are a few ideas for approaching the transition to annual subscriptions.
Require an opt-out
Try setting up your checkout to opt customers into an annual option as the default. Make it so they must take action to decline the annual sign-up, such as clicking a “monthly” radio button. Clearly indicate what each of these options entails and highlight any savings you’re offering for the annual choice. The goal is not to trick anyone into the annual option but to encourage a perception that it’s the standard or “normal” option for your product.
Ask at a better time
Some customers may be loath to pay for a year upfront when they haven’t even tried your product yet. Yet many companies only offer the annual subscription option at the sign-up stage — a kind of use-it-or-lose-it approach. But what about offering it as an upgrade option at the moment when non-serious customers tend to churn out? Those who are still around at the time when retention tends to plateau are more likely to jump at an annual subscription offer with a discount attached.
Offer freebies
Annual subscriptions can be made attractive by way of bulk discounts, such as offering two months’ usage free with an annual subscription. It’s better to offer set amounts or items for free instead of citing a percentage discount, since humans aren’t adept at interpreting fractions and percentages. Therefore, people generally prefer to get something for free than buy at a discount.
Only offer annual subscriptions
One possibility is to make a paid-upfront annual subscription the only option. For workflow-based products that require major inputs or that accrue value over time, an annual-only option may make most sense. But even for those products that could be sold successfully in other ways, going all-out annual subscriptions can still be beneficial — streamlining logistics, improving cashflow, and depressing churn. That being said, you will certainly be closing the door to a certain segment of potential customers.
If even a small portion of your customers — say 10% — were to opt for annual subscriptions, your cashflow would immediately shift in a business-friendly direction and your outlook for customer retention would brighten up. The drawbacks to this approach, while worth considering, most likely pale in comparison to the benefits.
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