One of the most important decisions you need to make when running a software-as-a-service (SaaS) company is your pricing strategy. Your cash flow (and survival as a business) depends on growing a customer base and securing a recurring source of revenue from those customers. For most SaaS companies, there are two main pricing strategies available – monthly billing and annual billing. Each strategy has its advantages and disadvantages, so consider these points as you decide on an appropriate pricing strategy for your business.
Many SaaS companies use a monthly billing strategy. Monthly billing can expedite the acquisition of new customers, as their upfront cost is relatively low, making it easier for them to sign up for the service. Automatic recurring billing (and payment) can also make it very easy for customers to pay for the service and keep subscribing to it.
If you’re a start-up company, using a monthly billing strategy makes sense. New customers may be reluctant to make a long-term commitment upfront, especially if you have established competitors with good reputations. Your top priority as a start-up is to acquire an initial customer base, build trust with them and demonstrate to the marketplace that you can provide a reliable, valuable service.
The main downside to a monthly billing strategy is the possibility of a high churn rate. It is easy for a customer to cancel service after just a few months, and you most likely will not recover your upfront acquisition costs if a customer leaves you after a short time. That’s an example of why having adequate start-up capital is so important for a new company’s success.
For an established company, an annual billing strategy has several benefits. Perhaps the most important one is improved cash flow. With annual billing, you get 12 months of revenue upfront and immediately cover your customer acquisition costs. You’ve also reduced your churn rate and improved customer retention time to at least one year. This a 12-month commitment, so you have a longer time to show your customers the benefits of the service you provide, making contract renewal more likely.
On the downside, your total annual revenue per customer will probably be lower, as most SaaS companies that offer an annual billing option give a 15-20% discount to entice customers to switch from a monthly plan to an annual plan.
Combination of monthly and annual billing
Once you’ve made it past the start-up stage, giving your customers a choice between monthly and annual billing is a smart move. You will have some customers that won’t want to switch to an annual billing plan due to cash flow issues or other reasons, and you will lose these customers if you don’t have a monthly billing option. Once you’re established and have a good reputation, some new customers will initially sign up for discounted annual rates, so offering both monthly and annual options benefits both your customers and your cash flow.
Your website for marketing your services reflects on your ability to provide your services effectively, so be sure it makes a positive impression on potential customers. Consider using a website monitoring service, this way you promptly know if your site loading speed degrades or if your site goes down.
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