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The author argues it's better to have monthly subscription plans only and ditch the yearly plans, but I don't really get it. This goes against one of the most c

The author argues it's better to have monthly subscription plans only and ditch the yearly plans, but I don't really get it. This goes against one of the most common cashflow optimizations known in the SaaS world - which is to push as many users to yearly plans as possible. I think long term subscription plans should be preferred as they produce lower churn, make the revenue more predictable and bring more money upfront.

ianandrich 7y ago
I thought he was arguing "Monthly vs. Transactional" rather than "Monthly vs. Yearly". I strongly agree with your assessment that Yearly is better than Monthly.
- Silhouette 7y ago
  Rule #1 is monthly vs. transactional, but then rule #2 is monthly vs. annual.
Silhouette 7y ago
I think long term subscription plans should be preferred as they produce lower churn So the received wisdom says, but particularly with card payments, churn rates due to random charge failures are insane. On top of that, the services that handle the payments and subscription management are often relatively new and prone to making changes up to and including things like dumping their whole API or doubling/trebling their prices overnight, making them terrible business partners to rely on. Literally every such service we have ever used has done something like that to us at some point. We are seriously considering dumping any form of recurring subscription, and all the baggage that goes with them, at one of my businesses. The proposed alternative is a simple tiered pricing model where customers have a choice of periods, with the longer ones being more cost-effective for them, but all payments are single, one-off charges only. This would be combined with something I'm seeing a lot lately, which is saving the customer's payment details so that extending for a further period can be done with just a click or two. The alternative we've been considering is one of the services that goes further, outsourcing our entire payment and sales tax infrastructure to them as merchant of record. Given how prohibitively complicated sales taxes are becoming on international transactions if you want to stay compliant, I wonder if this might soon become the only viable operating method for small businesses and startups anyway. However, these services all seem to be really cagey about telling you what using them will really cost and how legally robust their strategy for sales tax management really is, and I have no reason to believe they will be any more reliable as long term partners than the billing/subscription services, so right now we're hesitant to pursue this idea. I'd be very interested in the results if anyone else has tried either of these changes recently and is willing to share their experience.
rickpmg 7y ago
I think the author's assumption is that the subscriber would use the service for twelve months whether they were on monthly or annual. So, if that's the case, you're better off taking the extra x% percent that a monthly plan gives you. I think the author was also making the point that while you might have all your money upfront, you won't manage it well so it lasts all year. Could you? Yes. Will you? No. And from personal experience, depending on who your customer is, a yearly plan can make revenue far less predictable.. for a corporate customer there is a big difference between a $12k annual charge, and $1k monthly charge. The first they will scrutinize every year and question its value, while the second they might not even notice.
- GordonS 7y ago
  I agree with what you're saying here, but I've also found it really difficult to get corporate customers to sign up on a monthly billing basis - they always want to send a PO on an annual basis, and often don't even have a means internally to pay for software on a monthly basis. I've been on the other side of this in the corporate world too, and paying for stuff was always a horrible experience taking weeks at best, but often months. We'd always try to use OSS when possible, and built rather than bought far more often than we'd have liked, precisely because of how much red tape there was. Sometimes our preferred option only allowed monthly billing, and we went with an alternative instead, because nobody wanted to go through a protracted, painful, soul-destroying process of getting authorisation to pay monthly.
sky_rw 7y ago
Slightly disagree. The metric the author is measuring against is hassle. In my experience up front yearly payments often are much more of a hassle. Invoices, accounts receivable departments, paper checks, etc. I absolutely agree with your metric however, in that from a cashflow and churn basis this is a worthwhile hassle.
nlh 7y ago
I thought about this one as well - it was a bit confusing as I thought the author was confusing cash flow with revenue at first, but then I realized - I think - he’s referring to the fact that an annual subscription has the hassle of “the annual renewal”, which is to say that you have to go through the whole pitch and hope and pray (and negotiation) so you get that annual subscriber to do it again each year. This, as opposed to simply billing monthly, continuously providing value, and reducing the headache.
joisig 7y ago
OP here. My point is that getting paid yearly, especially if a lot of your subscribers pay yearly, means you're back to a similar feast-or-famine kind of cash flow situation as when you're transactional (e.g. an e-commerce shop). This is more hassle since you now need to be more careful about managing your cash flow and making sure you put aside for the leaner months. I fully acknowledge that it is a great hack for customer-funded startups (we do it ourselves at CrankWheel); as with all the "rules" it's more about becoming aware of the hassle associated with a given decision. I also question whether annual billing increases retention, when your retention is good already (say, 3-5 years projected lifetime). Sure, it lifts your retention when your average lifetime is less than a year, but does it really when you have very low churn? Or are those big annual bills going to be scrutinized more thoroughly than a monthly cost?
- ThisIsTheWay 7y ago
  If you’re handling revenue properly, cash flows aren’t an issue. A subscription paid upfront should be spread across the period of the subscription as deferred revenue. https://www.thesaascfo.com/deferred-revenue-saas/ https://www.thesaascfo.com/deferred-revenue-saas/
- benjaminjosephw 7y ago
  Annual subscriptions are particularly valuable for SaaS companies which are growing consistently. If I can reinvest the profits from an annual subscription in my growth engine I've self-funded growth that I would otherwise not have had. I'd only want to do this if my investment were likely to produce a higher value over the same period than revenue lost from the discount I've given my customer. Regardless of retention benefits, if you've got predictable growth then annual subscriptions should be well worth the discount.
imhoguy 7y ago
Annual CC subscription may actually cause more churn on renewal. You need to remind the customer about the end of subscription cycle, which maybe an occassion to rethink the purchase. Also I wouldn't automatically renew the yearly subscription without prior communication as that can result in unexpected charge on CC statement and thus a risk of charge-back.
notyourday 7y ago
Annual subscriptions are a terrible thing for a bootstrapped business without a huge runway because a sales of annual subscription is a liability from the accounting and legal perspective. Just because you got cash does not mean it is yours. In the first month only 1/12th of the money is yours. By spending more than 1/12th you are basically borrowing the money from the customer based on the terms ( whatever your service was ) at the moment of subscription sale. If you have a runway, already then it is great and optimizing for the cashflow is great. If you do not have a runway, the last thing that you want to do is commit to a long term delivery of something rather than charge the customer monthly.

ianandrich 7y ago

I thought he was arguing "Monthly vs. Transactional" rather than "Monthly vs. Yearly". I strongly agree with your assessment that Yearly is better than Monthly.

Silhouette 7y ago
Rule #1 is monthly vs. transactional, but then rule #2 is monthly vs. annual.

Silhouette 7y ago

I think long term subscription plans should be preferred as they produce lower churn So the received wisdom says, but particularly with card payments, churn rates due to random charge failures are insane. On top of that, the services that handle the payments and subscription management are often relatively new and prone to making changes up to and including things like dumping their whole API or doubling/trebling their prices overnight, making them terrible business partners to rely on. Literally every such service we have ever used has done something like that to us at some point. We are seriously considering dumping any form of recurring subscription, and all the baggage that goes with them, at one of my businesses. The proposed alternative is a simple tiered pricing model where customers have a choice of periods, with the longer ones being more cost-effective for them, but all payments are single, one-off charges only. This would be combined with something I'm seeing a lot lately, which is saving the customer's payment details so that extending for a further period can be done with just a click or two. The alternative we've been considering is one of the services that goes further, outsourcing our entire payment and sales tax infrastructure to them as merchant of record. Given how prohibitively complicated sales taxes are becoming on international transactions if you want to stay compliant, I wonder if this might soon become the only viable operating method for small businesses and startups anyway. However, these services all seem to be really cagey about telling you what using them will really cost and how legally robust their strategy for sales tax management really is, and I have no reason to believe they will be any more reliable as long term partners than the billing/subscription services, so right now we're hesitant to pursue this idea. I'd be very interested in the results if anyone else has tried either of these changes recently and is willing to share their experience.

rickpmg 7y ago

I think the author's assumption is that the subscriber would use the service for twelve months whether they were on monthly or annual. So, if that's the case, you're better off taking the extra x% percent that a monthly plan gives you. I think the author was also making the point that while you might have all your money upfront, you won't manage it well so it lasts all year. Could you? Yes. Will you? No. And from personal experience, depending on who your customer is, a yearly plan can make revenue far less predictable.. for a corporate customer there is a big difference between a $12k annual charge, and $1k monthly charge. The first they will scrutinize every year and question its value, while the second they might not even notice.

GordonS 7y ago
I agree with what you're saying here, but I've also found it really difficult to get corporate customers to sign up on a monthly billing basis - they always want to send a PO on an annual basis, and often don't even have a means internally to pay for software on a monthly basis. I've been on the other side of this in the corporate world too, and paying for stuff was always a horrible experience taking weeks at best, but often months. We'd always try to use OSS when possible, and built rather than bought far more often than we'd have liked, precisely because of how much red tape there was. Sometimes our preferred option only allowed monthly billing, and we went with an alternative instead, because nobody wanted to go through a protracted, painful, soul-destroying process of getting authorisation to pay monthly.

sky_rw 7y ago

Slightly disagree. The metric the author is measuring against is hassle. In my experience up front yearly payments often are much more of a hassle. Invoices, accounts receivable departments, paper checks, etc. I absolutely agree with your metric however, in that from a cashflow and churn basis this is a worthwhile hassle.

nlh 7y ago

I thought about this one as well - it was a bit confusing as I thought the author was confusing cash flow with revenue at first, but then I realized - I think - he’s referring to the fact that an annual subscription has the hassle of “the annual renewal”, which is to say that you have to go through the whole pitch and hope and pray (and negotiation) so you get that annual subscriber to do it again each year. This, as opposed to simply billing monthly, continuously providing value, and reducing the headache.

joisig 7y ago

OP here. My point is that getting paid yearly, especially if a lot of your subscribers pay yearly, means you're back to a similar feast-or-famine kind of cash flow situation as when you're transactional (e.g. an e-commerce shop). This is more hassle since you now need to be more careful about managing your cash flow and making sure you put aside for the leaner months. I fully acknowledge that it is a great hack for customer-funded startups (we do it ourselves at CrankWheel); as with all the "rules" it's more about becoming aware of the hassle associated with a given decision. I also question whether annual billing increases retention, when your retention is good already (say, 3-5 years projected lifetime). Sure, it lifts your retention when your average lifetime is less than a year, but does it really when you have very low churn? Or are those big annual bills going to be scrutinized more thoroughly than a monthly cost?

ThisIsTheWay 7y ago
If you’re handling revenue properly, cash flows aren’t an issue. A subscription paid upfront should be spread across the period of the subscription as deferred revenue. https://www.thesaascfo.com/deferred-revenue-saas/ https://www.thesaascfo.com/deferred-revenue-saas/
benjaminjosephw 7y ago
Annual subscriptions are particularly valuable for SaaS companies which are growing consistently. If I can reinvest the profits from an annual subscription in my growth engine I've self-funded growth that I would otherwise not have had. I'd only want to do this if my investment were likely to produce a higher value over the same period than revenue lost from the discount I've given my customer. Regardless of retention benefits, if you've got predictable growth then annual subscriptions should be well worth the discount.

imhoguy 7y ago

Annual CC subscription may actually cause more churn on renewal. You need to remind the customer about the end of subscription cycle, which maybe an occassion to rethink the purchase. Also I wouldn't automatically renew the yearly subscription without prior communication as that can result in unexpected charge on CC statement and thus a risk of charge-back.

notyourday 7y ago

Annual subscriptions are a terrible thing for a bootstrapped business without a huge runway because a sales of annual subscription is a liability from the accounting and legal perspective. Just because you got cash does not mean it is yours. In the first month only 1/12th of the money is yours. By spending more than 1/12th you are basically borrowing the money from the customer based on the terms ( whatever your service was ) at the moment of subscription sale. If you have a runway, already then it is great and optimizing for the cashflow is great. If you do not have a runway, the last thing that you want to do is commit to a long term delivery of something rather than charge the customer monthly.