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The answers to these questions, and why they're not addressed at length there, is: 1) The typical SaaS company has no meaningful ability to raise capital at c

by patio11 12y ago

The answers to these questions, and why they're not addressed at length there, is: 1) The typical SaaS company has no meaningful ability to raise capital at cheaper terms than pre-pays offer. If you could get a bank loan for 5% a year, then you actually have to do math here, but you can't get a bank loan for 5% a year as a SaaS company. It's virtually impossible. Not only can my business not get a bank loan, large, successful SaaS companies find it difficult to raise meaningful amounts of money on the terms that e.g. a restaurant would get if they pledged the real estate as collateral. If you speak to more specialized lenders, you can get them to loan you money based on your existing revenue, but the cost is typically > 10% on an APR basis. If you speak to less-specialized alternative small business lenders, you can easily end up in the 30% region. (OnDeck, for example.) Or you could do merchant cash advantages, which are up their with payday loans, except company-sized. 2) A rule-of-thumb for churn rates on month-to-month SaaS is +/- 5% before you start really working on it, 3% after you've done significant work on that, and 2% if you're among the most successful in the industry. This implies that you expect to lose between ~22% and ~46% of customers in the first 12 months. The yearly discount costs you ~8% and locks in those first 12 months of revenue. Assuming people willing to accept that deal are not a-prior wildly better customers than the median customer at the best month-to-month SaaS companies, it's net-beneficial virtually every time.

dennisgorelik 12y ago
That explains why switching to annual plain is beneficial. It does not explain $200 gain per email. 20% of $200 - quite possible. That translates to $40/email, which is still quite significant. But still not $200.
- gojomo 12y ago
  I see how "$200" works strictly as a cash-in-door number – though at the expense of later profits. Toy setup matching the post's parameters: STARTING SITUATION: 10 customers at $200/month = $2,000 cash this month and next 11 months over 12 months = $24,000 expected revenue BUT INSTEAD: send 10 emails, 1 customer prepays $2200 (instead of $200) = $4,000 cash this month then $1800/month next 11 months over 12 months = $23,800 revenue So, this month, the 10 emails brought in $2,000 extra cash – hence, "$200-per-email". But of course it's just pulling revenue forward (borrowing from customers). And, it's at a rather steep effective interest rate: over 17% per year. So while it's cash-flow positive, it's only profitable if there's some combination of (1) productive places to invest that money; and (2) improved mid-year retention of the prepaid customers – that together return more than the ~17% cost.
  - hawkice 12y ago
    It actually leaves you with more money, due to churn being reduced to 0 for that customer for a year. Assuming a somewhat idealized 5% churn, you'll get numbers floating in this ballpark: No Yearly Discount Offer: Month 1: $2,000 Month 2: $1,900 Month 3: $1,805 Month 4: $1,714 Month 5: $1,629 Month 6: $1,547 Month 7: $1,470 Month 8: $1,396 Month 9: $1,326 Month 10: $1,260 Month 11: $1,197 Month 12: $1,137 Total: $18,385 Yearly Discount Offer Month 1: $1,800 Month 2: $1,710 Month 3: $1,624 Month 4: $1,543 Month 5: $1,466 Month 6: $1,392 Month 7: $1,323 Month 8: $1,257 Month 9: $1,194 Month 10: $1,134 Month 11: $1,077 Month 12: $1,023 Total: $18,747 This works for churn = 2% and churn = 3% as well, but the difference is smaller (still favors the yearly discount, though). If you have a churn of 1%, then the yearly discount costs you money, but you still get the cash immediately, which is so useful I'd do still do it. EDIT: It should be noted that the churn rate you care about here is the churn rate of people who would be willing to make a year-long precommit (more loyal customers in general), but I don't see them as being 1% churn level, as 'patio11 alluded to above.

by patio11 12y ago

dennisgorelik 12y ago

That explains why switching to annual plain is beneficial. It does not explain $200 gain per email. 20% of $200 - quite possible. That translates to $40/email, which is still quite significant. But still not $200.

gojomo 12y ago
I see how "$200" works strictly as a cash-in-door number – though at the expense of later profits. Toy setup matching the post's parameters: STARTING SITUATION: 10 customers at $200/month = $2,000 cash this month and next 11 months over 12 months = $24,000 expected revenue BUT INSTEAD: send 10 emails, 1 customer prepays $2200 (instead of $200) = $4,000 cash this month then $1800/month next 11 months over 12 months = $23,800 revenue So, this month, the 10 emails brought in $2,000 extra cash – hence, "$200-per-email". But of course it's just pulling revenue forward (borrowing from customers). And, it's at a rather steep effective interest rate: over 17% per year. So while it's cash-flow positive, it's only profitable if there's some combination of (1) productive places to invest that money; and (2) improved mid-year retention of the prepaid customers – that together return more than the ~17% cost.
- hawkice 12y ago
  It actually leaves you with more money, due to churn being reduced to 0 for that customer for a year. Assuming a somewhat idealized 5% churn, you'll get numbers floating in this ballpark: No Yearly Discount Offer: Month 1: $2,000 Month 2: $1,900 Month 3: $1,805 Month 4: $1,714 Month 5: $1,629 Month 6: $1,547 Month 7: $1,470 Month 8: $1,396 Month 9: $1,326 Month 10: $1,260 Month 11: $1,197 Month 12: $1,137 Total: $18,385 Yearly Discount Offer Month 1: $1,800 Month 2: $1,710 Month 3: $1,624 Month 4: $1,543 Month 5: $1,466 Month 6: $1,392 Month 7: $1,323 Month 8: $1,257 Month 9: $1,194 Month 10: $1,134 Month 11: $1,077 Month 12: $1,023 Total: $18,747 This works for churn = 2% and churn = 3% as well, but the difference is smaller (still favors the yearly discount, though). If you have a churn of 1%, then the yearly discount costs you money, but you still get the cash immediately, which is so useful I'd do still do it. EDIT: It should be noted that the churn rate you care about here is the churn rate of people who would be willing to make a year-long precommit (more loyal customers in general), but I don't see them as being 1% churn level, as 'patio11 alluded to above.