Q: Should we push our customers into annual pricing, or let the smaller customers pay monthly?
It is almost always better to let the customer buy how they are most comfortable buying. Why? It removes friction from the sales process, leading to a higher and faster close rate.
Let’s take a look at Zoom. Zoom was growing > 100% at $500m in ARR, in an already well-established space. It may be the most successful SMB-focused app of our current generation. And in the early days — the early days — it had a ton of competition. It couldn’t risk playing games:
Zoom still does not play games. Zoom lets small groups pay monthly if they want, and easily. No hiding the monthly option, no pricing confusion:
In fact, 26% of Zoom’s customers still paid monthly even at $1b+ in ARR:
And in fact, during peak Covid, when SMBs signed up in droves, Zoom’s monthly customers hit 50% of all customers! More here.
Small businesses and individuals often prefer to pay monthly, even at a significantly higher price (e.g., often 20%+ higher). Certainly not always, but often. The money is often literally, or figuratively, out of their own pocket. Few of us like to pay rent annually, even if it were cheaper.
Bigger customers, though, find most monthly payments a huge accounting headache. And they pay out of an annual budget, not their own credit card. So a discount for annual is appealing to them. The annualized cost is already baked into their budget. And dealing with accounting every month to get a credit card payment approved isn’t worth the trouble.
In the end, if you sell to mostly to small businesses, and give customers an option, you’ll likely see a split, like Zoom and others.
If you take the monthly option away, you don’t accomplish much. You just make buying your app harder. Yes, nominal churn may seem lower by removing a monthly option. But that’s an illusion. If they churn at the end of a yearly subscription, or 6 months into a monthly one, they’re still gone. It doesn’t really matter much when they leave.
It’s your job to fight to keep them.
Now a few caveats:
First, apps that take longer to deploy, and are more work to deploy, may in many ways benefit from annual-only pricing as it raises the bar for customers to deploy and then increases their buy-in. Put differently, apps that require a lot of business process change may not be well suited in some cases for free or monthly plans. This is what Smartsheet has found, and indeed it’s more work to get going there on say Zoom. The less PLG your product is, the more this may make sense.
And eventually … when you are hyper-mature, and maybe growing 15%. Then maybe pricing games are worth it. At scale, even small pricing changes can have a big impact. But until then, make it easier to buy. The key to that is letting customers buy the way they want to buy. It’s worked for Zoom and Slack just fine.
(note: an updated SaaStr Classic answer)