Dear SaaStr: How Do I Convince My Customers with Monthly plans to Upgrade to Annual Plans?
My advice: Don’t. It’s too many calories expended for not enough benefit.
Let me explain what I mean …
- Large customers only pay via invoices, especially for any deal of any material size (>$10k a year). Invoices have their own annoying set of characteristics (they can be Net 60+, you have to deal with procurement, etc.). But. Usually, you can get an annual deal here. The last thing a VP in a Fortune 5000 company wants to deal with is credit card payments or monthly invoicing. They want to budget annually for stuff.
- The smaller the customer, the more important micro-cash management is. And the smaller the price per month, the more practical is it to put it on a credit card.
So products that are < $99-$299 a month, many if not most of your customers will pay monthly.
So what do you do to maximize annual prepayments (which you do want)?
- For smaller customers, offer a 20% discount for prepaying annual. The folks that care about price will take it. The folks that care about micro-cash management won’t.
- For larger customers, make annual contracts the default, once you’ve gotten a few under your belt. But — you may need a good VP of Sales to help you make this stick, so don’t be too dogmatic here until you have a real VP. And incent your sales reps to close annual deals, with either a larger commission, or a smaller one for non-annual deals, and/or clawbacks on any deals that don’t last a year.
You can’t change the way your customers want to buy. Well, you can, but if you do, you add friction to the sale, which generally is ROI negative. Instead, you want to optimize around helping the customer prepay annually.
Now, there are exceptions. Companies like Smartsheet sell to SMBs but have many annual contracts a standard practice because deploying involves some business process change. Annual puts more skin in the deployment game.
But most folks doing self-service and selling to small businesses will find many want to pay monthly. Better to just close them. And let them go if they want.
MongoDB in fact found pushing annual contracts led to a substantial decrease in sales. It just added too much friction to a developer sale, when folks are used to trying before they buy, and paying slowly until they pay a lot. More on that here:
#7. Not pushing annual contracts so much helped. As Mongo scaled up its sales team, at first it had an incentive program that heavily pushed annual deals. They saw this creating friction because of the approvals required for long-term commitments, so they changed the sale comp plan to incent sign-ups instead. A reminder that sales incentives really matter … and that you should just let customers buy the way they want to buy. If you want to close the most customers, at least.
And Zoom in fact on the path to $4B ARR increased the percent of monthly customers it had to 50% (!). It scaled back a bit as growth slowed, but still.
Yes, at the margin, getting some monthly customers to convert to annual may bring in some more cash. But usually, it’s at the cost of a lot of friction.
Make sure it’s worth it.
A related post here:
(note: an updated SaaStr Classic post)
