Dear SaaStr: What Percentage of Customers Choose Prepaid Annual Billing Versus Monthly?
Answer: The percent that want to.
Annual billing is a wonderful thing, done right:
- In the early and middle days, it’s magical for cash flow — assuming it’s prepaid on a credit card, or you are actually good at collections.
- It decreases churn, at least in terms of timing (even if they churn, it takes a year to ‘happen’).
- And it’s sometimes easier to administer — automated monthly credit card payments are easy nowadays, but any invoicing process more than an annual one can be a big administrative headache.
But the thing is, there is a natural and organic pattern to this:
- Very small businesses generally prefer to pay monthly. As much as 70%–80% of the time, small businesses buying a product <= $299 a month will want to pay monthly, period.
- Large enterprises almost always want to pay annually. There is no way they want to get 12 invoices a year through procurement. Way too much hassle, especially for a purchase that is budgeted. Even if they ask for this at first, they’ll likely switch to annual billing later once it’s budgeted for next year.
- And in the middle? It depends.
My simple suggestions:
1/ Do what your customers want. Remove friction from sales, and you close more. Period.
2/ For self-serve and low-end products, just mark up your monthly pricing by 20% (so you can discount annual contracts by 15–20%). And let the customer pick what is best for them.
3/ Don’t see annual payments as some sort of magical solution to cash flow. Done right, they do help. Done wrong, they lead to late collections and customer friction.
This is the way to close the most customers.
(note: an updated SaaStr Classic answer; 20% off image from here)