{"id":5107,"date":"2016-07-28T16:16:22","date_gmt":"2016-07-28T14:16:22","guid":{"rendered":"https:\/\/chartmogul.com\/blog\/?p=5107"},"modified":"2023-08-10T12:24:28","modified_gmt":"2023-08-10T10:24:28","slug":"saas-qa-subscription-annual-billing","status":"publish","type":"post","link":"https:\/\/chartmogul.com\/blog\/saas-qa-subscription-annual-billing\/","title":{"rendered":"SaaS Q&A: How does annual billing impact a subscription business?"},"content":{"rendered":"

Subscription services offer discounts if you pay annually, because annual contracts \u2014 particularly those with upfront payment \u2014 benefit their business in several ways.<\/p>\n

Why annual billing?<\/h1>\n

Primarily, companies prefer annual contracts because they can grow faster<\/strong>. Subscription companies, particularly young startups, prefer pre-pay annual contracts because the business receives a boost in cashflow. And with the predictable revenue of a subscription model made even more<\/em> predictable through a year-long commitment, these companies can more confidently forecast and make decisions concerning their growth down the line.<\/p>\n

How do annual contracts help grow a subscription service?<\/h1>\n

Cashflow<\/h3>\n

Especially helpful to early or small companies looking to scale. Growth requires cash. With pre-paid annual billing, the upfront influx of cash can be reinvested in the company. More development time on the product? Hiring an outbound sales team? Expand markets? This cash investment fuels new growth and new business, while the company simultaneously fulfills the annual contracts and serves existing business. Otherwise, the company would have to wait for incremental payments of cash, as with monthly billing, or an after-the-fact\u00a0lump sum of cash, as with post-pay annual contracts.<\/p>\n

\u201cManaging cash collections and structuring sales contracts are some of the most impactful initiatives a SaaS company can undertake to maximize their chances of success, particularly in the early days of the company\u2019s life.\u201d<\/p>\n

–Tomasz Tunguz<\/a>, on how the upfront cashflow from annual contracts can help subscription businesses<\/p><\/blockquote>\n

Important to note: Increased cashflow does not necessarily mean a sudden boost in revenue<\/strong>. This is because subscription businesses follow a specific revenue recognition schedule. To learn more, take a look at our Ultimate Finance Cheat Sheet<\/a>, tailored for the subscription model.<\/em><\/p>\n

Healthy Metrics<\/h3>\n

A secondary but also important benefit is that it helps reduce churn \u2014 and this has positive impact on the rest of the subscription metrics. With an annual contract, the customer is committed, and the team isn\u2019t spending energy or resources on chasing down and locking in revenue at the end of each month. With the higher retention rate, the company also retains the money it spent in acquiring those customers in the first place. In this way, annual billing stabilizes or lowers Customer Acquisition Cost, and in turn, helps increase Customer Lifetime Value.\u00a0The ultimate bottom line for a subscription service, though, is recurring revenue. And the combination of all the healthy metrics above results increases the company\u2019s Monthly Recurring Revenue.<\/p>\n

Ultimately, faster growth and healthier metrics present a much better picture to investors for future fundraising.<\/p>\n

If you\u2019d like a rundown of these metrics and\u00a0how each\u00a0impacts a subscription business, check out our\u00a0Ultimate Metrics Cheat Sheet<\/a>\u00a0for SaaS and subscription businesses.<\/em><\/p>\n

What are some\u00a0challenges of annual billing?<\/h1>\n

The company needs to demonstrate value enough to warrant the commitment of a year contract. This may take the form of a longer free trial, more involved demos with training aspects, etc.<\/p>\n

With monthly subscription contracts, the lower payments don\u2019t cause any sticker shock. The pay-as-you-go structure doesn\u2019t intimidate the customer. To overcome these potential barriers to purchase, companies might try the following:<\/p>\n