Q: Dear SaaStr: When should a SaaS Company allow Month-to-Month contracts vs requiring 12-month commitments?
I think this is a topic where you get a lot of bad advice.
Annual contracts combined with prepaid cash are a huge benefit. You get all the cash up-front (this is how I went cash-flow positive, in fact), and your churn almost by definition goes down. Because the earliest chance the customer has to churn is 12 months hence.
Get them whenever possible. 😉
But …
It’s a false choice.
- Bigger companies want to sign annual contracts, especially in exchange for discounts. It’s how big company procurement and budgeting processes work. Nothing is a bigger headache in a Fortune 500 company than having to go back to procurement every single month to get an invoice approved. And …
- Very small businesses and individuals mostly want to pay monthly on their credit cards. Think about yourself as a consumer. How often do you prepay annually? Only for a subset of services you are confident you want for the long term.
So there is a natural continuum.
If you offer bigger companies a natural incentive to sign up annually, they will. And later, you can even force them to and make it the only option. But if you ask tiny businesses and individuals to pay for a whole year upfront, they will hesitate.
Figure out who you sell to, and why, and offer the options each customer segment wants.
- And lastly, be flexible in the beginning. This is probably the most important thing on pricing terms. You have to learn. Once you have a brand that customers trust, more will prepay annually. In the beginning, at a minimum, you may need to do more paid trials and proofs-of-concept, or quarterly/monthly deals.
(note: an updated SaaStr Classic answer). Easy Payment image from here
A bit more here:
