Hi all, thanks to everyone for excellent contributions! Does anyone have thoughts / frameworks on how to think about annual discounts and up front payments? For most B2B SaaS that have monthly subscription models, we often see the option to “pay annually” to get a 5%-20% discount and based on my benchmarking most require an up front payment. But some offer a discount to simply lock in an annual term (i.e., 12 month subscription locked in but still payable on a monthly basis).
Our customers are small, independent medical clinics where cashflow is important so the benefit of being able to spread the cost out over the year is a huge plus. Is there anything wrong with providing a deeper discount for a full annual payment (~15%) and then a smaller discount (~5%) for an annual term where payments can still be made monthly (both relative to a given list price)?
I don’t see both options offered very often, assuming due to complexity and therefore added sales friction. But I’m interested to see if anyone else has had to think through this and come up with a useful way to implement.
Thanks in advance!
Shah
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In my experience even with annual commitments when someone drops out part way through it is difficult to get them to pay and can cause brand damage if you try. I would be cautious about this approach. I think you are better off just having the annual payment or monthly payment approach. Sorry to be a downer on this.
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That’s helpful, Steven. Not a downer at all. We had considered that fact and one of our founders has actually had that experience with a previous startup. In our segment, it’s hard to get folks to convert from their existing solution but if they decide to jump there should be limited churn (that’s already our experience so far with 0% churn). So while this helps with the issue of not expecting folks to drop out mid-term, I still take your point that there will always be those cases and then offering the discount becomes a moot point.
If I hear you correctly, no framework needed because annual term paid monthly is a no-go.
Shah, great question and glad you’re here! 
Alternative would be getting rid of the month-to-month option, requiring an annual contract (with monthly and discounted annual option) and offering a free trial for first month or so to drive acquisition. We did this at HubSpot when I was selling to SMBs and it worked great.
Does require Sales/CS support and would depend on how sensitive your ICP is to annual agreements, but figured it was worth mentioning.
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For monthly payments with an annual term: How will you ensure payments and collections if needed i.e. if a customer decided to stop paying after x months of the 12 month term? Seems like a hassle esp if they are already cash flow strapped. I would just do a monthly term (pay monthly) and annual term( pay for 12 months upfront).
If customers are cash constrained - I would handle that via pricing structures that make it easy for them to get started and grow (typically with larger portion of revenue coming from usage based pricing)
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Fair point re chasing down payments! Depending on how common that scenario is, pure monthly would probably simplify things.
At HUBS we had resourcing to track payments down which made it more feasible.
Great discussion and something I’ve done in the past is reframe the discount. It’s not a discount, but a penalty for paying monthly. i.e. There is a 5% increase on monthly payments. No additional fee to pay upfront. The benefit choice is now on the client to choose if they want to pay more per month or less upfront. Also, you don’t have to negotiate percentages or sell the cash option. It’s the client’s choice. Sort of like what was recently implemented with paying by credit card. Cash purchase is a lower price but pay CC and it’s 4% more.
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Love this re-frame, Chris.
Thanks Rob! I worked on the strategic pricing project at HubSpot with the C-suite team a few years back while I was at Simon-Kucher! That’s good input and would work but we’re not in a position to offer a free trial at the moment and our market (independent optometry) would not likely dabble with free trials.
This community is definitely validating the no-go on month to month with annual commit though!
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Thank Karthik, yes it seems the operational challenge of enforcing payment for churned customers is a consensus here. Good point on usage based pricing. We have a form of that incorporated into our pricing as well. I always try to balance these things with trying to keep pricing as simple as possible but the tradeoff between absolute simplicity and capturing more points along the curve is the challenge.
Thanks Chris, your bringing this up reminded me of a few client cases where we suggested this reframing to our clients when I was consulting on monetization (had totally forgot about it). I think this works well with certain markets and segments and I’m going to consider it for how we communicate price / discounts. Thanks!