How many web app customers will pay up front, and is this a good thing for the SaaS vendor?
From time to time - about every day this week - I get an email that I think more than just the person that asked it would benefit by reading the answer. This one I thought wasn't just an answer you'd like to read, but perhaps you could share your experiences in the comments section and help him out a bit. My friend in the "SaaS business" sent me the following:
Lincoln, quick question....do you happen to know % of companies willing to pre-pay (one year upfront for example). At the subscription metering and billing company I used to work for, it was about 15-20%...just curious how that compares to SaaS in general.
Here is my response, but feel free to leave yours in the comments...
For clarification, did you say 15 - 20% of your former company's customers were willing to pay up front or 15-20% of the customers of your customers in aggregate were willing to pre-pay. The latter would be the more interesting of the two and possibly more indicative of a "market" trend. Unfortunately I suspect it was the former.
Most of my answers to blanket questions like this involve or center around "it depends." The problem is there is not a "SaaS Market" where the rules apply across the board for all vendors. Your company was a part of the "infrastructure" of a SaaS business and so it might have made sense to pay up front for that - especially if a company just got some funding. I assume there were discounts for pre-pay as well, right?
What we've seen is if companies offer a compelling up-front discount the willingness to pay for some term beyond a month goes up. But we're talking significant discounts up front to make that happen - especially for a year or more in advance. I've yet to see any real value-added reasons for pre-payment of the full price that work. It would be nice. There is an entirely different discussion here about why the same company that would pay up front for legacy software is unwilling to for SaaS - could be a value perception issue by the customer.
From the vendor side, there are some problems with large up-front payments. First, you can negatively affect your reference price and market position by offering huge discounts. Second, and often this is the bigger issue, is that of negatively impacting Customer Lifetime Value (CLV). When you take 12 months up front, its harder to continue to push upgrades, up-sells, cross-sells, etc. The benefit of recurring revenue is not just that you get to amortize a payment over 36 months (at zero/negative interest re: time-value of money - great!) - its that you get 36+ revenue touch points with the client to grow CLV!
For the bootstrapped startups and early-stage companies relying on organic growth that we work with, we will often provide guidance for them to run "specials" - often behind the scenes to a voluntarily captive audience - to give limited-time incentives for pre-payment. This can put some cash in the bank but is limited in scope so as 1) to keep from negatively impacting reference price and 2) not to affect the CLV across the board. Some folks we've worked with wanted to get away from monthly payments due to dunning issues, but those are even *more* likely on annual renewal and by leveraging modern subscription management / recurring billing systems like Recurly, this becomes a non-issue.
I'll post this on the 16v blog and see if we can get some feedback on this from the vendors themselves.
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