How annual can boost your cash flow immediately
A yearly payment option is important for every SaaS company, and particularly so for bootstrapping SaaS companies. Securing more business up front allows you to focus on your customers, increase your cash flow, and make more money overall.
To break down how adding an annual subscription option to your pricing can help your bottom line, let’s take an example.
A SaaS company has monthly pricing only ($10 per month). It has nice linear growth month on month:
But something is missing from that graph — costs. For simplicity, let’s say the company only has fixed costs of $1500 a month:
You can see that it is month 3 before this company breaks even, and month 4 before it’s revenue exceeds costs. But that’s not the issue. Those fixed costs accumulate if there is no way to pay them. If you are funded or have money in the bank, you might be able to float your business, but if not, cash up front is a lifesaver. This shows what happens as the unpaid costs compound:
You’ll actually be 6 months in before you make any revenue will exceed costs and you can start to see any profit.
This is all without any variable costs, such as paid acquisition that can change month to month.
Annual subscriptions can stop this debt from arising and make you profitable immediately:
This is with just 10% of customers switching to an annual plan, and with a 1-month discount. When you look at monthly-only subscriptions vs. month and year, you can see that you are trading off slightly less revenue overall for more revenue up-front:
But having that money up front means that you can make more investment in your business, growing your user base and boosting your revenue.
A lump sum payment into your bank account can be a lifesaver for a new SaaS business. It can help cover customer acquisition costs and allow you to invest in your company, paying for office space, key new hires, and great SaaS services yourself.
In turn, this increase in investment means that you can spend more on customer retention, more on customer acquisition, and more on great people and your product, which will itself boost your bottom line.