When it comes to SaaS pricing models, many businesses feel pressured to push annual contracts to lock customers in and reduce churn. But is this really the best approach? According to SaaS expert Jason Lemkin, it might be a false choice.
Why Annual SaaS Pricing is Popular
Many SaaS companies believe they must decide between offering annual vs. monthly pricing, but Lemkin explains:
It is almost always better to let the customer buy how they are most comfortable buying. Why? It removes friction from the sales process, leading to a higher and faster close rate.
Even if you remove the monthly option to reduce churn, it’s important to remember that churn still happens—whether at the end of a monthly cycle or after a year-long contract. The best way to prevent churn is to offer value and support, not limit payment flexibility.
Benefits of Annual Pricing for Larger Companies
For larger customers, annual subscription pricing tends to make a lot of sense because:
- Ease of budgeting: Bigger companies tend to work with annual budgets, so committing to a yearly subscription is just simpler.
- Reduced accounting hassle: Monthly payments create extra work for accounting teams, making annual billing easier to manage.
Why SMBs Favour Monthly SaaS Payments
On the other hand, small-to-medium businesses (SMBs) often prefer monthly SaaS payment plans for flexibility and cash flow reasons.
- Cash Flow Management: Monthly payments allow SMBs to better manage their finances.
- Higher Flexibility: Monthly billing provides flexibility, especially for businesses operating on tighter margins.
In fact, even at $1 billion in ARR, 26% of Zoom’s customers still prefer to pay monthly! This highlights the ongoing importance of offering a monthly SaaS pricing option to accommodate different customer needs.
So what's the key takeaway? Flexibility.
Offering both annual and monthly payment options reduces friction in the sales process and allows customers to buy on their own terms. Companies like Zoom and Slack have proven that by offering both annual and monthly payment plans, they can attract a diverse customer base and thrive.
But as a SaaS company, you'd still prefer to sell more annual deals so you can get that cash up-front.
That's where Lemon steps in
At Lemon, we make it easy for SaaS vendors to offer annual contracts with the flexibility of monthly payments. Lemon is a financing platform built specifically for SaaS.
We help you close more deals by offering flexible payment options that work best for your customer (monthly, quarterly, yearly). They choose what works for them, and you get paid up-front.
It’s a win-win for everyone!
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