Leverage annual billing to increase retention and cash flow in your SaaS business

Have you ever noticed how subscribers billed annually have better retention than customers on monthly plans of your SaaS business?

If so, you are not alone. ProfitWell dug through their data and proved that the churn rate decreases as the ratio of customers on annual plans rises.

Source: ProfitWell

Having more subscribers on your annual plans is beneficial to your business. So I’ll show you exactly how you can get more of your users on monthly plans and convert them to yearly billing.

How annual pre-pay improves your cash flow

But before we get to the meat and potatoes, let’s first talk about one added benefit of annual pre-pay: drastically improved cash flow.

Of course, improved cash flow is not an end to itself. But access to more cash in the bank is incredible because it gives you more capital to invest – preferably in the cost of your business. It gives you better access to buy more ads on Google or Facebook and to invest in more and better quality content. This billing model also allows you to cater to niche audiences. For example, you can do invoicing for freelancers to help them lower their taxes and bill yearly instead of monthly.

To see just how big of an impact annual pre-pay has on your cash flow, consider this scenario: you get four new customers, and all four sign up for a monthly plan at $100. You make a total of $400 right now – which will hopefully cover some of your acquisition costs.

Now consider a slightly different scenario: one of the four customers signs up for your annual plan at $1,000 – a “get 12 months, pay only 10” discount. You make an immediate $1,300. $1,000 from the customer on the annual plan plus $300 from the three customers on the monthly plan.

That means you make over 3x the money right away. You’re filling your war chest and can use that money to acquire more new customers.

Two birds, one stone

Think about it this way: the more people you have on your annual plans as compared to the monthly plans, the happier you’ll be about the growth of your business.

Getting more annual subscribers kills two birds with one stone: you decrease your churn rate while simultaneously improving your cash flow.

You can now spend money to acquire more customers that stay longer.

How can you get more users on your annual plans?

It’s simple when you think about it: promote your annual plans. And one way to promote your annual plans is to message your existing customers on your monthly plans and ask them to switch to annual billing. Yet another reason why email marketing still works.

Core elements of the annual billing promotion strategy

Your strategy for sending promotional emails and get users to make the switch to annual billing builds on these fundamental cornerstones:

  • Transparent, personalized messaging
  • No friction

These strategies are what we’ll always keep in mind when we design and create the following email marketing automation workflow. To learn more about how to get personalization right, we can follow a grand strategy:

  1. Ask each new user on the monthly plan whether they want to switch to annual billing at a discount. We’ll only ask them after we’re confident that they are using the app and getting value from it.
  2. In the email, we’ll lay out exactly how to switch to annual billing AND how to stay on monthly plans. 
  3. Finally, we’ll make it one-click easy to switch to annual billing.

When to send the annual billing promotion email

The first challenge you’re facing is to decide when to send the promotion for your annual plans.

If you’re a scrappy little startup with not many extra resources to spare, here’s my rule of thumb: send the email after a customer has paid for your product for three full months.

The reasoning behind this is that customer churn is highest during the first 90 days because people need to activate and engage with your app. They need to integrate your product into their every day (work-)life.

Related: If your 90-day churn is bothering you, here’s an insightful case study on how Moz decreased their post-signup churn by 40%.

Of course, if you’re further along on the long slow SaaS ramp of death, you should use a different metric to determine when to send this marketing email. At this point, you hopefully know which user behaviour predicts successful activation and can make decisions based on that. 

Additionally, it’s to remind your users about the offer every once in a while. I generally recommend to do it every six months unless you have reason to follow a different schedule.

What to write in your emails

Your next decision is what to write in the email itself. You want to send an email that is candid, transparent, and inspires action.

Essential topics you need to cover should include:

  • What is in it for them if they switch to annual billing?
  • What happens when they decide to switch to annual billing – i.e. when the switch occurs, how much will be billed and when, how their latest payment will be prorated against the annual bill
  • Which plan they are currently on and what plan they’ll be switching to
  • How they can upgrade (more on that in a minute)
  • How they can choose to NOT upgrade to annual billing – i.e. by ignoring the email

That last point may sound strange to you. But believe me when I tell you that not mentioning how people can avoid the switch will keep your support team busy. Not mentioning this leaves enough uncertainty for your users that they will write to you asking for clarification. So it’s best to include this vital information from the get-go.

Here’s an example of the text I use with my clients – which I adopted from WPEngine:

This email, or rather the offer included in it, makes use of a lesser-known psychology hack: by giving away two months for free – instead of the equivalent 17 percent discount – you get an increased conversion rate.
I don’t know precisely why this works, but I assume it’s because people are horrendous at working out percentages. Plus, there’s always the Power of Free to consider.

Removing friction

As you can see from the text, customers can switch to annual billing by merely clicking a link in the email. There are no additional steps here.

Once they click the link and get to the landing page, the payment provider (Stripe in this case) gets instructed to switch their subscription to a different (annual) plan.

Setting up this infrastructure is – in my experience – the most significant chunk of work to implement this strategy. A reasonably competent developer will need about two weeks to build this.

What your new email marketing automation workflow now looks like

Here’s a visual representation of this workflow, that should make it all a bit easier to grasp:

Key conclusion

Converting as many users as possible to annual pre pay improves your cash flow and increases your retention rate. Asking the customers on your monthly plans to switch over is a guaranteed way to improve things in your subscription business.

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