Dear SaaStr: Is Monthly Pricing Better, or Just Going With Annual?

And Does Freemium Always Work?

Dear SaaStr: With SaaS sales, is it better to have an annual price or a monthly price, billed annually?

It is better for a very long time to let the customer buy how they are most comfortable buying. This removes friction from the sales process, leading to higher and faster close rates. You take friction out of sales, you close more. Especially at lower price points, which by definition are where the monthly vs. annual trade-off exists.

Let’s take a look at Zoom.

Zoom does not play games. Zoom lets small groups pay monthly if they want, and easily. No hiding the monthly option, no pricing confusion:

In fact 26% of Zoom’s customers still paid monthly at $500m+ in ARR, and that increased at $1B+ ARR and even at $3B in ARR!

More here: 5 Interesting Learnings From Zoom. As It IPOs. | SaaStr

Small business and individuals often prefer to pay monthly, even at a significantly higher price (e.g., often 20%+ higher). Certainly not always, but often. The money is often literally, or figuratively, out of their own pocket. Few of us like to pay rent annually, even if it were cheaper.

Bigger customers though find most monthly payments a huge accounting headache. And they pay out of an annual budget, not their own credit card. So a discount for annual is appealing to them. The annualized cost is already baked into their budget. And dealing with accounting every month to get a credit card payment approved isn’t worth the trouble.

In the end, if you sell to mostly small businesses, and give customers an option, you’ll likely see a split, like Zoom and others.

If you take the monthly option away, you just make buy your app harder. Yes, nominal churn may seem lower by removing a monthly option. But that’s an illusion. If they churn at the end of a yearly subscription, or 6 months into a monthly one, they’re still gone. It doesn’t really matter much when they leave.

It’s your job to fight to keep them.

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Eventually … when you are hyper-mature, and maybe growing 15%. Then maybe pricing games are worth it. But until then, make it easier to buy. Key to that is letting customers buy the way they want to buy. It’s worked for Zoom and Slack just fine.

Dear SaaStr: Do freemium software models always work?

No.

Freemium and PLG models don’t always work. And sometimes, they only work partially.

For Freemium to work, you need at least 2 things:

• The ability to get 50,000,000+ users at scale. Why? Because even with a 2% conversion rate, that only gets you to 100,000 customers. You don’t need to start there, of course. But if you can’t ultimately gets 10s of millions of free users, most conversion models just don’t get you enough paid customers.

• A product that is super, super easy to adopt. For sure this is part of most Freemium products we all use every day, from Canva to Zoom to Notion to Spotify. But most B2B products aren’t that easy to use.

If you can’t pull off both points, you’ll mostly likely need a product with a higher price point and a sales-driven model to support it.

A bit more here.