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A lot of you might end up paying valuable dollars for acquiring customers for your platform that provides a service whose consumption might require a customer to pay a monthly fee. In fact, this model is used by lots of growing technology companies that provide software as a service, most commonly known as “SaaS.”
However, it is difficult to make sure that a customer stays with you after paying for the first month. Even if you spend additional money to retain your existing customers, there is always the possibility that someone can drop in the next month. Your business spent significant resources to acquire a customer, but only a fraction of his lifetime value had been realized.
Of course, if there were a way to differentiate the loyal customer from the disloyal customer at first sight, it would certainly have been helpful for you to know otherwise you would have invested the same amount of money into your company’s growth rather than let it go to waste.
The most common reason for this is that a customer who is paying a monthly recurring fee is simply trying the service out, and already thinks about dropping a few months after using it. They didn’t have a strong buy-in initially and, as a result, there is a great chance that their revenues won’t break even with how much it cost to acquire them.
From the customer’s perspective, this makes sense because unless they recognize that there is a great value for them in using your service, then why should they keep paying a monthly fee that’s going to drain their wallet? Paying a lot of money for services that you don’t use is not only annoying, but it also drains your budget and you can’t switch to services that might actually be beneficial.
For a growing SaaS company, it is extremely difficult to convince a customer of the value of your product and the need to stay with your company for the long-term unless they personally trust and know your brand really well. If you don’t have a platform like Facebook that generates revenue from ads and therefore is able to offer registration that’s free of charge, you have to present the customer with an attractive offer that will convince them to buy in and stay for the long-term.
There are many SaaS companies that offer discounts for a one year or two-year upfront commitments. This strategy makes sense because your business receives guaranteed upfront cash payments to finance the growth of the company. Also, your customers demonstrate a much stronger buy-in such that they have an incentive to engage more with the service because they just bought it for the whole year.
Obviously, the trick here is finding the right discount rate that will unlock the customer’s buy-in and still enable your business to make a profit. The discount rate is advantageous for the customer because they could be saving lots of money by paying the cash up front. However, it’s also in your favor because you don’t have to worry about losing your customers next month. You reduce your churn rate and get an instant cash boost that you can grow the business with.
rnTheoretically, you need to know a customer’s average lifetime duration as a customer for your company and their monthly churn rate (which is the probability of dropping out next month). You have to make assumptions here. If you assume that the average lifetime duration of a customer is 12 months and the churn rate is 5%, then you have to calculate a geometric sum in which you multiply the monthly fee by the churn rate raised to the power of the period number in order to calculate the lifetime value (LTV) of that single customer. You should also calculate the case where the churn rate is 0% (they never drop during their lifetime). The difference between two numbers, divided by the LTV under no-churn, gives you the maximum discount rate you can apply.
You can’t apply theory exactly to every real-life situation. However, a discounted annual prepayment offers tremendous benefits for both the customer and the business.
First, customers get a strong incentive to take full advantage of their membership by using more of its features a lot more frequently to get the most value. Second, they familiarize themselves with the product or service much better and might even decide to continue their relationship when the time comes around for renewal.
Lastly, your customers are also going to like this deal more because they free up additional cash in their monthly budgets. Without a monthly recurring bill to pay, they can invest the extra cash, use for education or other personal development. When they pay up front instead of paying in small pieces at the end of every month, they even get an extra emergency cushion of monthly cash.
While this is based on a simplified hypothetical scenario, you can use your own data and assumptions to see what the effects of prepayments be on the growth of your business. Even an unnecessarily aggressive discounting method yields a larger customer base than a purely monthly fee-based business model.
In order to advertise your business via platforms that will connect your offerings with consumers, you can work with organizations that can feature your services on their websites. I found this platform that offers a direct interface where the consumers can show interest in the services of businesses and pay cash upfront for 1 to 2-year contracts. Organizations like these relieve your business of the large marketing costs to acquire new customers, as you simply take advantage of their platform’s user-base to market your products.
This can be a great deal for your company in order to secure cheap growth capital (cheaper than the cost of debt that you would get from a typical bank as a small and growing company) through advance cash payments. You can reduce your costs, maximize retention, and grow your business faster than just relying on monthly fees alone.
In conclusion, you should offer more prepayment options for your services if you don’t do that already. You should seek out to build partnerships with organizations with a mission to help their users reduce their expenses. Ubund is one such platform that delivers consolidated groups of customers with 1-2 or more years of pre-payment of their services against a discount on the list price. The value-add of your discounted offerings would draw especially more attention on these platforms whose users are looking to get value of out of useful services without hurting their wallet. Therefore, this strategy would help you grow your cash balances, expand your reach, and build a loyal customer base.
Author’s Bio: Cem Vardar has recently started wading the waters of personal finance and the fin-tech industry. Cem Vardar is an editor at Ubund.co a fin-tech platform that aggregates customers and provides 1—2 years pre-payment on their subscription services.