Many growing SaaS companies prefer offering annual contracts over monthly contracts, and for good reason. Annual contracts result in a higher ACV (average contract value), better cash flow management, less churn, and a level of predictability that short-term contracts can’t match. Long-term contracts are also the norm among enterprise-level businesses, so focusing exclusively on annual contracts as a B2B SaaS company means selling to the big players in the market.
However, annual contracts come with downsides. With their high upfront costs, they can result in high CAC (customer acquisition costs), long sales cycles, and a smaller pool of potential customers. To remedy these problems, many SaaS businesses offer discounts on annual contracts—typically anywhere from 10% to 20%.
This can create significant problems. 20% is a huge chunk of revenue to lose out on, which can especially hurt if the customer would’ve converted at full price. It may also not make financial sense if the cost of acquiring the contract far outweighs the revenue it brings in.
This raises the crucial question: Are these discounts worth it?
In this post, we’ll go over the benefits and drawbacks of offering annual contracts and their impact on your revenue, retention, and billing processes so you can make an informed decision about what’s best for your company.
4 benefits of annual discounts for growing SaaS companies
Here are the primary benefits of offering discounts on annual contracts.
1. They shorten sales cycles
Closing deals for annual contracts often involves navigating a complex landscape of negotiations, approvals, and red tape, and the higher value the contract is, the more complicated it gets. These extended sales cycles can last for weeks or months, and can significantly delay revenue generation and impact overall business growth.
Discounts can act as a powerful catalyst in expediting this process. The reduced upfront cost of an annual discount helps reduce the perceived financial burden on potential customers. This makes the decision-making process move much faster, as fewer internal approvals, negotiations, and stakeholders need to be involved. A discount can also sweeten the deal and tip the scale in your favor on prospects who are putting off closing because they’re on the fence.
2. They help you close more deals
Reducing the upfront cost doesn’t just make deals happen faster, it also increases the number of deals you can close. Discounts make your product more accessible to a broader range of potential customers, which means many prospects who would’ve been out of budget can now convert. This expanded affordability can be a game-changer if a large portion of your target market is limited by budgetary concerns.
And even when prospects do technically have the budget to purchase your product, discounts can sway the decision in your favor. Customers are more likely to choose your product over competitors' offerings when they perceive it as a better deal, and this is especially true when there’s a sense of urgency and exclusivity, which limited-time discounts can create. It can even convince a prospect in the consideration stage of their buyer’s journey to take the plunge when they weren’t planning on purchasing at all.
3. They decrease your customer acquisition cost (CAC)
When it takes less time to close deals and you can close more deals than ever, the net effect is that your customer acquisition cost, or CAC, declines—which is good for your bottom line. Since the discounted price incentivizes customers to make buying decisions more quickly and easily; less energy, time, and money needs to be spent on marketing and sales efforts.
The larger pool of prospects annual discounts create can also heighten the effectiveness of your sales and marketing efforts. Although it may cost more to advertise to a larger audience, these costs can quickly be offset by the increased revenue generated from increased conversions. A larger pool of prospects can also provide greater opportunities for lead nurturing, building brand awareness, and fine-tuning your marketing strategy.
Overall, this means that annual discounts can decrease your CAC and provide your business with the opportunity to achieve a higher return on investment (ROI) from its marketing efforts.
4. They incentivize long-term commitment
Just like you might take a 2-year job contract more seriously than a 2-week job contract, customers tend to take annual contracts more seriously than monthly ones. Customers are more likely to stay committed and develop long-term brand loyalty with annual contracts.
Often, this is simply because they make a purchasing decision once a year rather than once a month, leaving them with less opportunity to churn. Being committed to a long contract can also make it so customers are more likely to invest time and effort into fully adopting and utilizing your product. This deeper integration and engagement can increase customer satisfaction, reduce churn, promote a long-lasting partnership between your company and its clients, and increase the success of your SaaS company’s upselling efforts.
For growing SaaS companies that primarily sell in short-term contracts, offering annual discounts can be a powerful tool to incentivize customers to commit to long-term contracts rather than short-term ones, or to initiate a business-wide switch into only offering annual contracts.
4 Drawbacks of annual discounts for growing SaaS companies
Unfortunately, while discounts on annual contracts can be effective at incentivizing conversions and speeding up sales cycles, they also have their share of downsides. Here are 4 drawbacks of annual discounts to consider before offering them.
1. Reduced recurring revenue and immediate cash flow
One of the key trade-offs of offering discounts on annual contracts is the impact on revenue and immediate cash flow. By offering discounted rates, you’re accepting both a lower upfront payment and a lower overall ARR (annual recurring revenue) throughout the contract term.
This can have a direct negative effect on your short-term cash flow and revenue generation. If a significant portion of your customers sign on for discounted contracts rather than regular-priced ones, the revenue you generate may not result in enough short-term capital to pay for your daily expenses or to recoup the cost of acquiring the customers.
The implications of reduced revenue and immediate cash flow should be carefully assessed before deciding to offer discounts, as it can affect your ability to invest in growth initiatives and satisfy operational expenses. Proper financial planning and forecasting are essential to mitigate potential challenges arising from this trade-off and to ensure discounts make sense for your business.
2. Potential negative effect on your bottom line and long-term profitability
Unsurprisingly, discounts can also negatively affect your long-term financial performance. If the revenue forfeited by offering a discount exceeds the cost savings achieved from the lower CAC, faster sales cycles, and increased conversions, your company may experience a reduction in long-term profitability. Put simply, if the money it costs outweighs the money you earn, you’re in trouble.
Just like with short-term cash flow, this effect is magnified if more customers accept the discount than initially anticipated. Long-term losses can also be harder to see than short-term disruptions in cash flow. If you’re just evaluating the numbers on a monthly basis, the increased conversions from annual discounts may seem like a net positive. But often, larger-scale or irregular expenses that only show up on annual reports can quickly eat into this and turn it into a net negative.
Before deciding to offer discounts, it’s important to analyze how they will affect your long-term profitability and financial performance. If it doesn’t seem like discounts would be sustainable, it may be more financially viable to focus on acquiring more non-discounted customers.
3. Revenue leakage
An additional consideration when offering annual discounts is the potential for revenue leakage—a.k.a unintended and unnoticed lost revenue. This mostly occurs when discounts are taken by customers who would have been willing to pay the regular price anyway, but opted for the discount because it was a deal. This is more common when discounts are over-advertised or are advertised to the wrong audiences, but in general, if you’re offering discounts, you’ll have at least a few conversions that result in revenue leakage.
To mitigate revenue leakage when offering annual discounts, it’s important to be careful with who you advertise your discount to. It’s important to have a strong sense of how your customer segments vary in price sensitivity, willingness to pay, and pain points. This will allow you to create the appropriate discounting strategy and ensure that discounts are only offered to customers who genuinely require them to convert.
4. Negative market perception
If you’re constantly offering discounts, your audience may believe you’re struggling to acquire customers, or that your product is overpriced and lower value than it is—otherwise, you wouldn’t be giving it away at such a low price. Prospects and existing customers may also become accustomed to the discounted price, which can make it extremely difficult, if not impossible, to convert clients at your regular price.
While this is mostly an issue for brands that offer perpetual discounts, even a modest, occasional discount can have a similar psychological effect. Once a product goes on sale and customers understand they could’ve bought it at a low price (even if they didn’t), they won’t want to purchase it at full price.
Alternative solutions to annual discounts
Overall, offering discounts on annual contracts can have mixed results: while you may get more conversions, it comes at the cost of your revenue.
However, there are other ways to reap the benefits of annual discounts without the drawbacks.
Buy Now, Pay Later (BNPL) for B2B is one promising solution for growing SaaS companies to experience accelerated sales cycles, decreased CAC, and increased conversions of offering discounts, without sacrificing revenue, brand reputation, and profitability.
Advantages of buy now, pay later for B2B SaaS companies
Buy now, pay later, or BNPL for B2B is designed to provide payment flexibility to customers. By allowing customers to pay for annual contracts in flexible, monthly, or quarterly installments, you can reduce the upfront financial burden of annual contracts without reducing your total ARR. Here are some of the biggest benefits of using buy now, pay later for B2B.
- Shortened sales cycles. Similar to annual discounts, BNPL solutions facilitate quicker sales cycles by removing the financial obstacles that often lengthen the decision-making process on expensive annual contracts. However, unlike discounts, BNPL has the added bonus of keeping the total value of the contract. With the option to spread payments over time, customers can make purchasing decisions with fewer negotiations.
- Lower CAC. The increased affordability and flexibility provided by installment payments make it easier for customers to commit with fewer sales and marketing pressure, leading to a reduced CAC.
- Increased conversions and deals closed. BNPL opens the door to converting a wider pool of prospects by making your product or service more accessible to those who may have been deterred by high upfront costs.
- Higher ARR and ACV. Because BNPL solutions don’t reduce the total cost of the contract but do increase your total conversions, they enable you to increase your ARR, ACV, and upfront access to cash. I
- Reduced billing issues. BNPL solutions handle billing and collections for you, which can significantly reduce the administrative complexities and potential for error in managing payments across different customers and contracts. This ensures smoother financial operations and minimizes billing issues for your growing SaaS company.
How to Implement B2B BNPL
Implementing a B2B BNPL solution like Capchase Pay is straightforward and simple. The solution seamlessly integrates into your existing sales process, including any CRMs you may be using, such as Hubspot or Salesforce.
Capchase Pay can also be easily customized to fit the terms of each specific deal, ensuring a tailored payment experience for your customers. To initiate the process after a deal is closed, all your sales team needs to do is send the provided payment link to the customer. Both customers and vendors can manage payments using the portal.
Get the benefits of annual discounts without the drawbacks with Capchase
The decision for growing SaaS companies to offer annual discounts is multifaceted and requires careful consideration. While annual discounts can provide many benefits to your conversions and sales performance, there’s no question that they can significantly hurt your financial performance.
Fortunately, there are other solutions that can help you get the benefits of discounts without the drawbacks. B2B BNPL solutions like Capchase Pay can help your customers get the reduced financial burden of a discount, without requiring you to sacrifice your ARR or negative market perception.
If you’d like to get started using Capchase Pay as a replacement for annual discounts, book a demo with our team.
