December 21, 2021

Why get paid upfront?

Zeus Dhanbhura
CEO at BridgeUp

The pandemic has hit SaaS companies hard, with many of them struggling to maintain cash flow and sustain operations.

According to a 2020 report by Statista, the SaaS industry saw mixed spending behaviour during the Covid-19 period.

Despite the liquidity crunch in the market, almost 22% of companies experienced no impact on their spending. Another 30% of companies in fact increased their spending by up to 10% or more.

This implies that over 52% of companies did well even during the pandemic. Conversely, almost 44% of SaaS businesses reduced their spending by up to 10% or more, suggesting they were negatively affected during the same period.

Either way, there is no denying that this pandemic has left the market volatile. And this market volatility has led to many SaaS businesses seeking payments annually from their customers instead of depending on monthly payments. There are many reasons why they want to move to an annual recurring payment based model.

An annual recurring payment structure is one where the customer pays for a year’s worth of service upfront. In other words, they pay for all 12 months at once as opposed to making payments each month.

Benefits of Getting Paid Upfront Annually

When you shift to an annual upfront payment structure, you are essentially asking for a lump sum payment in advance in exchange for services to be rendered over the next 12 months.

Here are a few advantages of getting paid upfront annually.

1. Reduce Churn

Customers are less likely to churn when they have already committed to a long-term contract and have paid in advance.

That happens because when customers stay for a long time, they understand your product and are only looking for new ideas and innovation to stay on.

New customers, on the other hand, are doubtful and are still figuring out hence the churn rate is higher.

To understand this further, we need to go through the three stages of churn:  

  • Early-stage churn: The testing stage where customers are basically figuring out how to use your product and deciding if they should continue. In this stage, if your customers are on 30 day plans, it is quite difficult to keep them convinced to renew because of less time. Which is why they end up leaving.
  • Mid-term churn: In the mid-term stage a.k.a the plateau stage, to keep the customers engaged, you must keep giving them the product’s fundamental value. They usually get to this stage after a few weeks or a few months of service. The churn here only happens if he/she is not engaged well.
  • Long-term churn: The upgraded stage is when customers have now used your product for quite some time. They are totally familiar with your services. So you must upgrade and upsell to encourage them to invest even more.

It takes a few months for customers to reach this level and they quit only when they don’t see any innovation and growth. This is the stage where churn rate is the lowest.

2. Make Planning Easier

Upfront payments make it much easier to forecast and plan accordingly because you have a fixed amount of money coming in for the whole year. You can plan on things like:

  • Providing sustainable value to the client.

  • Building a deeper relationship with the customers that leads to better service and referral sales.

  • The best times to make important investments and expenses.

  • Customer retention, financial forecasting, and enhancing your product.

3. Increase Predictability

When business expenses and cash flow are more predictable, it helps you reduce the risk and make informed business decisions. When you have accurate predictability, you can:

  • Feel more secure revenue wise and be able to spend more.

  • Have more accurate financial projections models that will help meet your monthly expectations.

  • Negotiate compelling rates for your upfront payments with banks and investors, which means lower cost of capital.

  • Control your inventory much better.

  • Plan your marketing strategies according to the revenue projections. For example, if the estimated revenues are higher, you can prepare high-end marketing campaigns. For slower periods, however, you may consider lower-cost marketing methods.

4. Optimize Cash Flows

SaaS businesses often run on thin cash flow due to the nature of billing and having a high operating cost. Getting paid upfront can help make it easier for these companies to optimize their cash flows and operate more effectively.

According to the Office of National Statistics, 90% of business failures are due to cash flow issues. But with optimized cash flows, these SMBs can:

  • Have a better understanding of the budget and expenses that are needed for their business.

  • Have more cash that can be reinvested in marketing, product development, and other important initiatives.

5. Provide Convenience to the Customers

Being able to pay for the whole year makes the customer’s experience hassle free. It also gives them the flexibility to pay when they can, which in turn reduces their churn rate. Some of the other benefits to customers are:

  • They do not have to think about the payment cycle anymore.

  • Paying less frequently is easier to make the purchase decision.

  • They can plan the work to be delivered by the vendor in a way that is more convenient for them.

  • Customers can course correct with the vendor if the service is not meeting their needs without quitting.

  • Paying upfront also allows customers to budget their payments more easily and helps with their own cash flow management.

While getting paid every month is the norm, upfront yearly payments can be really profitable for SaaS businesses. However, many businesses follow the 30 day payment model.

A monthly revenue model is a month-on-month based subscription where customers pay a certain amount of money for using the application every month.

This is the most popular billing model for SaaS products and has a lesser renewal rate. Because you only have a short 30-day period to convince your customers to renew the contract.

That could be challenging as you’ll have to analyze the reasons for churn, see the patterns and growth risks early––and fix the loopholes.

Meaning, you would need to strategize it from the inside-out and look into every single aspect of your business to find the flaws.

These loopholes can be in the product, customer service, service delivery, or any critical aspect of your business. But with a one month billing cycle, the clock is ticking faster and you’ll have the month-end in the blink of an eye.

No wonder it is becoming highly challenging for SaaS vendors to retain customers that pay month-by-month causing a severe cash flow crunch.

In such a scenario, being paid upfront for at least a year provides many advantages as mentioned above.

But what do you do when you need that cash to keep going and your customers don’t pay yearly?

Well, you reach out to BridgeUp to raise a year’s worth of recurring cash in advance from external investors. Fundraising with us won’t disturb your customers’ current payment plans, be it monthly, quarterly or half-yearly.

Yes, you read that right.

BridgeUp provides a simple system for businesses to obtain cash without the hassles of traditional fundraising or the debt or dilution that come with it. Companies can trade the annual value of their monthly contracts and get the entire’s revenue upfront. We facilitate this transaction without compromising or diluting the equity of the company.”