Multi-Year Deals vs. Lifetime Deals in SaaS
If you’re running a SaaS startup, then you should consider various models for payments. The two main choices you have are annual subscriptions or multi-year deals SaaS and lifetime deals. We will look into the pros and cons of each option. We will check whether multi-year deals SaaS is worth offering.
It’s a great time to be in the Saas market right now. That’s because the SaaS market is growing by as much as 18% annually. It is predicted to grow even more in the coming years. It’s also projected that by the end of 2021, 99% of all organizations will be using some kind of SaaS solution in one form or another.
Companies are increasingly adopting SaaS solutions because they better match their IT needs. The subscription-based pricing models offered by SaaS are better suited to small and medium-sized businesses that have limited resources. But even bigger companies are seeing the value of using SaaS solutions.
This healthy market attracts players, which increases the competition faced by the average Saas company. Back in 2012, it was estimated that there were three competitors available for every SaaS firm. By 2017, that number had risen to nine competitors vying for the same SaaS market sector. So, while there is a great demand for the products and services offered by a SaaS firm, the competition is also quite fierce.
The intense competition in the Saas market means that startups and even the more established companies must think of ways to entice new customers. All startups, for example, must come up with innovative offers that would get new clients interested in what they are offering.
Sometimes, the innovations are no longer enough to get new clients. Companies must offer innovation when it comes to their pricing deals as well. Many companies see the wisdom of offering multi-year deals SaaS, while others are resorting to lifetime deals. Which of these two options is better?
Annual Subscriptions or Multi-year Deals
The most common type of deal offered by a SaaS company is a monthly subscription. Under this model, a user will be paying a monthly fee to use the software or application.
Missing a payment would generally mean that the subscription will be canceled. But because of the increase of competition, SaaS companies started offering alternative payment deals that are supposed to be more beneficial to their clients.
Because a monthly deal can be costly in the long run, some SaaS companies offer other types of deals that are supposedly better than a monthly subscription. The first alternative type of offer is the annual subscription, which means that the client will be paying for a license to use software for an entire year. In exchange, the annual subscription cost is lower than the cost of a monthly subscription for 12 months added up.
The annual subscription offer increases the number of customers of a business, but it also reduces the churn rate. The churn rate refers to the rate by which customers stop doing business with an entity. In other words, it is the rate that a company losses business. According to research, having a 75% to 100% of your clients in annual contracts will bring down the churn rate to 2.5%.
One step further from the annual subscription model is the multi-year deal SaaS. The idea here is to commit the client to sign up for several years, and the annual contract value will be lowered. If you get the yearly cost to a 5-year deal, that should be significantly lower than an annual contract.
A multi-year deal will also reduce the churn rate for your company if done right, and it’s easy to see why. The longer the SaaS contract period, the fewer opportunities for the customer to drop your service. For example, on a monthly subscription, you have to assume that each customer is deciding whether to drop or keep your service each month. Under an annual subscription, they will only get to consider their subscription after a year or, in the case of a multi-year deal, after several years.
Pricing and Payments
Some companies offer their annual and multi-year deals SaaS as monthly payments. This means if the cost of the annual plan is $120, they are allowing their customers to pay $10 each month for it. This defeats the purpose of the annual or multi-year deal. One of the reasons you will be offering annual and multi-year deals is to reduce the churn rate.
Allowing clients to pay for their annual plan monthly will defeat that purpose. That takes away the benefits of an annual subscription.
Pricing in Multi-Year Deals
One of the most challenging things about offering a multi-year deal is determining the right pricing. Get a price that’s too high and will not draw in the new clients you need. Get a price that’s too low, and your SaaS company will end up losing a lot of money.
So, how do you determine the pricing for your annual and multi-year deals?
Whatever the pricing you decide to use for your business, one of the most important metrics that you can use is the Customer Lifetime Value (LTV). Here is a simple formula to get the LTV:
(Revenue per period – Cost of delivering service/ customer per period) How long you will keep the customer
Let’s say your software costs $20 per month for each customer. Then it costs you $5 each month to deliver it to each customer, and you keep each customer for an average of 10 months. Your customer LTV is $150.
Now that you have the LTV, how do you use it for determining the pricing of your deals? The idea is to make sure that the cost of acquiring customers must be a lot lower than the cost of acquiring them. Based on the value that we have computed, if the acquisition cost is $200, you are losing money in the process. That means the pricing that you are offering is incorrect.
Pros of Annual or Multi-Year Deals
What are the benefits of offering an annual deal to your customers? Here are a few that you should take note of:
- We have mentioned earlier how an annual deal can help lower the churn rate. That’s because customers are locked in for a longer period.
- Annual deals are also good for customer retention. This happens because they give you more time to develop better customer relationships.
- Offering an annual plan will also give your cash flow a significant boost.
- Offering an annual deal can also save you money in the long run because of lesser transaction costs.
These are just some of the advantages that you can get from offering an annual and even a multi-year agreement.
SaaS Lifetime Deals
We come to the other type of model that is the lifetime deal. As the name suggests, the basic idea of a lifetime deal is to give the clients perpetual access to the software in exchange for a one-time payment. Let’s say that your lifetime deal is priced at $200. When the customers pay that amount, they will have access to the software for as long as you offer it. You won’t be charging them even if they use the software for several years and even after increasing the prices of your subscription.
Computing for a Lifetime Deal
Computing for the price of the lifetime deal follows the same formula as computing for the customer’s lifetime value. The idea is to have the lifetime deal be greater than the lifetime value. If it goes below that, then you are losing money already.
In the scenario earlier, the lifetime value of a customer is $150. The lifetime deal should then be priced at a higher cost than that, like at $200 or even $300 to make it worth it. Remember that the customer will be using the app in perpetuity after that, and it’s the only time you will be getting money from them. Imagine a new customer using your product for 10 years, and you only got a one-time payment.
Pros of a Lifetime Deal
We have listed here some of the benefits you can derive from offering a lifetime deal.
- Offering a lifetime deal allows you to build an audience. Sometimes the most challenging part of launching software is finding enough people to try it out. Having a lifetime deal is a great way to build up that initial audience.
- A lifetime is also great for creating a solid base of loyal users. It will be in the interest of your early lifetime customers to see you succeed.
- The main benefit of offering a lifetime for many Saas startups is its boost to their cash flow.
These are just a few of the benefits you can get when you offer a lifetime deal to your clients.
When Should You Offer Different Deals?
When should you offer an annual or a multi-year deal? When is it best to offer a lifetime deal?
It is best to offer an annual or a multi-year deal after you have already launched your product and have a base of subscribers who are using it. The next step for you is to convince them that it would be worth their money to sign up for your service for a longer period instead of paying for monthly billing.
A lifetime deal is best offered when you are just trying to get people to sign up and use your software and product. A lifetime deal is one way that you can get the attention of users who otherwise might not have paid any attention to your software.
Offering a lifetime is also a good idea when trying to get some cash into your company. If you are running low on funds, a lifetime deal can be a great way to bring in that money. But the downside, of course, is that a lifetime deal will leave you vulnerable. You are taking on possible responsibilities for a one-time payment.
Things to Consider When Determining SaaS Pricing
Whether you are using a lifetime deal or an annual offer, there are many things that you have to keep in mind when determining the pricing that you will have to charge. Here are some of the things that you need to consider when determining your pricing:
- You should consider your sales model when determining the pricing. If you have salespeople calling out potential clients, that can be costly.
- Consider the opportunities for upselling before deciding on the final price. Even after you offer a lifetime deal, you can still come up with ideas for upselling.
- Be careful about offering discounts to those who sign up for annual deals. While it might bring in an influx of customers, you might be losing money in the long term.
- Think about offering a free trial for your product. Not all SaaS companies can offer this. Some products might be too complicated, but it’s a great way of gaining new users.
- Remember that your customers do not care about your cost. So, while you need to factor that when determining your pricing, you don’t need to tell your customers about that.
- Remember that a low price does not necessarily translate to many customers.
Examples of Annual and Lifetime Deals
There are a lot of companies that have offered lifetime deals to their subscribers. One success story is that of Visitor Queue, which raised $4800 after making 50 sales within two weeks of offering lifetime deals. The amount might be small, but it helped the struggling company immensely and those clients who signed up with them became loyal users.
When it comes to yearly plans, HubSpot is probably the best example. They are encouraging the people who sign up on their site to go for the annual plan by designing their sign-up page so that people will see the advantage of the annual subscriptions.
These are just some things that you should know about multi-year deals SaaS, annual subscriptions, and lifetime offers. For more information about SaaS deals and ideas, visit our blog here.