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The discussion around annual pricing seems misguided. You should charge customers in whatever method they prefer to pay. For some customers, putting $400/month on a card is much easier to deal with than a $4800 check. The oposite is true in other organizations. Requiring pre-payment for software and using customers to fund working capital to pay sales associates seems myopic. Get the working capital from somewhere else and do whatever is best for revenue.



Very few companies are going to turn down revenue, regardless of the shape it takes, so if customers are unwilling to pre-pay for a year, it's easy to figure out a way to make it work.

That being said, the startups we've spoken with who have switched to annual pricing are able to get paid in advance 60-70% of the time. This helps a lot.

Some companies prefer this as well as it can reduce their own AP and record-keeping burden.


Annual pricing can be a great thing -- simplification and money up front: what's not to like? But anyone being paid long in advance of when a service will be delivered should keep in mind that, from an accounting perspective, some portion of that pool of advance payments may be considered a liability, and can complicate revenue recognition. As soon as you receive a payment, you now owe the customer a year of service instead of, perhaps, them owing you the cost of a month of service.


Rev rec definitely gets more complicated, this is a good point. Everything is a tradeoff.


Cashflow.

Cashflow, cashflow, cashflow.

Getting paid up front is better for cashflow than getting paid monthly.


Not to mention there ain't no chance the customer's skipping to a different service in 6 months.


His math is completely skewed. 22 sales a month of a service that charges $200/month will generate $343,200 a year (unless he's assuming 100% churn rate).


At the end of the year, yeah. But at the end of the first month, in order to be able to pay your salesman, he must have done 22 sales. By charging yearly, only 2 sales are needed. That's cash flow.

So yeah, if he does his 22 sales / month, at the end of the first month, you're even, and starting from month #2, you're making money.

Combine this with "It's easier to sell one time a $1000 product than 1000 times a $1 one" and you get the main idea.


Good point! I was talking about startup costs for the first few months of hire as the rep ramps but didn't make that clear at all. I'll update soon.

Edit: Updated now.


Your math is still way off unless you assume 100% churn rate. Assuming a reasonable churn rate in the 2nd month you will have some fraction 22 existing customers paying $4400/mo (not really sure how $4400 breaks even with $4800).




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