If you are a growing SaaS business, it’s probably safe to assume that cash flow is one of the most important areas of the business to monitor. Due to the nature of how SaaS business models usually work, your company is usually spending more cash than it is bringing in, even if you have some healthy new sales figures. And if you have solid SaaS metrics, it should take your company approximately twelve months of payments to recoup the sales and marketing expenses needed to close that one customer.
With the above in mind, one of the most important sales jobs your company can do might come after a customer has agreed to purchase your product. In fact, this one post-sale agreement might even lead to your company closing more customers faster!
Get the customer to pay for multiple months upfront. Pretty simple, right? Anyone other than sales is allowed to answer that question….
I don’t think I’m dropping any earth shattering advice by stating a check for twelve months in advance is better than one check a month over twelve months. But I want to go a bit deeper on the multiple reason why it is so much better.
- Free working capital. Say you receive a check for an annual prepayment for $12,000 ($1,000/month). If you went to a bank for the same amount, they would charge you interest and make you pay it back. If you went to an investor for the same amount, you’d have to give up part of your company. But all a customer wants in return is a working product!
- Lock in customer retention. Every month the customer prepays guarantees one important thing: that they are a customer. If a customer is paying monthly as opposed to annually, there are eleven more chances the customer could not pay you. Even if you sign an annual contract, paying monthly doesn’t 100% guarantee the money. Shit happens. Cards go down and key stakeholders leave the company. Customers go bankrupt.
- Reinvest your returns. Much like investing for retirement, SaaS business models have a compound element to growth. You invest (via sales and marketing) to grow your customer base. And with the recurring nature of your revenue model, your investment (aka customers) should continue to pay you back for years after they come on board. That being said, getting the cash upfront from one customer will theoretically allow you to immediately invest it to acquire a new one if your CAC and CAC payback period is reasonable instead of having to continue to wait on monthly payments to reinvest.
Now, I get it…”easier said than done.” This is very true, and some customers will adamantly refuse to do this (I’ve been guilty of this from time to time…). Still, you should do WHATEVER it takes to try to make this happen.
I have absolutely no problem offering a discount to the customer to pay upfront. A 10-15% discount (around 1-2 months free) is well worth it to lock that customer in for a year and reinvest the proceeds. One key rule here, though: make sure you adjust the commission to your sales reps if offering a discount. They should be paid the same as if that discount didn’t exist and the customer just paid the full amount monthly; otherwise, they will have zero incentive to push for upfront payment.
This is a very simple but very important strategy for a company of any size to pursue. Done well and it can drastically improve the cash flow of your business and provide you with some much needed flexibility to make decisions with extra cash in the bank.
PS…consider yourself lucky I strayed away from present value of a dollar and/or discounted cash flow analysis! Next time……? 😉