For new startups, cash flow is king. And the way a company chooses to bill its customers will directly impact revenue streams needed to adequately maintain cash flow and business operations. For businesses that naturally lend themselves to a recurring billing model, the question is, what’s the optimal billing period?
Whether you decide to bill on a longer or a shorter period depends heavily on your product and business model. Here’s a quick run-down on two common recurring billing approaches:
Annual Recurring Payment Plans
Provides a full year of revenue upfront, easing cash flow concerns.
Guarantees customer retention for at least one year.
No costs associated with monthly invoicing or collection issues.
Monthly Recurring Payment Plans
Offers less risk to customers who may be skeptical of an upfront commitment.
Provides a lower barrier to entry, which should increase user acquisition numbers.
Makes the sales process shorter and more cost effective.
Because startups are new and unproven from the market’s perspective, business managers will need to evaluate how skeptical the market will be of the product or service being offered. If a company is introducing a brand new concept, it may be in its best interest to offer less risk to customers upfront through monthly payment plan options. Using this recurring billing method, cash flow will need to be addressed on the front-end to ensure that business operations can be successfully managed.
Price points will also play a role in determining recurring billing structure.
Typically, the higher the price point, the more options consumers will want to choose from due to the risk associated with the investment. Companies in this position may want to consider offering numerous billing options that would include a reduced rate for annual payments and a higher rate for monthly payments. This way, consumers feel more in control of their options, but the company stands to improve both its cash flow and revenue stream by combining both options.
Ultimately, the right billing plan will depend on a startup’s business model and their position in the market. While annual plans offer a number of advantages from a cash flow standpoint, monthly plans reduce the risk for the customer and are often more viable for new companies. Offering a plan for both annual and monthly billing periods can be optimal as well, so long as the overall pricing structure remains easy to understand.