Getting customers to pay up-front for a year is great… the challenge comes 12 months later at renewal time. There are four ways to do renewals, but only one right way.
This came up on a recent Clarity call with a SaaS founder, and since annual pre-payments are often the go-to funding source for many early-stage B2B SaaS companies or those bootstrapped companies – regardless of their stage – that have chosen to forego any serious external funding, I thought it was important to discuss publicly.
While that up-front money from annual pre-pays is great, when it comes time to renew those customers, well, that’s where things get tricky.
I’m going to help you make that less tricky.
First, let me take a quick step back and cover a couple of basic ideas.
SaaS Sales Models
There are basically two types of sales models in SaaS: self-service and high-touch.
In the self-service, e-commerce sales model, the expectation (and generally the reality) is, post-sale, there will be no interaction with humans. The product “sells itself” and then magically works to onboard and engage the new customer, eventually turning the new customer into an old customer, all without human interaction on the vendor side. Cool.
In the high-touch model, and while the level of touch varies greatly from company to company, overall this model differs from the self-service model in that a human is involved in the entire process. In the self-service model, a human interaction is the exception, not the rule.
Now, the higher-touch sales model often – not always, but often – leads to some higher-touch post-sales engagement (or, at least, that’s the oft-oversold expectation by the customer), meaning there will likely be someone to help the customer along the way as they use the SaaS product.
Sure, support might be available, but anything beyond break/fix issues and bug reports either gets pitched to Professional Services (if that’s even an option) or… ignored.
No matter what, in a high-touch situation, there are often several – typically ad-hoc and unplanned – touches between the vendor and the customer. This means, when the time comes for renewal, at the very least, the renewal event isn’t the first time the customer has heard from, or interacted with, the vendor in some meaningful way… which is a good thing.
Of course it could be A LOT better if the interactions with the customer are pre-arranged, you understand what success is for them, plan a customer journey around that success, etc. But at least, the vendor isn’t hiding from them in this scenario.
Startups and the Long-term Contract / Annual Pre-Pay Trap
When it comes to early-stage startups, I suggest that you don’t lock early customers into long-term contracts or even offer annual pre-pays. BLERG! What?
I know… not what you want to hear, right?
My reason is simple: it’s too safe and reduces the potential for learning.
You simply won’t have the pressure to properly onboard or otherwise get your customers up and running, you won’t feel the need to really help your customers achieve success both initially and over time… and you won’t really know about churn for 12 months or more.
It’s tempting to GET THAT MONEY!… but if you’re in this for the long-haul, then I’d forgo that in exchange for learnings and a sense of urgency around helping customers achieve success.
PROTIP: If you absolutely need the cash-flow that annual pre-pays bring – and you’re in the early stages – do this:
Figure out how much you NEED (need is the key here; not want) and divide that by the amount you’d get from an annual pre-payment. That will give you the number of pre-payments you’ll accept. That limits your exposure to the potential downsides of pre-pays, raises the funds you need, and, for the ninja Growth Hacker in you, this puts legitimate scarcity on the availability of a the pre-payment discounts available, which should improve conversions. Win-Win!
Annual Pre-Pay vs. Contracts
I want to be very clear here; annual (or multi-year) contracts like we see in Enterprise SaaS are different from annual pre-pays in this context. What I’m talking about here is simply when a customer gives you an up-front, pre-payment for 12 months of continuous month-to-month service, often heavily discounted (though I think there’s a better way to use discounts) to encourage that pre-payment.
In the Annual Pre-Pay scenario, the customer can cancel anytime; there are no contracts. Of course, how the vendor handles that cancellation depends on what was in the original agreement (no contracts, of course… just agreements. Sure, why not.) ranges from a pro-rated refund and immediately revoking access to the more extreme (but relatively common) no refunds of any kind, you can use the system until the end of the period you pre-paid for, all we did was simply ensure we won’t renew your subscription at the end of the period you paid for. Probably. You basically just canceled your annual renewal.
No matter what – Annual Pre-pay or Long-term Contract – if you focus on Customer Success and ensure that your customers are achieving success with your product, renewals will be a non-event; contract or not.
3 Bad Ways to Handle Annual Pre-Pay Renewals + 1 Good Way
When month 12 ends and month 13 begins, what do you do to get that renewal?
There are basically 4 ways to handle renewals on Annual Pre-pays in a self-service SaaS model, and only one is the right way:
1. Charge ’em and Ask for Forgiveness
This is where you bill ‘em without warning or asking for permission first.
If you’re afraid of asking your customers if it’s okay for you to bill them – or just reminding of the fact that you’re going to bill them soon – then there’s something bigger going on here. You don’t have confidence in your relationship with your customers.
You don’t know if your customers are being successful with your product. You can’t know that or you’d be confident in your relationship and wouldn’t be afraid to tell them you’re going to bill them.
If you’re honest, you know this is basically a fingers-crossed maneuver. You hope it works. You hope the credit card goes through. You hope they don’t get mad. You hope they don’t notice… and don’t even notice your notification of successful payment.
And of course, when you charge them first and then tell them what you did, you’ll get refund requests because some people wanted to cancel but forgot to.
You hope they don’t ask for a refund, but even more, you really hope they don’t do a chargeback because they completely forgot who you were in that year since they last interacted with you.
Don’t do this.
That said, there are some instances were a once-a-year notice that a vendor charged your card after they did it is potentially, maybe, slightly somewhat acceptable: Online backups or other Disaster Recovery services, security, etc.
For these services, an “ask for forgiveness and just charge ‘em” methodology is the least likely to cause mass cancels or chargebacks because they’re already super-passive (i.e. little to no interaction is needed/wanted, except in the case of emergencies) and where the longer you use it, the more valuable they become (i.e. you’ve now stored another year’s worth of data, files, music, pictures, etc. with them).
For these services, you get the receipt and you’re like “oh, good. That’s taken care of.”
Those are just about the only types of services where I think this sort of silence-followed-by-a-charge is even slightly acceptable. But even then, I wouldn’t do it. I’d send weekly status updates to let them know the service is working for them along the way, and then auto-renew.
For everything else, don’t do this.
If you’re only interacting with your customers once per year, you’re probably not heavily focused on Customer Success, so you don’t really know who’s likely to churn and who’s a good candidate for renewal, right?
How do I know you’re not focused on Customer Success? Because the first time your customer hears from you in 11+ months is to tell them you just charged their credit card!
That, and you’re actively trying to justify this “ask for forgiveness” approach.
2. Ask for Permission to Charge ’em
Before you run their credit card and charge them for the new billing period – whether another year or the next month – you send them an email telling them you’re going to charge them.
If this is the first time they’ve heard from you in 11+ months, you’ll get a lot of folks scrambling to keep that charge from happening. Guaranteed. Unless you fall into the category of disaster recovery, security, or online backups… this will probably result in a lot of churn.
Oh, and if you make it difficult to keep the charge from happening – i.e. they have to call to cancel when they were able to sign-up online – don’t expect a lot of calls… but definitely expect a lot of refund requests or worse – chargebacks – because you put up artificial and arbitrary barriers to canceling.
Consider creating Cancel Flows instead of creating artificial barriers to closing their account.
But also consider not letting the first time your customer hears from you in 11+ months be to tell them you’re going to charge their credit card.
Don’t do this either.
3. Hide Completely but still Charge ’em
Don’t ask for permission. Don’t send a receipt. And don’t forget to keep it sleazy.
If your price is so low that you think you can survive as a grey or phantom charge then whatever… that’s your bag… but I don’t really want to know you, thank you very much.
Obviously don’t do this, right?
Okay, so what’s the right way?
4. Deliver Customer Success while you Charge ’em
If it’s not clear yet, this is the right way to deal with annual pre-pay renewals… or any renewals for that matter.
And while some people are averse to saying there is only one right way to do something… I’m not. This is it.
You can’t just communicate with a customer when it’s time to renew. You need to stay engaged with them so they’ll stay engaged with you.
There’s no excuse for hiding from customers. There’s no excuse for not engaging with customers. There’s no excuse for not working to make your customers successful. Period.
And with all of the amazing automated lifecycle messaging products out there – like Vero – there’s no excuse not to stay in contact with your customers, frequently, across their entire lifecycle.
Leveraging Use- or Activity-based lifecycle messaging, ideally you’re getting them back into the product often as you’re moving them along a path to continued success.
And with amazing Customer Success products out there – like Gainsight – and the vast amount of information on implementing Customer Success in your organization, there is simply no excuse for not knowing whether your customers are being successful with your product.
Expired Credit Cards Shouldn’t Happen
I wrote an entire post on this called “Use Customer Success to Reduce Credit Card Failures” if you’d like a deep dive on this subject.
Of course, all communication isn’t about getting them to do things that will lead directly to their success though I’d argue if they don’t pay for your product then how can they be successful with it, right?
Some messages might be “your credit card on file is about to expire” messages. Pre-dunning, if you will.
This is a big deal for SaaS companies that rely on Credit Cards for, oh, 100% of their revenue.
Clearly, expired cards aren’t the only reason transactions fail, but since credit cards typically expire every 3 years, or every 36 months, one could ascertain via simple math that roughly 3% of cards will expire every month – though obviously it’s not that evenly distributed; some months will have more, some less – this will be a very big deal for you when it comes to annual renewals.
And if the first time they hear from you in months is when you try to get them to fix their credit card info, that might be a reminder to cancel. And the more times you have to remind them to fix their credit card info… the more they become a churn threat.
But if they’re engaged and successful, when they get that credit card expiry warning, they’ll actually want to fix that issue right away so they don’t miss the renewal, which of course you’ll tell them about in advance AND send them a receipt for.
Reminding them in-app that their credit card is about to expire is awesome and works well. Doing it right after they performed a series of activities that we know will lead to success is ninja.
Another ninja move is allowing the user to forward the CC expiry notice to someone else to take care of… and allowing that “economic buyer” to take care of it without having to be a user in the system (but getting their contact info so you can ping them next time with CC issues)! Now that’s hyper-ninja!
Hope this helps a bit.