I’m sure if you have ever been part of a startup, you would understand the importance of managing cash flow at an early stage and how it can make or break your startup. It becomes even more important for a SaaS company which depends on the recurring revenue to sustain itself.
Cash is the lifeblood of any startup. It let’s the management invest in the business not just in terms of growth but also with regards to beefing up the intellectual capacity of the team. It helps the startup take a faster trajectory to achieving its milestones – It’s virtually a no brainer that any startup should focus on improving its cash flow at an early stage.
Let’s analyse the pricing & payment collection strategies a SaaS startup could adopt to improve its cash reserves. Assume a hypothetical startup generating a MRR of $60k in the first month, growing 10% YoY and with a burn rate of $250k per month. Startup has an existing cash reserve of $3 Million from series A.
I have put down 5 pricing strategies ( payment collection) options :
1) Monthly – Customers pay at the end of each month
2) Quarterly – Customers pay at the end of each quarter
3) Bi Annual – Customers pay at the end of each 6 month period
4) Annual Pre Payment – Customers pay for one full year at the beginning of the year
5) Annual Post Payment – Customers pay at the end of one year
See how in the case of Bi Annual and Annual Post Payment systems, the startup runs out of cash and is on the verge of bankruptcy. It’s a a situation you wouldn’t want to address as a startup founder. While the Annual Pre Payment system infuses a ton of cash into your reserves which will help you pump in more money into your business to grow. Remember, this is an effectively zero interest capital that your consumers have provided you access to that you can leverage for rapid business expansion.
So how are you collecting payments from your customers? It might make complete sense for a startup to shift their pricing strategy to a annual pre-payment option provided you don’t see an increased reduction in conversion because of a change in the pricing strategy. Certain segments and markets do react differently to annual pre-payment pricing strategy especially the SMB segment where the owners of these business themselves would in all probability be in a cash crunch situation to run their businesses.
Do your math and run the experiment!
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