Annual cashflows build the foundation of a scalable growth engine as they:
- Increase your cashflows;
- Lower your churn; and
- Add an element of forecastability to your financial reporting and revenue forecasting.
Cash runway is one of the most challenging factors in getting a startup running. Most companies have limited working capital and cash-in-hand. Limited access to cash means they also struggle to find scalable growth.
Cash is king. But how do you generate more of it for customer acquisition?
From your customers, of course! To quadruple your Monthly Recurring Revenue (MRR) growth, switch your monthly deals to annual deals.
Why should all B2B companies aim to have annual deals and upfront payments?
The biggest advantage in annual deals is that you have more immediate cash to work with when a new customer signs up. You can then reinvest this upfront payment in two areas to speed up revenue growth:
- Customer acquisition—increase your marketing spend for larger outreach or hire more sales reps.
- Product development—improve your product and increase your Net Revenue Retention (NRR).
Annual deals and upfront payments are key elements in achieving that hockey stick growth effect–the dream of every startup. So let’s make it happen!
When you switch from monthly deals to annual deals, you’ll start seeing:
- Improved Customer Lifetime Value (LTV) to Customer Acquisition Costs (CAC) ratio
- Lower customer acquisition costs payback time
- More stable revenue and cashflow forecasting
- Lower customer acquisition costs
- Lower churn rates
Improved Customer Lifetime Value (LTV) to Customer Acquisition Costs (CAC) ratio
Scaling is all about timing. Your Customer Lifetime Value (LTV)/Customer Acquisition Costs (CAC) ratio tells you your readiness to scale. Before scaling customer acquisition, it’s crucial to get this ratio right.
Go deeper: Achieving the ideal Customer Lifetime Value (LTV) to Customer Acquisition Costs ratio. In this lesson, we will show you the ideal ratio to aim for.
Lower customer acquisition costs payback time
Your CAC payback time tells you how long it takes for you to break even.
Aim for a CAC payback time of less than 12 months in any scenario to increase revenue growth. The more you’re able to push the payback time to under 12 months, the more available cash you have for new customer acquisition.
Go deeper: Understanding your Customer Acquisition Costs (CAC) payback time. In this lesson, we will show you examples of how monthly deals and annual deals affect your your CAC payback time.
More stable revenue and cashflow forecasting
Revenue and cashflow forecasting tend to be the biggest headache for many startups when you’re still building your customer base. Simply because it takes time to build one and have a solid MRR base.
The benefit of an MRR is that you don’t have to focus on new monthly one-off sales. Your customers will automatically return every month through a subscription.
Having a monthly deal means that you may lose your customer at any time. Whereas having an annual deal means that once a customer signs up, they commit to you for at least a year. Thus, making your revenue and cashflow forecasting more stable and less tedious than it needs to be.
Go deeper: How do your subscription plans affect your revenue and cashflow forecasting? In this lesson, we will show you examples of how both monthly and annual deals stabilize your revenue and cashflow forecasting.
Lower customer acquisition costs
By having annual deals, your cashflows are positive from Day 1 due to upfront payments. It means that you will have excess cash available for reinvesting in growth from the beginning of the customer relationship.
This extra cash will allow you to focus on onboarding new customers at a faster rate. For example, instead of acquiring 180 new customers in 36 months on a monthly deal, you’ll have the resources to acquire 863 new customers for the same period.
You may wonder, how is that even possible?
Go deeper: Reinvest upfront payments into your Customer Acquisition Costs (CAC) to boost growth. In this lesson, we’ll show you the impact of monthly deals and annual deals on your CAC.
Lower churn rates
Monthly deals are great because they give your customers total flexibility to cancel, pause, and restart the contract. While that’s a great deal for your customers, it isn’t as great for your cashflows and metrics–specifically your churn rate.
When customers commit to an annual contract, it locks in a big proportion of your revenue. Therefore, it also stabilizes your performance metrics and financial forecasts. It guarantees your revenue for the next 12 months and you won’t have to worry about churn any time soon.
If your churn rate is greater than your growth rate, it will have a significant impact on your NRR rate. The result? Your company’s valuation will decrease significantly.
Go deeper: What is an acceptable churn rate? In this lesson, we will show you examples of how to manage your churn rate.
Considerations
If you offer both monthly and annual deals, you will need to make the annual deal more appealing. For example, offer your customer 2 months or a 20% discount when they sign up for the annual deal.
Naturally, you will notice a decrease in your Average Revenue per Account (ARPA) because of the reduction offer. But as long as the CAC payback period remains shorter than 12 months, you’re still on track to building a scalable growth engine.
Offering annual deals means that you need to recognize your revenues on a monthly basis. Your cashflows, deferred revenues and recognized revenues will need to be reconciled carefully every month.
Happy Calqulating!
