A while ago I wrote a piece about pricing web services and getting them into buckets. I mentioned I’d write more so here goes.
Pricing is an incredibly hard thing to do. As I mentioned in the last post, getting things into three buckets is really important, so I want to talk today about yearly packages.
At first blush offering your customers a yearly option may seem like a great idea. For one, you lock them in for a year – this is good. For two, you have more cash right now – this is also good. There are two major problems with yearly packages though.
The first problem is too much choice. When you talk about getting your pricing into three buckets to make your pricing simple, adding yearly packages (assuming you are doing monthly packages in the first place) will double the number of packages you offer. So right out of the blocks you have 6 packages which is three too many. [Note: if you question this, read the pricing buckets post].
The second problem is the smoothness of your cash flow. Reporting, monitoring and improving monthly cash flow is much more manageable and consistent with monthly packages than when you try to manage yearly subscriptions. As a start-up cash flow is king. Demonstrating steady growth is key when you are talking with stakeholders. Monthly packages can derail your revenue reporting if you have a relatively high or low number of annual sign-ups in any given month. With monthly packages, these fluctuations and their effects are moderated.
I’m going to post more on pricing again in the future. By the way, Levi and I are presenting at DemoCamp 8 tonight. If you are there, please say hello.
Michael McDerment 
What about having just yearly pricing, like Flickr does? They have a $25/year Pro plan, and that’s it.
Also, in addition to the benefits of yearly pricing you mentioned, there is also reduced complication and expense because you don’t need to initiate monthly e-commerce transations.
True John…very true…much less benefit in terms of smoothness of cash flow, but if your monthly transaction size is less than $5/month, annual packages might be a better fit for you.
I agree. Also another factor is that many credit card merchant accounts don’t allow you (the merchant) to charge for future goods or services. So it’s not even an option for many.
“Monthly packages can derail your revenue reporting if you have a relatively high or low number of annual sign-ups in any given month. With monthly packages, these fluctuations and their effects are moderated.”
That’s only because you are using cash basis accounting. Accural based accounting will automatically match revenues with expenses and smooth things out. It gives you a better picture of what’s happening regardless of how you take in cash.
That’s true stacey….in theory. The reality is cash in the bank is very different than “revenue” in your financial statements and churn is much harder to forecast with annual packages, and it has more impact…so what you have in your accounting reports can vary wildly from what you wind up collecting…and that lack of cash flow smoothness can be especially painful as you are getting started. On the flipside, financing your business through annual packages (i.e. more cash now) is attractive to many and has it’s own benefits…