Most SaaS companies offer 15% to 20% off for paying a year up front. Few check whether that number makes sense for their own business. The answer depends on one thing: how long your monthly customers really stay.
Why churn sets the break-even
A monthly customer doesn't pay 12 × the monthly price in their first year unless they never cancel. Some leave after two months, some after six. The expected first-year revenue from a monthly customer is lower than the list price suggests, and an annual plan can give some of that gap away as a discount without losing money.
With monthly churn c, expected first-year revenue is price × (1 − (1 − c)¹²) ÷ c. The break-even discount is 1 − that revenue ÷ (12 × price).
Annual price
$20.00 × 12 × (1 − 20%)equals$192.00
Monthly plan, year 1
$20.00 × (1 − (1 − 3%)¹²) ÷ 3%equals$204.11
Break-even discount
1 − $204.11 ÷ $240.00equals15%
At 3% churn, a discount of up to 15% earns at least as much per customer as monthly billing. A 20% discount gives up about $12 per customer in the first year.
Reasons to go beyond break-even
- Cash up front: a year of revenue on day one can fund growth without borrowing.
- Lower churn at renewal: customers who commit for a year tend to renew at higher rates.
- Habit: a year of use gives the product time to become part of how a team works.
If those matter to you, a discount somewhat above break-even can still be the right call. Just make it a deliberate trade, not a copied number.
Tip: Higher churn supports a bigger discount. At 5% monthly churn the break-even rises to about 23%, because fewer monthly customers would have paid for a full year anyway.