This works until it doesn’t. I have seen many startups raise a ton of cash from pre-payments, burn it on marketing and R&D, and then find that the cashflow isn’t forthcoming as expected. I force my companies to clearly show prepaid revenue on their balance sheet and treat it as debt. Any discounts provided to win the pre-payment also have to be recorded as a financing cost - not a “sales discount” or buried in lower ARR. It might be borrowed from your customers, but it’s still debt and you have to “service” it by providing products and services that do have a marginal cost. Showing the financing cost achieves two things:
1. It allows you to run a higher EBITDA metrics because financing costs are backed out of EBITDA.
2. You record the non-discounted revenue for the customer, which is a truer representation of where the business could be one day when it’s no longer playing the pre-payment game to generate cashflow.
Generally speaking, it’s a good idea to generate cash from pre-payments, but don’t treat it as free no-risk money. You can get over your skis quickly, run out of cash, and then be in a world of hurt when you’re unable to service those customers.
> I force my companies to clearly show prepaid revenue on their balance sheet and treat it as debt. Any discounts provided to win the pre-payment also have to be recorded as a financing cost - not a “sales discount” or buried in lower ARR
“Unearned revenue” is a common account on any company’s balance sheet and is standard best practice.
You sign a 12 month deal, and it immediately hits your books as a liability because the revenue isn’t “earned” until your company provides the service, so each month 1/12 of the contract moves from the “unearned” revenue account to an income account.
But the 2nd idea of treating sales discounts as a financing charge sounds like some questionable financial engineering to me. If your sales guy offers a “10% end of quarter discount if you sign in the next week” you shouldn’t be booking that discounted 10% as financing income because, simply, that’s money you’ll never receive.
I’ve never heard of “non-discounted revenue” as a serious SaaS metric. Sure it will inflate your revenue (as will booking discounts as revenue) but those practices won’t pass the sniff test when any outside VC or auditor looks at your books.
But 100% agree with the first part of your comment: from an accounting perspective, prepaid contracts are typically booked as a liability or debt on your balance sheet, and gradually moved over into your Income/Earned Revenue account in 1/12 increments (or equivalent) over the upcoming year.
I should clarify: The IFRS statements do not break out the discount in this manner. In accordance with IFRS/GAAP, revenue should be reduced by the amount of the discount, not treated as a financing item. However, for internal reporting, particularly to the board, I have found it useful to break out discounts for pre-payments in this manner and to force the CEO to think about pre-paid revenue as “debt” and the inherent discounts as “financing cost”.
Appreciate the clarification. That makes perfect sense.
I work at a B2B SaaS company that sells $50k contracts, and we don’t offer monthly billing and we’ve done quarterly billing maybe once (for a premium). I could imagine the way you’re thinking being helpful if you offer monthly billing and you have lock in to the point where you know people won’t churn so there’s no major benefit to locking people in for a year.
I've recently been in contact with a SaaS company that failed in part because they changed their revenue model from pre-pay for something somewhat easy to deliver to something quite hard to deliver. Along the lines of 'pay (by buying 'credits') for any response to your marketing' to 'pay (by buying 'credits') for only positive responses to your marketing'.
A deal isn't closed until both parties have done their part, and, as you aptly describe, until one has done the delivery any payment is akin to a debt, and hence it's a liability or risk until the customer got what they signed up for.
> but it’s still debt and you have to “service” it by providing products and services that do have a marginal cost.
This should be accounted for. Say you sign a customer for $100 for a year. You should be able to estimate up front that it will cost you $5 in service costs, $15 dollars in support, $5 in ... then you can book the $75 as expected profit. Some of that can be put back into marketing in a short loop.
The main difference from monthly is that it takes N months for that revenue to be captured. However you are more certain about it. (Especially in pay-after where you can subtract actual support and infrastructure costs from the revenue.)
That’s why you have a deferred revenue report. You divide the income across the length of the contract so you “earn” each month as it comes. This can help prevent you overspending on contract delivery because you can see your numbers go red more easily.
Yep, this is what deferred revenue reports are for. I’ve seen a business skirt close to the edge because they didn’t respect what it was showing until it was almost too late.
Tracking monthly/annual bookings (or whatever the MRR/ARR number is) for investors seperately from monthly/annual recognized recognized revenue for conservative operations seems simpler and achieves the same?
And yeah, the blog's advocacy of spending unrecognized revenue is indeed risky, and how to do that safely is an interesting q...
I generally prefer to prepay a year. It tends to knock a bit off the price, and is less annoying, as I'm not constantly getting notices of withdrawal. Many companies will actually refund the unused portion, if you cancel early.
However, lifetime subscriptions seem to be almost worthless, as I have yet to encounter a company that doesn't redefine "lifetime," to mean the lifetime of the subscription, which ends, whenever they want.
"Lifetime" anything in tech is insane. The company is not going to be around as long as you are, not without a major shock and reorganization. Nor is your need for the product going to last that long in the same form either. Imagine having a lifetime subscription for typewriter ribbon.
No, the only place that does lifetime products right is the financial services industry, because a pension is necessarily a lifetime product.
In response to your last point, Image Line has has had lifetime updates for FL Studio for over 25 years[0]. They even changed the name of the product but kept the lifetime updates in place.
At best, a lifetime subscription means the lesser of my lifetime or the company’s lifetime. If the former, sucks for me - it’s kinda like “winning” on your life insurance policy.
Depends on what you're getting. I have some 'lifetime subscriptions' that allow me to keep copies of whatever these companies are selling access to, which means that it's in part up to me what I take from the deal and keep until the end of my lifetime.
I think reneging on a lifetime signup is really petty. I strongly suspect that they don't actually constitute much of a drain, and they are folks that had faith, and supported the company, early on.
And of course taxes make it better to spend less money than to earn the same amount of additional money. Beating a 10% discount for a one-year prepay means you're getting really good returns on your money, and 10% is the low end for annual discounts.
There is a sense to this but it depends on the kind of business you're in. The more novel your business is, the more the customer will need to try it out before they are convinced it's good value. Similarly, where you are delivering the same thing every month (like a vpn service) the customer can be easily convinced that the next 11 months will deliver the same value, but where it's a new thing every month (entertainment, education, information) the customer will need several months to decide that your value is consistently delivered. And the worst case is where, like a dating app, or therapy, you are selling the prospect that it might work, but each additional month is evidence that it's not working.
Where I live, most people will hesitate to buy into a yearly plan.
I'd suggest to make it possible to gift someone x years of your service, because that's something many people will happily do. The only thing to avoid here is any kind of automatic retention. One year is one year, period.
Annual plans aren’t for the most part aimed at individuals though: they’re aimed at corporations. Corporations regularly sign annual and even multi-year contracts for all manner of services. There are many reasons this can be desirable, but budgeting and discounts are often big factors.
Even as a corporation, we are often given some discretion on spending through expenses. I may not be able to expense an entire year, but I can expense a whole month at a time. If it's valuable, then I will get permission to expense an entire year ... but I have to be able to prove it's value.
My first license of 1Password was a gift, although, this was before it was a SaaS. You can gift Neftflix and similar. There's a lot of things that can be a decent gift.
If I give someone cash [1], then they might just spend it on their power bill or rent or groceries or just let it live in a bank account. This is “fine”, but it doesn’t really feel like a “gift”.
If I buy them a gift card to Best Buy or something, they’re kind of forced to buy themselves something fun. You can’t really pay your rent with a gift card, it can’t sit in a bank account, you’re kind of forced to get yourself something you’ll enjoy.
I am not saying it’s the best gift or anything, I just think “idiots” is harsh.
[1] and assuming that the person is in an economically alright position
Using the word idiots reveals GP's level of thinking. Gift cards are a less useful gift than cash. The first principals reasoning would say the more useful gift is worth more than three less useful gift but this is human psychology we're talking about so first principal reasoning isn't enough.
Gifts are about having thought about somebody, and cash is the equivalent of saying I couldn't be bothered. Hence, gift cards. I thought about you for half a second longer and gave you money to spend at a store off my choosing. Under that framing, calling people idiots because they give gift cards indicates an inability to grasp or accept that cultural norm.
So, it makes it easy when someone telegraphs their mental shortcomings to you.
>Hence, gift cards. I thought about you for half a second longer and gave you money to spend at a store off my choosing.
That half second costs me far more time and effort to keep track of a gift card, especially if a balance remains on it. Either get the actual gift you want to give the person, or give cash.
A gift card only benefits the merchant who gets to hold onto cash and earn interest.
I'm mildly annoyed by merchant-specific gift cards when I receive them. They're strictly worse than cash because rarely does the merchant have anything I want at a price that I consider reasonable.
I seriously dislike getting gift cards and rarely used them. It makes checking out take longer, and you need to remember you have them etc it’s just a worse experience.
Ideally you know the person well enough that you at least know "fun" stores they'll be shopping at anyway.
Or give something like an Amazon gift card which really is more or less like cash for most people. (Though Amazon knows this and their conversion rate is generally worse than most retailers who are more specialized.)
That said, I'm not a huge fan of gift cards. It's one more thing to keep track of but, hey, they're probably better than some gift you don't want and cash just isn't really acceptable in all cases.
It's somewhat of a cultural thing. Giving cash can seem tacky whereas if someone has just got a house, a gift card from a home improvement store or, if they're an outdoor sports type, somewhere like REI might seem somewhat more thoughtful even if you don't know exactly what they'd like.
right, giving your daughter an annual netflix subscription when she moves out is idiotic but giving her money she can spend on a party and get drunk is a next-level genius move!
Jason Cohen talks about annual prepay in https://youtu.be/otbnC2zE2rw about bootstrapping or self-funding your startup. Excellent talk that includes many other valuable opinions.
I know nothing about which is more profitable, monthly or annual, but I'm sure TFA is mixing profit&loss and cash-flow. Getting the money in advance (a concept belonging in cash flow) doesn't make your budget (an item of P&L) any larger.
A wierd bubble he/she lives in. "Raise your prices! Your prices are low! Raise them now!"
I find most services now are extremely overpriced. Your "pay us $coffee$ per month", is absolutely not going to happen because your service is one of dozens or hundreds I randomly find kinda somewhat interesting in a given day. Ok If the service was a couple of pennies, i might consider it.
Every single little app/service now thinks they are indispensable utility provider and by such are entitled to x% of my monthly salary. Get lost!!
This analysis is the right kind of analysis but most people use the wrong metrics.
On the value of your time side, the metric that I’ve seen people always use is the average value of a person’s time. However, the real relevant metric is the marginal value of someone’s time.
So,for example, if you are an engineer earning a fixed salary that works out to $100/hr, saving a few more hours will not earn you any more money. If, for example, it saves you some time, the real question is what’s the value of the time you saved. If it saves company time, then the answer is close to $0 with the only benefits being an earlier delivery (which may even be a negative in many workplaces for you personally). This may be a reason for the company to pay for the tool but not for you as an individual. Alternatively, if those 2 hours saved means you’re gonna earn an additional 2 hours of free personal time, then the question is what you will do with that personal time. If the answer is watch Netflix for 2 hours then the value of those 2 hours is likely much lower than $100/hr and in some cases may even be negative.
Then there’s an incomplete analysis on the other side as well. If I save 2 hours by paying a freelancer $20 to setup my servers, I may be losing some educational value that I would have gained it by doing it myself. And for some there may also be entertainment value attached. Personally, there are several projects I can outsource that I enjoy doing myself. Paying Google to manage my emails and calendars (at least the less important accounts) is actually taking away from the enjoyment I get in setting up, tinkering with, and maintaining my NextCloud instance.
It's different for everyone, but I don't stumble across tools that save an hour or two that often.
In fact, excluding the very well known tools (e.g. LLMs) I think I've found maybe 3 in my career and I only use one of them sporadically (a $20 one-time Excel add-in). The other two cost 4-5 figures and were provided by my employer at the time.
Ah yes, the bubble of having a product worth paying for.
In B2C I think subscriptions are over used since products do not provide value over time but in B2B that should not be the case.
Software that supports your business may be used be a daily basis, and the value can be translated into a dollar figure of time saved versus the alternative.
1. It allows you to run a higher EBITDA metrics because financing costs are backed out of EBITDA.
2. You record the non-discounted revenue for the customer, which is a truer representation of where the business could be one day when it’s no longer playing the pre-payment game to generate cashflow.
Generally speaking, it’s a good idea to generate cash from pre-payments, but don’t treat it as free no-risk money. You can get over your skis quickly, run out of cash, and then be in a world of hurt when you’re unable to service those customers.