Monthly or annual billing for a software product
How monthly and annual upfront billing change churn, cash and the books of a software business, and how each option is invoiced in Achekam.
By Achekam · · 6 min read · For Software (SaaS) businesses in South Africa, Nigeria, Kenya
Sooner or later a software founder in Nairobi, Lagos or Cape Town has to settle a pricing-page question that looks small: do customers pay every month, or once a year in advance? The answer reaches well past the checkout. It affects how many customers stay, how much cash sits in the bank, and what the income statement says about how the business is doing.
Plenty of founders decide on instinct, usually by copying a product they admire. It is better to look at three things in turn: what each option does to the customer's commitment, which kind of selling it suits, and what it does to the books. This article takes them in that order and ends with how each option is invoiced in Achekam.
Commitment: what paying upfront changes
David Skok, the investor behind the For Entrepreneurs blog, notes that getting paid more upfront usually helps lower churn. His reasoning is about behaviour more than contracts: a customer who has paid for the year has made a greater commitment, and is more likely to spend the time it takes to get the service running. Someone paying month to month can walk away after one frustrating week of set-up; someone who has paid for the year tends to push through it. His SaaS Metrics 2.0 guide sets out how churn, monthly and annual recurring revenue and customer acquisition cost fit together, and it is worth reading before you redesign a pricing page.
That does not make annual billing right in every case. It moves part of the churn decision to renewal day, and it asks a customer to hand over a larger amount before they have seen much value. For a product people find on their own and use without help, that request can cost sign-ups.
Two ways of selling software, two billing habits
Stripe Atlas, in its guide to how SaaS businesses work, separates low-touch from high-touch selling. Low-touch products are built so that most customers buy without sustained one-on-one contact with a person: they arrive through the website or e-mail marketing, often start on a trial period, and generally pay month to month. Stripe Atlas puts low-touch price points at around $10 a month for consumer apps and in the $20 to $500 range for business software. It adds that low-touch businesses treat monthly recurring revenue (MRR) as their most important metric, while high-touch businesses, which sell through people and negotiated contracts, treat annual recurring revenue (ARR) as theirs.
Those are US dollar examples, but the logic travels. A Kenyan rostering tool sold to small shops through a sign-up page is low-touch, and a monthly plan suits it. A South African compliance platform sold to banks after demos, security questionnaires and a negotiated order form is high-touch, and an annual contract paid upfront is the natural fit. Many products offer both: monthly by default, with an annual option for customers who prefer it.
Four questions that usually settle it
- Who closes the sale? If nobody does, start monthly. If an account executive does, annual terms are normal.
- How long before the customer sees value? The longer the set-up, the more an upfront commitment helps, which is Skok's point.
- How tight is cash? Annual payments fund growth before the work is done; monthly payments arrive as the work is done.
- Can you keep up with the accounting? Annual billing needs a small deferred revenue routine every month.
Money in the bank is not this month's profit
This is where many young software companies trip. When a customer pays a year ahead, the cash is in the account today, but the service has not been delivered. Andreessen Horowitz explains that cash collected in advance is recorded as deferred revenue, which is a liability, and that it moves into revenue as the service is delivered: on a 24-month deal, deferred revenue falls by 1/24th and revenue rises by 1/24th each month.
Skip that step and the income statement misleads. Investopedia notes that without deferring revenue a company might overstate its profits in periods of high upfront payments. For a business that runs its renewal campaign in one quarter, that shows up as one spectacular month followed by months that look like a slump, when nothing about the underlying business has changed.
Why a large deferred balance can alarm a lender
The same entry has a second effect, on the balance sheet. Investopedia notes that a high deferred revenue balance increases total liabilities and can temporarily make a company seem more leveraged. A bank officer or investor skimming the figures sees large liabilities against modest equity and may read them as borrowing.
They are not borrowing in the usual sense. The business owes service, not cash, and the liability shrinks as customers use the product. But the reader has to be told. When management accounts go to a lender or a shareholder, name the account plainly as deferred revenue (or contract liabilities, if your accountant prefers) and add one sentence saying it is subscription income collected ahead of delivery. That sentence heads off a misreading before it starts.
Invoicing each option in Achekam
Both options run through the same receivables ledger. A business creates a customer invoice as a draft it can change or delete, and issuing it takes the next number in the sequence and posts it to the ledger as debtors, sales and output VAT. Default terms are 30 days.
Monthly billing. Achekam cannot yet set up a recurring invoice for a customer (repeating invoices exist only as retainers created from a signed engagement letter), so someone issues each month's invoice. Once it is issued, create a payment link and e-mail it with the invoice; the customer pays on a public page that shows your business's name and branding. A link lasts 14 days by default, and an open link for the same amount is reused rather than duplicated. A verified gateway payment is recorded as a receipt against the invoice, which then shows as paid or part-paid, so the sale and the cash both reach the books without being typed twice.
Annual billing. Issue one invoice for the year. Because the invoice posts its whole amount to sales on the day it is issued, the deferral is a step you take yourself. Add a deferred revenue liability account to your chart (accounts can be added, renamed or switched off), post a manual journal moving the unearned part of the invoice into it, then post a journal each month releasing that month's share to revenue. Journals are checked as they post: an unbalanced one, or one dated in a closed month, is refused, and a posted journal is corrected only by a reversal. The whole routine is walked through in deferring an annual invoice with month-end journals.
Cash deserves the same care as revenue. Annual payments lengthen your runway on paper, so read tracking burn and runway from your own books before treating a renewal season's takings as money you can spend.
Before you change the pricing page
Write down which customers you expect to choose each option and why, and test the choice against your own sign-up and cancellation history rather than another company's. If you add an annual plan, create the deferred revenue account and diarise the month-end release before the first annual invoice goes out, not after the first confusing set of management accounts.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
