Definition
An annual prepay discount reduces price when a customer pays a full year upfront, improving cash flow and reducing churn risk.
Why it matters
Done well, it stabilizes revenue and aligns incentives. Done poorly, it locks in low pricing and erodes margin.
Pricing implications
Compare the discount to the cost of capital, expected churn reduction, and support load. Set a floor to protect gross margin.
Measurement tips
Track annual conversion rate, renewal rate, and discount-weighted ARPA to confirm the tradeoff is positive.
Checklist
- Define the list price and the discounted annual price.
- Model the effective monthly rate versus monthly plans.
- Set a maximum discount tied to margin targets.
- Require full upfront payment (no monthly installments).
- Review discounting by segment quarterly.
- Align invoice terms with revenue recognition rules.
- Monitor renewals for annual cohorts.
- Limit discount stacking with promos.
Examples
- annual prepay vs monthly (16.7% discount).
- 10% off annual for SMB, 5% for mid-market.