Annual or monthly: the discount that pays for itself at a small SaaS

Almost every SaaS pricing page has the same switch above the plans: Monthly, Annual, and a little green label that says "Save 20%". Most small vendors copy it because everyone else has it. Then the questions arrive later. Was 20 per cent too much? Who actually picks annual? What happens to the cash when a customer pays a year in advance and asks for it back in month three?

This piece works through the switch with numbers: what well-known vendors charge for annual today, how many customers take it according to ChartMogul's billing data for 2,500 SaaS companies, what annual does to retention, and a worked example for a $29 plan that shows the year-one revenue, the cash, the card fees and the discount at which annual stops paying for itself. Then the refund and renewal terms, and the cases where monthly only is the better choice.

What the annual discount looks like on real pricing pages

We read the pricing pages below on 27 October 2026. Where a page showed both prices, the discount is ours, worked out from the two figures; where it only printed a percentage, that is what we give.

Two discounts cover nearly all of it: 16.7 per cent, which is "two months free" (pay for ten, get twelve), and 20 per cent. Shopify's 25 per cent is the generous end. The pattern is not an accident. Below about 15 per cent the saving on a $10 seat is under $20 a year, easy to overlook; above 25 per cent you are mostly giving money to customers who would have stayed anyway, as the worked example below shows.

How many customers actually choose annual

The best public numbers come from ChartMogul's SaaS Billing Report (May 2025, more than 2,500 SaaS companies, full-year 2024 data). It splits companies by size and by average revenue per account (ARPA).

Read the last two lines twice. At a small company, the annual plan mostly sells at sign-up or not at all: only 9 per cent of companies under $300K ARR saw any customer move from monthly to annual during the year. The bigger companies get upgrades because they ask for them, in the product and by email. ChartMogul also found that customers in its January 2024 cohort were more than three times as likely to upgrade in their second month as in their ninth. If you want annual customers, the window is short and early.

What annual does to retention, and what it does not prove

Annual customers stay longer at every price point ChartMogul looked at. The gap is widest for cheap products, which makes sense: a $9 monthly charge is easy to cancel on a whim, and an annual charge removes eleven of the twelve moments when the customer could.

But be careful about what the gap means. The people who choose annual on day one are, to a large extent, the people who had already decided to stay. Some of that 21-point gap is the plan holding customers in; some of it is simply who picked the plan. No published dataset separates the two. What you can say for sure is that an annual customer cannot leave for twelve months, and that renewal is one decision a year instead of twelve.

There is also a cost on the other side. SaaS Capital's study of contract length across more than 400 private SaaS companies concluded that month-to-month contracts are "more compelling as a potential driver of revenue growth than any downside" on churn. ChartMogul saw the same in its data. Between $1M and $10M ARR, companies taking 75 per cent or more of revenue from monthly plans grew 9 per cent faster than those taking under 25 per cent from monthly (18 per cent faster in the top quartile). Under $1M ARR, the top quarter of mostly-monthly companies grew 131 per cent in a year, while the median company with half to three quarters of revenue on annual grew 15 per cent. Monthly is easier to say yes to. Early on, that matters more than the lock.

The worked example: a $29 plan with 20 per cent off annual

Take a small product at $29 a month. Annual at 20 per cent off is $278.40 a year, or $23.20 a month, so each annual customer gives up $69.60 compared with twelve monthly payments. Monthly customers churn at a steady rate. We use ChartMogul's 41 per cent twelve-month retention for cheap products, which works out to 7.2 per cent a month, and two gentler cases.

This is the whole question in three rows. If the person choosing annual would otherwise have behaved like your average monthly customer, annual at 20 per cent earns you more ($278.40 against $238.94), and you could go as far as 31 per cent before it stops paying. If the person choosing annual is one of your loyal customers, who would have stayed at least as well as the 70 per cent row, then 20 per cent costs you money in year one, and anything above 14.6 per cent is a gift.

Real customers sit between those two. That is why 16.7 to 20 per cent is where the market has settled: it is enough to tip a doubtful buyer, and the loss on the ones who were staying anyway is small. A customer who would have paid the full $348 for twelve months costs you $69.60; a customer who would have quit in month five and is instead held for twelve brings in $133.40 more than they would have.

Card fees, the small extra

On Stripe's US list price for domestic cards (2.9% + 30 cents per charge) plus Stripe Billing's 0.7%, twelve monthly charges of $29 cost $16.13 in fees; one annual charge of $278.40 costs $10.32. That is about $5.80 per customer per year. Twelve charges are also eleven more chances for a card to expire or be declined, which is where involuntary churn comes from. It is not the reason to offer annual, but it does pull in the same direction.

The cash: money in the bank is not revenue yet

Now run a whole year. Forty new customers a month, the $29 plan, monthly customers churning 7.2 per cent a month. Compare a monthly-only business with one where 30 per cent of new customers pick annual (roughly the middle of ChartMogul's 28 to 47 per cent ARR shares).

The annual option brings in about $19,000 more cash in the first year, but only about $570 more revenue. The rest is the customers' money for months you have not delivered yet. Accountants call it deferred revenue, and it is a liability on the balance sheet. It is fine to use it to smooth payroll; it is dangerous to treat it as profit. If a buyer looks at the business later, they will take that liability off the price (our piece on selling a small SaaS covers what buyers check).

The cash does change one thing for real: a small company can fund a hire or a month of ads out of annual prepayments without borrowing. Just keep at least the refundable part of the year's prepayments in the account, and know what month thirteen looks like, when that first group renews or does not.

Refunds: write the rule before the first annual sale

A monthly refund is $29. An annual refund can be $278, asked for by someone who forgot they agreed to renew. Decide the rule first, put it in the terms next to the plan switch, and apply it the same way every time. For comparison, Notion's help centre gives a refund if you contact it within three days of a monthly invoice or within 30 days of an annual one; outside that, nothing is promised.

Two details save arguments. First, if you refund unused months, work them out at the monthly price, not the discounted one: a customer who used four months of a $278.40 year has had $116 of service at the $29 rate, not $92.80. Say so in the terms. Second, a refused refund on a forgotten renewal very often turns into a card dispute, which costs a fee whether you win or lose. Our article on chargebacks at a small SaaS has the fees and the cases you can win; the cheapest defence is the renewal notice below.

The renewal notice the law asks for

California's amended Automatic Renewal Law took effect on 1 July 2025 and is the strictest common reference point for US consumer subscriptions. Even if you sell mostly to businesses, it is a good standard to follow, because it is what stops the angry renewal email.

If you sell to consumers in the EU or the UK, they also have 14 days to withdraw from a new online subscription, annual included. A checkout box where they ask you to start the service straight away limits what you have to give back; put it next to the plan switch. Business customers are not covered by either rule, but they appreciate the email just as much.

When monthly only is the right answer

Before you know the product works. If you still change the product every week and do not know why people stay, an annual plan hides the churn you need to see. Twelve monthly decisions tell you far more than one annual one.

When the price is low and the use is irregular. RevenueCat's State of Subscription Apps 2026 found that in productivity apps 76.7 per cent of subscriptions are monthly and monthly plans bring in 90.7 per cent of the revenue. Annual is the most popular plan in most other app categories, but not here. People who need a tool for a project buy a month.

When you charge for use. If most of the bill is metered usage, annual prepayment means credits, expiry dates and true-ups, which is a different product. Keep a monthly base fee and discuss annual commitments only with larger customers.

When growth is the goal for the next year. The SaaS Capital and ChartMogul results above both say monthly makes the first yes easier. If you need customers more than you need cash, keep annual on the page but do not push it.

A setup that works for a small vendor

1. Offer both, priced at two months free (16.7 per cent) or 20 per cent. Show the annual price as a monthly figure with the yearly total next to it: "$23.20 a month, billed $278.40 yearly". Hiding the total is the fastest way to a refund request.

2. Let the customer choose at checkout; default the switch to monthly unless you are sure. A pre-selected annual plan raises the share, and the refund rate with it.

3. Ask once, in month two. Customers are three times more likely to move to annual in month two than in month nine. One email or in-app note with the saving in dollars and the date it would start.

4. Write the refund rule next to the switch, with the number of days and the starting date, and how unused months are valued.

5. Send the renewal email 30 days before every annual renewal, with the price and a cancel link. Keep the record of that email and of the original consent for three years.

6. Treat prepayments as owed until they are earned. Look at month thirteen in advance: how many annual customers renew and on what dates.

7. Look at the numbers after six months: what share of new customers chose annual, how many asked for refunds, and how annual and monthly customers from the same months compare. If almost nobody picks annual at 20 per cent, the issue is usually trust in the product, not the size of the discount.

If you are also changing your prices, our piece on raising prices on customers you already have covers how annual customers are moved to a new price at renewal, and the calculator below shows what a price lock on annual plans costs over a year.

Sources

ChartMogul: SaaS Billing Report, "Billing is the invisible force behind your growth" (May 2025; 2,500+ SaaS companies, 2024 data: billing models offered, share of ARR on annual, NRR and customer retention by billing plan, upgrades to annual, growth by billing mix); SaaS Capital: Contract length and its impact on growth and retention (400+ SaaS companies); RevenueCat: Monthly plans might be your best option (June 2026, citing State of Subscription Apps 2026); pricing pages read 27 October 2026: Zoom, Slack, Calendly, Notion, Shopify, Linear; Notion: Refunds; Stripe US pricing (2.9% + 30 cents for domestic cards, Stripe Billing 0.7%); Stripe: Prorations; Cooley: California Automatic Renewal Law amendments take effect on July 1, 2025. Worked example: our own calculation; monthly churn derived from ChartMogul's 41% twelve-month customer retention, 40 new customers a month, 30% choosing annual.