How big an annual plan discount should be: compare it with what a monthly customer really pays in a year given your churn. Formula, table and example.
By Sergey BruhPublished 6 min read
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A safe annual plan discount is smaller than the share of the year that an average monthly customer doesn't pay for because they leave. With monthly churn of 3–6%, a monthly customer pays for roughly 9 to 10 of the first 12 months, so the break-even discount is about 15–27%. For most small SaaS products "two months free", a discount of 16.7%, sits safely inside that range and brings the cash forward. Below is the formula, a table for different churn rates and a worked example, plus the cases where a smaller discount is wiser.
Yana runs CupQueue, a web app that lets coffee shops take orders from customers' phones so they can pick up a drink without queuing. It costs 500 UAH a month. About 4% of monthly customers leave each month: a shop closes, changes owners or decides the queue isn't that bad.
She wants to add a yearly plan and has three options:
Which one can she afford?
The first month is paid for certain. Each following month the customer is still there with probability , where is monthly churn. So the expected number of months paid in the first year is
With :
At 500 UAH that's about 4,841 UAH from an average monthly customer in the first year. The break-even discount is the share of the year that isn't paid for:
Compare the options with 4,841:
The higher your churn, the more an annual plan is worth to you, and the bigger the discount you can afford. If you don't know your churn yet, measure it first; how to calculate MRR and churn shows how from one month of events.
There's a catch. The shops that pick a yearly plan are usually the ones most sure they'll stay. Suppose they would have churned at only 2% a month on a monthly plan. For them, the break-even discount is 10.3%: month by month they would have paid about 5,382 UAH in the first year, so two months free (5,000) costs Yana about 382 UAH per such customer.
That doesn't make the annual plan a bad deal. It means the discount pays for three things, not for retention alone:
A practical range: between about 10% and your break-even discount. Below 10% few customers switch; above break-even you're paying for cash you could get more cheaply.
In a typical month CupQueue signs 32 new shops, and 8 choose the yearly plan. In month one those 8 pay 8 × 5,000 = 40,000 UAH instead of 8 × 500 = 4,000. That's 36,000 UAH of extra cash in a single month, repeated as long as the share holds.
For a self-funded company that extends the runway, see personal runway, and pays for things that can't wait, like a laptop or a first contractor. Two rules keep it safe:
Many products offer 15–20%, often framed as "two months free". The right number for you depends on your monthly churn: calculate your break-even discount and stay below it.
Yes, if your product is used all year. It brings cash when it's scarcest and gives new customers time to get value. Keep the monthly option too.
Divide the yearly payment by 12. A 5,000 UAH annual plan adds about 416.67 UAH to MRR every month of the year, not 5,000 in the month it's paid.
Decide the policy before you sell, write it on the pricing page and follow it. A common choice is a refund of unused months within a short period after purchase and no refund after that.
The lesson A yearly plan from day one shows two founders designing their first yearly plan, with numeric exercises and a practice task checked by AI. It is part of the course From Idea to Profitable Product: Building Without Investors; MRR and churn shows how yearly plans enter the monthly numbers.
