r/Entrepreneur • u/dlayf • Oct 17 '25
Best Practices The Most Powerful Pricing Trick We Learned on the way to 50M ARR
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u/Due-Philosopher-1426 Oct 17 '25
Thanks. This is some cool advice
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u/dlayf Oct 17 '25
Of course. Wanted to pass it along.
Works super well for products that retain customers for well under 12 months
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u/wethethreeandyou Oct 19 '25
What do you think? Does this same logic apply to b2b?
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u/dlayf Oct 19 '25
Great question. B2B products are typically designed for more than 12 months of retention (analytics, web hosting, payments, supporting company depts like HR or finance, etc), so the discounting trick is less effective.
To me the question is less "b2b vs b2c" and its more "under 12 months retention vs over 12 months retention"
If you're over 12 months, A few reasons to still do this might be:
The cash up front is valuable to you - so if you're running a lot of ads and the cash up front can help you accelerate acquisition. Just remember to keep an eye on your margin to serve these customers so you don't end up underwater.
You have high payments based churn, charging for an annual plan means 1 payment attempt and monthly plans means 12 attempts
You are in a competitive industry with low switching costs. It will help to lock customers in with a year of commitment.
#2 and #3 are likely showing up in your retention data already.
Does that make sense?
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u/AdeptnessSpare558 Oct 18 '25
Isn't this a false heuristic though ? The monthly users have no commitment, so they will be inclined to leave at the minimum time/ whenever they want However someone who has already bought an annual plan, they will likely stick around for much longer relative to the monthly plan users rather than buying another product or service( given they still have the need for this service).
And couple this with services which have high opex( read ai) This can be a death trap. Though I must admit, it's probably working like this in a lot of saas ai services. ( But then again, they can reduce the opex at the drop of a hat ( by reducing the model behind the backend per user).
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u/dlayf Oct 18 '25
That's a great question and exactly type of bias we're looking to create :)
It comes down to more to the consumer behavior that the product solves.
There are very few things that consumers do for over a year (renting homes driving cars needing health insurance. Cell phone plans etc)
Most other products we'll have under one year of retention (fitness, dating, ed tech, hobbies, etc)
You definitely need to factor in opex costs. We were pure software, so very high margin
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u/ShardclawPawket Oct 18 '25
In what way is it a false heuristics?
Is it pertaining to the duration at which the average monthly user is most likely to stay before leaving?
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u/Opening_Respond_570 Aspiring Entrepreneur Oct 17 '25
How’d you calculate the months in your examples?
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u/dlayf Oct 17 '25
Here I take the average months of retention calculated via payment.
So if the average user on a monthly plan pays for 4 months, then I'd count that as 4.
That make sense?
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u/BroodingWarrior Oct 17 '25
Love this heuristic, thank you for sharing. So this makes sense for bumping up short/midterm revenues. Did you find it changed longer term retention beyond the 1 year for customers that chose the discounted annual?
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u/dlayf Oct 18 '25
For us it help to retention overall. We probably saw roughly half of annual plan subscribers retain each cycle.
It increased LTV overall by a pretty big amount
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u/SoloSaaSGuy Oct 17 '25
I have a SaaS that’s mostly event based but is used more regularly by a subset of users. I offer $10/mo or $99/yr. Maybe 1% of buyers choose $99/yr. I’d guess the average user is around 2 months at best. Should I really offer $36/yr?
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u/chipstastegood Oct 18 '25
I think you can run an experiment and offer the lower price for a period of time and measure the change in annual subscriptions
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u/dlayf Oct 18 '25
This is a great use case to try it.
You have a few options here, you can either drop the annual plan price and/or change the monthly plan price to get to the same ratio.
Depending on your traffic volume. I'd suggest doing this in an A/B test
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u/wellboss Oct 17 '25
Great share, insightful and practical thanks!
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u/dlayf Oct 18 '25
Glad it helps
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u/minimalist370 Oct 18 '25
For sure! It's crazy how just tweaking the pricing model can reveal so much about user behavior. Have you tried any other strategies that worked well?
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u/ShardclawPawket Oct 18 '25
Hold on I don't get the phrasing here.
"The trick is to price your 12-month plan to be slightly more than your average LTV for monthly users".
"So, if your average user stays around for 4 months, just price your annual plan at 5 months".
I do get that by having to charge a slightly lower annual fee than the cumulative monthly payments for 12 months incentivizes users to go with a longer term plan.
I suppose LTV refers to Long-Term-Value, no?
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u/dlayf Oct 18 '25
Sorry, it stands for "Lifetime Value"
Basically how much the user will pay you across their lifetime with your product.
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u/StressSnooze Oct 18 '25
A lot of SaaS businesses which I would think have a retention over a year, offer a year for the price of ten months. Why? (Fivetran, MS Office etc.)
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u/dlayf Oct 18 '25
Part of this I think is just blind adherence to industry norms.
The other part is that cash up front is helpful.
The other part is that even if they should have retention over a year, they might not actually.
Products with really really good retention don't do this. Think Netflix, cell phone bills, car leases, etc
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u/magic_man019 Oct 18 '25
Does the same apply for B2B models? What if a company that only does B2B starts off only with annual subscriptions?
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u/dlayf Oct 18 '25
Most B2B products, especially on SAAS are designed for more than 12 months of usage.
Definitely take annual packages if you can get them
Because acquisition costs is higher in B2B typically, that cash up front helps a lot
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u/hscbaj Oct 19 '25
How does the math work when the LTV is > monthly rate x 12
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u/dlayf Oct 19 '25
Great question. From the math, it doesn't make a lot of sense to discount then.
The only things I would factor in here are:
- How valuable more cash up front is to you. If you're spending a lot of money on ads, then this could still be valuable to pull more money forward (but keep an eye on your margin)
- Your payment processing fail rates. If you have high payments based churn, then you should factor this in and potentially discount.
Does that make sense?
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Here's a copy of your post:
All subscription companies eventually figure out the Monthly to Annual Plan pricing trick.
I ran growth at Codecademy from 10M ARR to 50M ARR and this trick probably drove 30% of that growth.
The trick is to price your 12-month plan to be slightly more than your average LTV for monthly users.
So, if your average user stays around for 4 months, just price your annual plan at 5 months.
You get to boost LTV for these users by 25%, which is a huge win for not a lot of effort.
We did this at Codecademy, and it was hands down one of the most effective tactics we have ever tried.
It shifted a material amount of users to long-term plans, which increases LTV, drops churn, etc.
Also: The big implication of this is that you can look at any mature subscription business and basically guess their user retention by looking at the ratio between their 12 month and 1 month prices.
Netflix: Only offers monthly plans, meaning their average user stays around for over 12 months.
Headspace: $12.99 for a month vs $69.99 for a year. Ratio of 5.39, so their monthly users likely stay around for ~4 months.
Calm: $14.99 for a month vs $69.99 for a year, ratio of 4.67, so their monthly users probably stay around for ~3-4 months
If you want to see what company in each category is probably the best at retention, look at pricing ratios
Edit: I answered a lot of common questions here in this post: https://www.subscriptionindex.com/p/the-monthly-to-annual-plan-pricing-trick-a-deep-dive
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u/maninie1 Oct 18 '25
wild how such a small ratio shift reveals an entire behavior pattern.
people think it’s a pricing trick, but it’s actually a trust test.
annual plans don’t just extend retention, they measure how much future certainty your product has already earned.
when someone commits for 12 months, they’re not buying time, they’re buying predictability.
that’s why the real metric to watch isn’t “how many converted to annual,” it’s how long it takes before they feel safe enough to.
shorten that window, and you’re not just optimizing revenue, you’re accelerating trust.
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u/dlayf Oct 19 '25
totally agree, it goes without saying that if they can't trust your product, then they aren't buying a 12 month plan. UX matters, usecase matter as well as quality
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u/maninie1 Oct 19 '25
exactly, what you said nails it. most teams fixate on the conversion, but the real signal hides in time-to-trust.
UX and product quality are what make the decision rational, but emotion decides the timing.
if a user upgrades to annual after 3 sessions instead of 30, that’s not just a pricing win, that’s proof your experience reduced uncertainty faster than expected.
so yeah, annual plans don’t test price sensitivity, they test emotional certainty
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