How it's calculated
An annual plan trades a lower price for a year's commitment, paid up front. Whether the discount pays off depends on churn: a customer on a monthly plan might leave after a few months, while an annual customer has paid for twelve. The calculator compares the annual price with what a monthly customer is expected to pay in the first year, and finds the churn rate at which the two are equal.
Annual and monthly plans also count differently in recurring revenue: public companies such as Freshworks annualise monthly subscriptions from the last month's run rate and count annual contracts at their contracted value.SEC (EDGAR)
The formula
- Annual price = 12 × monthly price × (1 − discount)
- Expected first-year revenue from a monthly customer = price × (1 − (1 − c)12) ÷ c, where c is monthly churn: in month k the customer is still paying with probability (1 − c)k − 1.
- Break-even churn: the value of c at which the two are equal.
Worked example
20% off a $50 monthly plan makes the annual plan $480.00. At 3% monthly churn a monthly customer is expected to pay $510.26 in the first year, so the annual plan earns -$30.26 more per customer (negative means less). It breaks even at 4.163% monthly churn.
| Line | Amount |
|---|---|
| 12 monthly payments, if nobody churned | $600.00 |
| Expected from a monthly customer at 3% churn | $510.26 |
| Annual plan, paid up front | $480.00 |
| Annual plan earns less by | $30.26 |
A two-months-free offer (about 16.7%) breaks even at 3.392% monthly churn.
Assumptions and limitations
- Year one only. Annual customers may renew at a lower churn rate than monthly customers, which the comparison does not count.
- Cash timing is ignored. Up-front payment is worth more than the same amount spread over a year, especially for a company that is burning cash.
- The same customers choose either plan. In practice, customers who pick annual plans are often more committed to begin with.