Should Your SaaS Company Give Customer Refunds?

In the early days, the higher priced, enterprise SaaS companies tended to require annual, or at least quarterly, payments. But SaaS that targeted the SMB, or that was at a lower price point, offered monthly subscription payments as the norm.

This approach to billing has shifted in the past year or two. SaaS companies at all price points are making a move to push for customers to pay for their subscription a year in advance. Monthly payment options (when even offered) usually come with a penalty in the form of a higher subscription cost. This makes the annual payment more appealing, and once a customer has decided to purchase they usually opt for yearly payments.

This new focus on collecting annual pre-payments brings with it a tricky operational question: Do you offer a refund on the pre-payment if the customer wants to cancel their subscription early?

Now, based on the exact terms of your service agreement, you probably don’t offer early cancellations. But no SaaS wants the lousy reputation of forcing unhappy customers to stay with a product they don’t want and aren’t using. So at some point, the “no cancellation” rule bends or breaks, and some customers do cancel early.

So what to do about those SaaS refund requests?

As a bootstrapped SaaS company, I was never able to provide refunds, except in very extreme situations. And even then, it was never a full refund, just pro-rated. When I say “extreme,” I think there may have been two times we ever gave a refund, so it was RARE.

Luckily we didn’t get many requests for refunds. But on the infrequent occasion it did come up, there was always a moment where everyone in the room looked each other and wondered aloud, “Wait, what’s our policy on refunds again?”.

Even when refund requests are rare, as they should be, it helps to have a pre-established framework for how to handle those requests. 

Because of my bootstrapped background, my knee-jerk reaction when working with a client to develop their refund policy is pretty simple. Don’t refund.

But it’s more nuanced than that, and there are creative ways to ensure you don’t have to shell out lots of cash to a cancelled customer, while letting them feel like they have a way to recoup their costs if they aren’t happy. 

To refund or not to refund?

If you can handle the cash flow implications of a refund, do it. Just minimize cancellation requests in the first place by selling to the right customer, having a great product, an onboarding them well. You don’t want the bad energy, reputation, and word of mouth of being the company who doesn’t help satisfy an unhappy customer.

If you can’t handle the cash flow hit of a refund, then move to quarterly billing, so at any time you are not having to “refund” more than 3 months at the most. This will help smooth out the cash flow part of giving a refund. But again, I think the root thing is really looking at why you are getting requests for refunds.

Refund requests should be a big red flag. Don’t shrug these off as part of the cancellation fall out. Solve the root issues to ensure you don’t get to the point of customers cancelling early and requesting refunds at all.

A win-win for you and the customer

Opt for quarterly billing instead of annual to mitigate the cash flow hit of the rare refund request. Annual pre-paid billing is great GREAT for your balance sheet and your cash flow. But quarterly payments are pretty good too, and then you don’t have to sweat it.

I consider quarterly billing to be a win-win for the cash flow concerned company and the customer. The customer gets the peace of mind of getting the refund they feel is due them, and absorbing a 1-3 month refund won’t kill even the most cash-strapped company.

But wait. Why are you getting refund requests?

In my experience, a customer asking for a refund on a pre-payment is rare in and of itself. Most customers will ride out whatever term they have paid for and just cancel if they are disillusioned or switching vendors. I may have given a refund once or twice in 10+ years.

If you are getting lots of customers asking for refunds, you have to ask why. That needs to be solved. Get to the root of that issue first. It could be that sales is setting the wrong expectations or making promises your company can’t keep. It may be that the product has some serious usability or functional gaps. It could be due to poor customer support, training and onboarding. It could be that you aren’t selling to your ideal customer profile.

When large customers want cancellation and refund language in their contracts

Some of your large customers won’t sign your standard terms & conditions. They will require you to sign their Master Service Agreement (MSA). MSAs usually contain cancellation and refund language that you won’t be able to get rid of. But you can usually make edits to the language to make it a win-win.  Move to quarterly billing and let them have their refund language. Because again, I think getting a request for a refund is pretty rare and large companies will require this language in all their agreements.

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