Having it both ways with SaaS subscriptions

Hello there,

Some entrepreneurs just keep returning to the ring. They learn from their experiences, rebuild, and come back for more.

That’s certainly the case with Matt Bird who has been learning and iterating through a number of subscription-focused business models. We’ve actually written about the previous two in this newsletter.

Now he’s back with an ambitious startup that aims to make life better for B2B SaaS software sellers and buyers alike.

As ever, our paying subscribers get the full story as well as access to our Startup Tracker. Today in particular, the full version of the article has a bunch of valuable detail we could only fit below the line.

– Martin

PS: Look out for something a bit different from PreSeed Now in your inbox tomorrow, as a bonus beyond our regular Tuesday and Thursday editions!

Lemon wants businesses to have it both ways with SaaS subscription payments

It’s a familiar scene: you’re looking at a SaaS product you need for your business. The monthly pricing seems reasonable… until you realise you’re actually looking at the annual price divided by 12. 

It’s a common marketing tactic, but it’s a frustrating one. If you’re a small business wanting to keep a tight lock on cashflow, monthly payments might well be better. And once you see the real, higher, monthly price, the software suddenly looks a lot less appealing.

Lemon is a new startup that wants to fix this problem by allowing businesses to pay monthly for SaaS products at the annual subscription price. 

What’s more, they say they have their first merchants lined up to go live on the service, which is set to act a bit like a Klarna checkout button, but for annual B2B SaaS subscriptions.

“Vendors that are selling the software can get paid for their annual plan upfront whilst the buyer retains the comfort of monthly payments, saving between 20% and 40%,” explains Lemon co-founder Matt Bird.

Lemon is initially targeting early-stage startups and SMBs.

“It’s the kind of market typically spending between £25,000 and £30,000 a year on up to 15 different pieces of software to run their business,” explains Bird.

So this is essentially the by-now-pay-later lending model in a B2B context.

Bird says Lemon has 200 B2B SaaS merchants on its waiting list, interested in offering the product to their customers. Around 30 companies are set up and ready to go live.

But is there a market for this on the SaaS customer side? Bird says the waiting list of merchants confirms there is.

“We know that on the buyer side, there's enough demand there because a lot of these companies that want us have come to us because their customers are saying ‘is there credit or any kind of financing available?’ So there's a need from their buyers, which I think has helped us with that conversation and conversion. 

“So I'm not too concerned on the buyer side right now because these companies are bringing their customers to us based on conversations they've already had. Our main focus is acquiring the merchant rather than the buyer, because we think acquiring the merchants gives us access to their buyers.”

Here’s a video prepared by Lemon, complete with bombastic music, to showcase the buying process:

The story so far

Lemon has emerged from the ashes of Bird’s previous startup, Aboard, which offered multi-brand subscriptions. But they found the market wasn’t really there for it. 

“It took off quite well and we had hundreds of customer signups to our waiting list, but we found that no-one would pay for that product.”

And Aboard was an evolution of a previous idea, Bypass, a subscription loyalty programme product we briefly mentioned in our third ever edition of this newsletter.

Bird continues to refine his ideas around subscriptions, though. He says this time, he’s more thoroughly validated the market by involving potential customers in the development process.

“It's all about getting that customer buy-in before you've even built anything. Get them to give you feedback on your ideas, build some really ropey MVPs and prototypes, put them in front of as many people as possible, iterate as fast as you can, and not spend too long pursuing something that you can't really see a way out of.”

Bird has co-founded Lemon with Chris Boud, a former early-stage VC, and James Lewis, who was previously COO and chief product officer at Manchester-based AR company Fixtuur (previously known as Digital Bridge).

Bird’s interest in subscriptions came from his own pain points building a shirt subscription business between 2019 and 2021.

“We built our own subscription platform. When Covid came around, we really needed to generate higher levels of revenue and not rely on our investors’ money or getting external capital. So we needed to sell more annual plans, get more of that revenue committed upfront,” says Bird. 

“And so we offered a 30% discount to customers who paid upfront. What we found was a lot of customers weren't willing to part ways with that lump sum of money straight away, but they wanted the price that was attached to the annual plan, and so they asked us if they could pay monthly for that annual rate.”

Obviously, that would be a bad deal for the seller in that instance, but Bird has now returned to that problem, identifying B2B SaaS as a market opportunity.

“There's this paradox with that transaction, where SaaS merchants want more annual plans to be sold, hence why they offer a big discount. But it's really important from a buyer's perspective that they maintain monthly payments to manage their cash flow,” says Bird.

“So there's this dilemma here that's been around for a while, and we're looking back on our own past experience and trying to build a product that really solves that for a lot of B2B SaaS comes.”

An obvious question is, with many businesses failing in their first year, what happens if Lemon ends up with a load of dead companies on its books?

“Our underwriting process hopefully eliminates a lot of that risk,” says Bird. 

“We use Open Banking to look at real-time data to make real-time lending decisions. If they go bust, obviously there is a bit of a risk in that first instance, but there are plans for how we can mitigate that risk moving forward. 

“We might be able to buy in wholesale annual licences from SaaS merchants. If a company goes bust, at least we have the contract to then sell on to somebody else who needs that contract as well. So there's a lot less risk involved in that, but we need a bit more customer traction to be able to buy them wholesale.”

Lemon just needs to take the product live. We dig into the reason why that hasn’t happened quite yet below…

Go deeper on Lemon

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