Is yearly subscription for a new SaaS a bad idea?

You're making the mistake of not thinking like your customer. Right now, you're approaching the problem from the position of "how can we stuff our bank out the fastest?" but you should be asking "what is most appropriate for our customers?".

When a potential customer is deciding whether to subscribe to a service or not, they're considering ROI and risks:

• ROI/value:
  • For how long will I need this?
  • How quickly will I get some value out of this?
  • If I subscribe for 3/6/12/24/etc months will I continue to receive benefits after X time?
  • Do I have the funds to pay for 3/6/12/24/etc months at once?
• Risk:
  • What will happen if I no longer need the service but it had been pre-paid for X time ahead?
  • What will happen if the company no longer provides the services but it had been pre-paid for X time ahead?

So when you're devising your payment schedules these questions should your top priorities. Otherwise, you'll end up offering $200 annual subscriptions to a low-value service needed only a couple of times a year and wonder why you can't sign any customers.

@bangdang has made a good point that sometimes monthly subscription charge is too low and isn't financially feasible so you have to charge in larger packages. However, it all still comes back to the value and the risk: if you pre-paid for a year of $2/mo. service ($24) and the company folded after 8 months, you lost only $8, a negligible amount, as oppoosed to $80 or $40 had the service cost $20/mo. or $10/mo.

Factor in the overhead costs as well. What does it cost to manage a monthly subscriber versus yearly subscriber. One area to consider is how you will accept payment. Will you accept credit card payments? If so, what's the per-transaction charge? What's the likelihood and frequency of chargebacks?

Xmarks and lastpass charge $1 per month but will only bill in yearly increments. If they charged monthly $1/mo, the overhead costs for the transactions alone could eat half the revenue. In some instances, managing monthly subscriptions could net you a loss depending on the price point and associated transaction costs/fees.

I don't think it's a bad idea. Why not offer monthly subscription and year subscription? Yearly subscriptions will be cheaper by 5%?

Monthly memberships are offered as a more cost effective plan to people who are on the fence about your product. What looks better to you when you come to a site you don't know that much about, but you want to try it out - $10/month or $100/year. I would rather spend the $10, try it out, and if I like it, up my subscription.

Plus, some people may only need it for 3 months, so why would they want to pay for the whole year.

I see it purely as a cost issue. I really only go for bigger subscriptions when I am confident that I will use and enjoy the product for that long. An example would be my hosting. I went month to month or yearly on 4 different hosting providers before I bought 3 years worth of BlueHost.