Annual and monthly plans are the most often used billing intervals in SaaS businesses.
Some entrepreneurs provide both monthly and annual subscriptions, some choose to put in their offer only one of them. How did they decide which pricing plan is right? What questions did they have to ask themselves before their offer took its final form?
Let’s take a look on both solutions and their workings, and determine which option would hit the spot for you.
Btw. If you don’t know how to use subscriptions (recurring payments) in your business here’s an article for you.
Annual Billings in Subscription/SaaS-Based Services
Using annual billing plans in your business means that the client makes only one payment for the whole year upfront. As nothing in the world is perfect, that one huge payment heads toward your bank account together with a set of advantages and disadvantages.
- if your SaaS system has no automated option for subscription renewal, a yearly fee means less work for you, as there are no manual renewals every month necessary
- the churn rate is lower than with monthly billings – the customer pays for a whole year, so most probably they will give the system a chance for that amount of time at least; with monthly payments there’s always a risk of client’s churning after only one or a few months
- you don’t have to worry about your clients exceeding limits on their card, a situation which leads to various complications: blocked transactions, the necessity to contact the customers, who then have to contact their bank… it’s quite troublesome when it happens
- each time a client makes a purchase, your business gets a bigger amount, which means better cash flow
- when you collect money once a year, the transaction costs shrink considerably; your payment service provider charges you only for one payment, not for twelve; you can use any amount spared that way to widen your reach through discounts, promotions and to their marketing possibilities
- if somehow your product misses the clients` expectations, the number of potential chargebacks for one credit card is lower
- usually businesses attract clients to annual SaaS plans by making them much more affordable than subscriptions paid monthly; this means they earn less, especially when they offer additional discounts
- annual billing transactions, and merchants deciding on using them, are a tad more risky for acquirers and payment service providers, therefore the process of obtaining a merchant account for a SaaS/subscription-based business using this model might be more problematic
- the customer has much more time for chargebacks (6 months after the billing period, in case of annual billing that means 18 months for chargeback) which, although good for the client, is not as good for a service owner
- when you sign an annual contract, it’s very easy to lose touch with your customers; the interaction gets somewhat reduced, so you need to put in place additional processes to ensure you know what your real-time customer satisfaction level is
- a company that prices their products on a base of volume variants, such as number of licenses per user, should not stick to the thought of using annual subscriptions; the demand for the number of licenses may fluctuate and predicting the yearly demand would be very hard for a client; if they wanted to change the tier after a few months, it would create a great deal of confusion in your bookkeeping and all operations
Monthly Payments in Subscription/SaaS-Based Products
With monthly fee you charge your product’s users every month. The customer pays more often, you get the money more often. Easy as that.
Is this a good option to implement? Just as with annual predecessor: both yes and no.
- clients prefer this option, because they are sure they are allowed to cancel the service at any chosen moment
- there’s less to pay each time (multiple smaller payments instead of a big, one shot fee)
- the merchant will, most likely, earn more this way than with the use of yearly fees (usually annual plans are much cheaper than separate twelve monthly payments)
- the problem with rejecting the transaction by an issuer will emerge less often because of the limits on card; smaller quote to pay means that the client may have lower limits set on their card and the transaction still will go through successfully
- with monthly interactions, your company has better contact with the customers and their overall experience and real-time performance of the service; this means increased predictability (you don’t have to wait a year to know if the client wants to continue using the service, so it’s much easier to make plans and make the financial prognosis)
- monthly subs are less risky for PSP and acquirer, and therefore it’s an easier route to create your company’s merchant account
- the client has less time to issue a chargeback – 7 months starting from the time of payment (a month of subscription 6 months, and not like with annual billings – 12 months of subscription and additional 6 months)
- the client’s freedom to resign at any moment and small-chunked payments usually cost more in the end; most often monthly subscriptions are more expensive than annual plans
- the merchant feels more insecure, as the client may resign any moment, earlier than after a year; the probability of churn is much higher than with yearly plan
- if we don’t collect payments automatically and use another method, e.g. we send a payment link to the client every month, there is high possibility that we’ll get more rejected transactions
- monthly transactions have higher cost of processing for the merchant (you pay for 12 transactions, not for just one)
- potentially, there is a higher risk of chargeback occurring (if we have one annual transaction and somebody wants to issue a chargeback – they make one chargeback for the transaction; if we have a few monthly transactions, we may end up with larger number of chargebacks)
A Few Questions to Ask Yourself
Where is your business right now?
It’s not that I discourage you from offering annual plans. That’s not the point. Yearly subscriptions may be a great solution for both your company and its clients. However, if you have just created a fresh startup, this model might be a little too much to tackle. You might want to sell your product some other way first, get some money, build some value and have a processing history to show to a PSP. Then will come the time to bring out the big guns.
Is there mobility in your pricing?
If yes, annual is not the best option.
The number of licenses or the tier your client uses may change throughout the year. It would be unwise to tie the customer up to a solution they don’t need and don’t use fully .
If your pricing model is flexible, it’s value-based and/or leaves much room for changes in tiers, implementing annual billing won’t do you much good, or even make sense from the accounting standpoint.
Do you have processes in place to measure the metrics real-time?
With the annual payments it’s easy to lose touch with your clients, because of less interactivity. Less contact with your clients means less feedback and information on service’s overall performance. (Still, this option is much cheaper both for you and your client.)
Monthly payments are more interactive, but also cost more both from the merchant’s and the client’s perspective.
Of course it would be best to offer both options to your clients, and let them decide, which option works best for them. Whether it is something you can do right now, will it serve your interests well, it is something you need to consider first.
As always, you are welcome to share your thoughts on this matter with us!