No doubt monthly and annual plans are the most popular billing periods in SaaS businesses. Let’s talk about annual billing plans today. Let’s look at some pros and cons.
Pros of annual billing plans in SaaS/subscription-based businesses
Annual billing plans mean simply one thing: one payment for the whole year upfront. And one payment means:
- bigger amount, better cash flow
- no problems with renewals (if the SaaS doesn’t charge their customers automatically)
- no problems with credit cards (user might not have money on their bank account, might change limits on their card, might block it, the card might expire, bank might reject future transactions etc.)
- lower fees of payment service provider – SaaS pays once only, for one transaction
- potentially lower number of chargebacks per user/card – if your user is not satisfied and want their money back
- lower churn rate – if someone pays for a year upfront, probably heís going to use the service for at least a year; in monthly billing plans he can change his mind after 1, 3, 6 or even 11 months and simply disable his account
- lower costs mean more marketing possibilities (e.g. discounts for users that want to pay for a year upfront)
Cons of annual billing plans in SaaS/subscription-based businesses
- such transactions and such merchants are more risky for payment service providers or acquirers – SaaS/subscription-based business might have a problem obtaining a merchant account
- more time for chargebacks (6 months after the billing period, so in case of annual billing that means 18 months for chargeback)
- SaaS might possibly earn less; if they offer discounts for annual plans, they might earn less than on a customer that pays month by month due to the discounts
So… to annual or not to annual?
Yes. I highly recommend offering annual plans. That could be a great thing for a company and its customers. However not at the beginning. Not for a just-created startup. First sell something, accept some money, build a processing history. Simply… build trust and prove that you are responsible enough.