It’s a debate that spans across all segments of the subscription industry: How often should you charge your customers?
In the Software as a Service (SaaS) market, there are two schools of thought: Monthly vs. annual billing. Generally, both options renew automatically once a subscriber selects a billing plan, and payments are made through a reputable payment processing vendor.
There are pros and cons for each plan, and ultimately, there’s no one-size-fits-all answer; your subscription billing frequency largely depends on your business’ goals. In fact, we’ve seen many companies offer a combination of both.
Read on to learn more about each subscription plan, including their respective benefits and drawbacks, to discover what best fits your SaaS subscription.
Monthly Subscription Billing
A SaaS subscription is typically billed monthly and enables your customers to use the service on a month-per-month basis. There are pros and cons to using these, and keep in mind that what might be a benefit for one company might be a drawback for another.
Benefits of Monthly Subscriptions
- Low barriers to entry — Monthly subscriptions make it easy for consumers to sign up without committing to a large financial investment all at once, which might not be an affordable option to a potentially loyal customer.
- Higher customer acquisition rates — Segpay data shows that a lower commitment is typically highly appealing to customers who aren’t sure how long they want to use a product or service.
- Investor appeal — Investors find SaaS subscription models more attractive than outright licensed purchases of software, according to Segpay data, because it provides more predictability of revenue.
- Easy to use — Customers can pay monthly, even set up automatic payments, which usually means if they like your service, payments will continue seamlessly.
Drawbacks of Monthly Subscription Billing
- Higher churn rates — By offering month-to-month payments, businesses potentially run a higher risk of churn since the customers are only locked in for a short period of time. This may not be enough time for them to determine the appeal and benefit of your SaaS.
- Unpredictable cash flow — Monthly payments can also cost you more in setup fees rather than the one-time, once-a-year setup.
- Difficult to make long-term plans — Without consistent revenue, some businesses may find it hard to strategically plan.
Annual Subscription Billing
With a SaaS annual billing option, your customers can use your service for the full year after making a lump-sum payment. There are some benefits and drawbacks to this as well. Consider that these could vary depending on your business model and your goals.
Benefits of Annual Subscription Billing
- Discounts — By offering an annual subscription option, businesses can gain guaranteed revenue for the year, which means they can pass on savings to customers. Last year, 15% of Segpay customers signed up after receiving an annual subscription offer.
- Predictable revenue — By collecting annual subscription payments, you know how much money is earned for the year, enabling your company to better plan for expansions, upgrades, and other key factors.
- Higher customer retention — Customers who buy an annual subscription have plenty of time to really learn about the SaaS and become comfortable using it. Businesses can also use this timeframe to nurture relationships with customers that can be extended through annual renewals.
- Provide additional features — Annual subscriptions empower businesses with the opportunity to give committed customers additional exclusive features or other options. Since they will be using the SaaS for at least a year, you’re able to test various options.
- Convenience — Annual subscription billing makes it easier for both businesses and their customers to not have to worry about monthly payments/processing.
Drawbacks of Annual Subscription Billing
- Repeals some customers — According to Harvard Business Review, consumers tend to use products/services they know the value of. Once they get over the hurdle of the large annual payment in the beginning, they tend to forget about the purchase or not use it as much, which can lead to frustration when it’s time to renew.
- Increased disputed charges — When businesses default to automatic annual renewal, customers may not remember they made this purchase and create a dispute with their credit cards. This may cause logistical issues and additional costs (this can easily be offset by sending automated email reminders of the renewal).
- Banks typically do not like annual subscription billing as there is a higher level of chargebacks due to the end user not remembering what the charge was for. Banks might also impose higher reserves if you offer several annual plans.
Can You Offer Both Monthly and Annual Subscription Billing Options?
Yes, you can!
While monthly subscriptions are Segpay’s most common subscription type (followed closely by weekly and with yearly subscriptions coming in third based on our 2021 numbers), businesses can be successful in offering a variety of subscription payment options.
Simplifying SaaS subscription options into two choices while highlighting the benefits of both options can bring in more customers and aggregate more predictable revenue. A percentage of customers will find a short-term commitment more appealing, while others will appreciate the option to make a long-term commitment to save money on their subscriptions. By offering both options, you are activating two revenue streams while fulfilling a broader number of your customers’ preferences. It’s a potential win-win.
Want more insights on the importance of customer retention? Attend SubSummit and hear from some of the leading names in the subscription industry and how they’ve found success with their customers.