Businesses that offer subscription services have several ways in which they can bill for those services. When it comes to monthly vs annual subscriptions, which one is best for your business? Here, we break down the differences between them, along with some pros and cons to help you decide.
What are Subscriptions?
Subscriptions are goods or services that are billed on a regular interval basis, typically with an automatic renewal feature. Subscriptions can be for physical merchandise, or services provided. Here are a few examples of each:
Annual vs Monthly Subscriptions Table of Contents
Merchandise Subscriptions
The simplest example is a magazine subscription. Although they are rare now, they used to be an extremely popular form of subscription billing. Other examples include meal delivery services, curated clothing boxes, and membership kits like shave clubs or wine clubs. These subscriptions offer physical merchandise that is shipped to the customer at regular interval with automatic payments collected.
Service Subscriptions
This article will focus more on service subscriptions. These include things like website hosting, software subscriptions,
And other services that businesses require to operate. Companies that offer Software as a Service (SaaS) to business owners do so in a manner that requires a membership or subscription to the service.
Annual Subscriptions
Annual subscriptions are those that are renewed on an annual basis. They generally have an automatic renewal feature setup that allows the service provider to bill their clients automatically when the subscription expires. Annual subscriptions can be a great option for both the service provider and the client.
The service provider gets a guaranteed payment upfront for the entire year of service, which is helpful from a cash flow perspective. For the client, an annual subscription could mean a discount for paying upfront for services. It’s also helpful to keep the client on track and focused on the goals they’ve set for themselves. Paying upfront for a year has a level of accountability that can help keep their business moving forward.
For some clients, the idea of paying upfront for a full year can be off-putting. Many startups are building their business as they run it and are not quite sure which options will be best for them. They also typically have concerns about the cancellation process, as annual subscriptions often have a complicated cancellation process. In these instances, many will opt not to pay upfront for a full year of service.
Benefits of Annual Billing
- Upfront payment for the service provider
- Lower churn rate for service provider
- Simple revenue projections for the service provider
- Potential discount for clients
- Accountability and focus for clients
Cons of Annual Billing
- Service providers are expected to give a discount for upfront payment
- Many startup businesses don’t want to commit to a full year
- Could be a waste of money for clients if they decide the service isn’t suitable for them
- Complicated cancellation process
Monthly Subscriptions
Monthly subscriptions are renewed on a monthly basis, generally with an auto-renew feature. These are subscriptions for which clients pay a monthly fee to continue their access to a specific software or service. These can also be a great option, depending on the needs of the client.
Monthly subscriptions allow clients to test a specific software for a few months without committing to a full year of service. This is an attractive offer for many start-ups who have not yet refined their processes or business model. It’s a “try before you buy” mentality that works for many small businesses as they grow. However, since it allows clients to cancel at any time, it often results in higher churn rates for the provider.
For service providers, monthly billing can be a great sales tool. These providers can train their sales team to lead with the annual subscription and use the monthly billing as a backup to overcome objections. The lower price point also allows their business to appeal to more potential long-term clients. Getting a client in the door at a lower price point and then giving them fantastic customer service is a great way to build long-term subscribers.
Benefits of Monthly Billing
- Lower price point attracts more potential clients for the provider
- Monthly billing can be used as a sales tool for providers
- Allows start-ups to try the service without a long-term commitment
Cons of Monthly Billing
- Higher churn rate for the provider
- Monthly sales projections can be more complicated for the provider
- Clients may pay higher prices for the convenience of monthly billing vs. annual
Best Subscription Billing Method
You should offer both monthly and annual subscriptions to your clients. Merchants who offer SaaS solutions to their clients often benefit from having flexible payment options. No two clients are alike and
it’s good for business when you can offer a few different options. Your clients will not only appreciate the variety but will also build trust with you that can turn into a long-term relationship.
When building the pricing strategy for your SaaS business, you have several things to consider:
- Monthly billing often provides the majority of income for SaaS businesses
- Monthly billing also contributes to a higher churn rate, which can be frustrating
- Annual billing increases retention and decreases churn
- Having the option to do either one entices more clients to do business with you
Both types of subscriptions have a place in your business model if you do them well. For monthly billing, you’ll need to consider your marketing activities and the cost to acquire a new subscriber. How can you make the experience seamless and entice that customer to stay long enough to at least recoup the acquisition costs?
When considering annual billing, your cost to acquire a new client may increase, but so will your retention of that customer. You are far more likely to recoup the cost of acquiring that client by securing an annual subscription with them. You can likely secure even more annual subscription clients by offering a slight discount for the annual plan.
Final Thoughts
Offering monthly and annual subscriptions will help your business by allowing long-term clients the convenience of paying once per year for their services while allowing new clients to get their feet wet first. We recommend offering some training or other support in addition to your monthly billing services to show the value that your business can provide. If you show value to your clients who are on monthly billing, you may be able to entice them to become annual subscribers instead. This will lead to lower churn and a better rate of return for your business.
