Key Takeaways
- Monthly and annual subscriptions are two primary payment options businesses often offer customers when they buy SaaS products.
- Each pricing model has the potential to help businesses establish authority or gain a strong market position, depending on what their targeted audiences seek.
- A combination of payment subscription strategies is the best solution.
- 5 minute read
We see many companies operate with a SaaS business model rather than selling products or hard goods. SaaS solution providers allow consumers to access software via cloud-based technology. SaaS providers include streaming companies, software applications, anti-virus software providers, ticketing platforms, etc. One of the biggest challenges facing them is what pricing model they should adopt. Two common options we see are monthly and annual subscriptions. Generally, both of these subscription options renew automatically once the customer selects a billing plan and payments are made through a reputable payment processing vendor. The service purchased continues until the subscription is canceled.
I’ve talked to merchants and many often wonder if there are standout reasons why they should choose monthly vs. annual subscriptions. The reality is that each SaaS subscription option brings its own benefits and drawbacks and they depend on a multitude of factors including business objectives, cash flow needs, and the targeted goal of the customer, to name a few.
It’s our observation that there is no one-size-fits-all answer to strategizing price when choosing a monthly vs. annual subscription – it is largely dependent upon a company’s goals. In fact, we’ve seen many companies offer a combination of both. Let’s take a look at the pros and cons of both annual and monthly subscription options.
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. Let’s look into some benefits and drawbacks that we perceive with structuring payments on a monthly, recurring basis. Keep in mind, what might be a benefit for one company might be a drawback for another.
Benefits of Monthly Subscriptions
- Flexibility – Customers receive flexible options which may make it more appealing and easier to entice them to make a purchase.
- Low barriers to entry – Monthly subscriptions make it easy for customers to sign up without committing to a large financial investment and it gives companies more flexibility to make changes.
- Faster growth – Many companies find monthly subscriptions help them to quickly expand their consumer bases – along with a consistent regular income to help the company grow.
- Enjoy higher customer acquisition rates – 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 because it provides more predictability of revenue.
- Easy to use – Customers can pay monthly, even setting up auto-payments, which usually means if they like your service, payments will continue seamlessly.
Drawbacks of Monthly Subcription Billing
- Potential churn rates – By offering month-to-month payments, businesses potentially run a higher risk of churn rates 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 product/service.
- Unpredictable cash flow – With monthly payments, this equates to a less predictable means to know how many customers will cancel and how many will keep using the SaaS.
- Difficult to make long-term plans – Without consistent revenue, some businesses may find it hard to strategically plan for the future.
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. It’s important for your company to consider that these could vary depending on the model and your business goals.
Benefits of Annual Subscription Billing
- 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 and build an even longer-term relationship through annual renewals.
- Provide additional features – Annual subscriptions empower businesses with the opportunity to give committed customers additional features or other options not offered to monthly subscribers. Since they will be using the SaaS for at least a year, it provides you with the ability to test options to see if customers like them.
- Convenience – Annual billing makes it easier for both businesses and their customers to not have to worry about monthly payments/processing; it also helps to reduce churn levels.
Drawbacks of Annual Subscription Billing
- Repels some customers – Some customers may not like the idea of large, upfront costs as opposed to monthly payments which may seem more affordable.
- Customers do not want commitment – A percentage of customers may want to use a product without making a large commitment. Be careful, this may turn them to competitors that does offer monthly subscriptions.
- 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 memberships 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 have a large number of annual memberships.
Can You Offer Both Monthly vs. Annual Subscription Options? Yes, You Can!
Many new businesses find monthly subscriptions more beneficial, but we do not necessarily believe this is a hard-fast rule. Startups and established businesses often successfully offer both subscription payment options. You might find it beneficial to offer your customers a choice – many consumers prefer options – as long as the choices aren’t complex.
Simplifying SaaS subscription options into two choices while highlighting the benefits of both options can bring in more customers and gain 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 subscription. By offering both options, it provides you with two revenue stream options while fulfilling a broader number of your customers’ preferences. It’s a potential win-win.
Conclusion
At Segpay, we feel the answer to which is better, a monthly vs. annual subscription is that there is no definitive answer we do know that the subscription market is a great place for company growth. UBS, a financial services firm, predicts the “subscription economy” will grow to a whopping $1.5 trillion by 2025, more than doubling its current $650 billion, according to the Washington Post.
Even businesses not traditionally linked to subscription models are embracing subscription strategies (e.g. look at what the movie theater business is strategizing to retain customers who now have plenty of streaming options). We feel businesses should evaluate all the pros and cons to determine which option best suits their brand while simultaneously meeting the needs of their primary audiences.
