Determining the right billing plan is key to the success of all subscription businesses. Billing not only affects recurring revenue streams, it can also have a dramatic impact on both customer acquisition and retention.
According to a Price Intelligently survey, when it comes to billing annually or monthly, only one in five SaaS businesses offer both. Many startups only offer monthly plans while more established players often only offer yearly subscriptions. For example, Salesforce.com and Hubspot offer yearly subscriptions as the only option.
Both choices have advantages and disadvantages. Ultimately, the best solution for your subscription product will depend on your specific product and the preferences of your target customers.
Why You Should Offer a Monthly Billing Plan
The main advantage of a monthly billing option is that it lowers the barrier to entry for new customers, especially those who may not be that familiar with your brand. Not only is the upfront cost lower for them, they will be less anxious with a shorter commitment and it often shortens the sales-cycle for your team. Additionally, it gives you a reason to consistently engage with your customers to ensure that they are using your service.
Why You Should Offer a Yearly Plan
Unfortunately, monthly plans also leave open the possibility of users unsubscribing soon after sign up, leaving you with unrecovered acquisition and development costs. Monthly payments are also vulnerable to credit cards expiring or otherwise being declined.
Alternatively, yearly plans provide you with your revenue up front with no risk of churn until that year is up. This can help with cash flow and give your customers time to become thoroughly familiar with the value of your service.
There’s No Reason You Can’t Have Both
There are exceptions to this. SalesForce.com is a good example of a product that is well known in the industry and likely does not significantly hurt signups by not offering month-to-month plans.
But for smaller to medium sized subscription businesses with recurring payments looking to gain customers as much as retain them, offering both may be a good way to have the best of both worlds. It will allow you to onboard customers that only want to commit monthly at the start. At the same time though, you can also lock in more heavy users and have more revenue stability by offering yearly plans (usually with a modest discount for incentive). If you do go this route, make the pricing structure easy to understand by clearly outlining the savings and benefits for both annual and monthly plans.
Finally, ensure your pricing structure aligns with the value your customers seek. If you have customers with varied needs, providing both options will allow you to cater to different buyers at different stages in the customer life cycle. This flexible approach can positively contribute to customer acquisition, retention and ultimately to customer lifetime value.