Annual subscription vs monthly billing

Subscription-based businesses such as SaaS companies often have two main payment plan options for their customers: monthly or annual subscriptions. Which SaaS payment plan is better actually depends less on the business offering the services, and more on the customer.

Different customers have different needs and different perspectives on what constitutes value for them. Both monthly and annual subscriptions have advantages and disadvantages. Here, we look at both to see which payment plan is better.

Monthly and annual subscriptions

Monthly subscriptions require subscribers to make monthly payments for products or services they are using. Annual subscriptions require subscribers to pay once a year for the products and services they use. They are usually more affordable than 12 months’ worth of individual monthly payments combined.

In most cases, both monthly and annual subscription payments renew automatically after every payment period. They can be cancelled by the subscriber.

This is where the similarities end. Let’s compare the pros and cons of each SaaS payment plan.

Monthly subscription pros and cons

A monthly subscription appeals to customers who cannot or do not wish to commit to being billed annually. This may be because they aren’t sure how long they are going to need to use a service. Alternatively, it may be because they know or believe that they will only want to use a service for a short time. In either case, capturing these customers helps to achieve both faster and higher customer-acquisition rates.

Using a recurring payment process like direct debit means that a monthly subscription is easy for both the provider and the customer to manage. The customer just has to provide a one-time authorisation. The provider sets up a recurring payment. With GoCardless, this can be done through the dashboard or via popular invoicing packages.

Offering a monthly subscription can also have marketing benefits. A monthly subscription tends to attract more customers than annual subscriptions. If the provider delivers a great service, these customers often recommend it to other people.

The main disadvantage of a monthly model is the potential for a higher churn rate. This is because customers are able to cancel their subscriptions more easily. It should be noted that many of these customers would not have signed up to an annual subscription in the first place.

Long-term cash flow management can also be an issue. This is because month-on-month income can vary according to the new customer acquisition and churn rates.

Pros of monthly subscriptions

• attract more customers – bring in customers who are unsure about committing or who know that they don’t want to commit

• easy to manage subscriptions through direct debit – eliminate administrative overheads by setting up a recurring payment and charging it through direct debit.

• brand enhancement through word of mouth – make your short-term customers happy and they may recommend you to other people.

Cons of monthly subscriptions

• potential for a higher churn rate – it’s generally much easier to cancel a monthly subscription than it is to cancel an annual subscription.

• can create issues with long-term cash flow management – the fact that monthly subscriptions are easier to cancel than annual subscriptions means it can be harder to predict cash flow accurately.

Annual subscription pros and cons

The main benefit of an annual subscription is that it provides a predictable revenue stream for a whole year. Having this security can make it easier to commit to longer-term investments yourself. For example, you may choose to commit to an annual subscription with your own service providers. This potentially allows you to benefit from more attractive pricing.

Furthermore, when a customer is billed annually vs monthly, you are guaranteed 12 months to work on your relationship with them. Making the most of this time can pay dividends with customer retention.

The main disadvantage of an annual subscription is that it can be much harder to get customers to sign up to it in the first place. However, offering a discount on annual subscriptions can be a significant inducement. If you offer both monthly subscription and annual subscription, also try to make it as easy as possible for customers to switch from one to the other. 

Making it easy for customers to switch from a monthly subscription to being billed annually encourages them to do so. Making it easy for them to switch back if they wish can help to overcome any remaining barriers to commitment. With GoCardless, it’s easy to adjust payments if a customer’s situation changes.

Pros of annual subscriptions

• predictable cash flow – with an annual subscription you know what money you will receive over the course of 12 months.

• a chance to build strong customer relationships – you have a whole year to work on impressing your customers.

Cons of annual subscriptions

• can be much harder to sell – customers can be wary about being billed annually vs monthly. Offering discounts may help as may making it easy for customers to switch between a monthly subscription and an annual subscription.

We can help

GoCardless was designed to allow merchants to collect both one-off and recurring payments seamlessly. You can set them up from the GoCardless dashboard or use your preferred invoicing software. 

With GoCardless you can choose to have recurring payments continue indefinitely or stop after a certain number of billing cycles. This means that GoCardless is just as useful if you want to branch out from purely subscription-based services.

For example, if you wanted to make one-off sales of products (digital or physical), you could offer a buy-now-pay-later option through GoCardless. This would work in much the same way as a subscription payment. The only real difference is that it would end automatically after the specified number of payment cycles.