Last editedApr 20222 min read
Subscription-based businesses such as SaaS companies have two main payment plan options for their customers in the form of monthly or annual subscriptions. Which SaaS payment plan is better is actually less dependant 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, so here we will look at both to see which payment plan is better.
Monthly and annual subscriptions
Monthly subscriptions require subscribers to make monthly payments for whatever products or services they are using. Annual subscriptions require subscribers to pay once a year for the products and services they use, and will usually be a little cheaper than 12 months’ worth of individual monthly payments combined.
In most cases, both monthly and annualsubscription payments renew automatically after every payment period and have to be actively cancelled by the subscriber.
And here, the similarities end. Let’s compare the pros and cons of each SaaS payment plan.
Monthly subscription pros and cons
Monthly subscriptions are a more attractive option for customers who aren’t sure how long they need to use a service for. This will often mean far more start-ups will be interested in a monthly subscription than an annual one. This is great news for new businesses who have a better chance of guaranteeing regular income straightaway.
Monthly subscriptions are easy to manage from both the provider and the customer’s perspective with arecurring payment process like direct debit. The monthly model also helps enhance the reputation of the provider by attracting more customers who spread the word of mouth.
The cons of a monthly model include the potential for a higher churn rate, with customers able to cancel their subscriptions more easily. However, it should also be factored in 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, as the month-on-month income can vary according to the new customer acquisition and churn rates.
Pros of monthly subscriptions
attract more customers
easy to manage subscriptions through direct debit
brand enhancement through word of mouth
Cons of monthly subscriptions
potential for a higher churn rate
hinders long-term cash flow management
Annual subscription pros and cons
The pros of an annual subscription model include much more predictable long-term cash flow management as well as long-term customer retention. The annual model also allows a business to offer discounts to subscribers.
However, an annual subscription can put off a lot of customers who do not want to commit for a whole year, which is a pretty big disadvantage. It is possible to offer both a monthly and anannual subscription though, which can alleviate this pretty big con considerably.
Pros of annual subscriptions
long-term cash flow management
lower churn rate
discounts for subscribers
Cons of annual subscriptions
unsuitable for many customers
more complicated cancellation process
We can help
GoCardless enables businesses to collect invoice payments directly from their customers’ bank accounts. It is easy and cost effective.
GoCardless can be used both for recurring and one-off invoice payments.
Collecting directly from the bank account, via direct debit, puts the business in
greater control of incoming payments as it is pull based, so the business controls the
payment amount and date.
“For ongoing monthly payments, it’s perfect. You can easily adjust the subscription
amounts and don’t suffer from the problem of expired cards” – Charles Cridland,
Technical Director ofYourParkingSpace.
If you’re interested in finding out more about a monthly payment plan or annual subscription, or any other aspect of your business finances, then get in touch with our financial experts at GoCardless. Find out how GoCardless can help you with ad hoc payments or recurring payments.