Annual vs. Monthly Subscription Billing (Or Both)?

Over the last ten years or so, subscription billing has become a major component of modern business. Pioneered by Software-as-a-Service (SaaS) companies, today, all kinds of businesses are experimenting with subscription billing – from flower companies to makeup companies.

The main driver behind this rise in subscription billing is the promise of recurrent revenues as well as the need to streamline billing processes for customers. Today, many customers prefer to pay for services through subscriptions as it allows a smaller initial cost as well as the flexibility to jump from one service to another.

For a business considering subscription billing, there is the added factor of considering whether to bill monthly or annually. As both have pros and cons, which we cover in detail in the rest of this article, picking the right one can help your company grow. Before we jump into the pros and cons of each method, let’s first define each.

  • Annual subscription billing: In this billing method, a customer pays for a service in one annual payment. However, it is different from annual contract payments because the customer is locked into a recurring payment contract which bills them every year automatically until and unless canceled. (For the sake of clarity, in this article annual subscription billing will include quarterly, biannual, and triannual payments.)
  • Monthly subscription billing: Here, a customer pays for a service every month. In most cases, they can also cancel the contract at any time in the course of the billing cycle with the contract terminating at the end of the current month.  

Annual Subscription Billing Advantages

Annual vs. Monthly Subscription Billing (Or Both)?

Annual subscription billing is a great option for several reasons, including:

  • Increased cash flow: Any business could do with more cash flow as it is what funds growth. When you charge annually, you get a big lump sum payment at the start of every year. In effect, your customers are lending you money upfront at zero interest to fund your company’s growth.
  • Predictable revenue: Although any subscription model introduces more predictable revenue, annual payments do this better as they cushion the business against high churn rates, which are known to impact subscription billing companies severely.
  • Lower churn rates: As insinuated in the previous point, when your customers pay you yearly, you are sure you will not lose any revenue associated with them for at least that year. It is possible that some may not renew after the year is done, but this does not affect annual revenue calculations.
  • Improved customer convenience: Annual payments are both convenient and, in most cases, lower, both of which benefit the customer.

Annual Subscription Billing Disadvantages

On the flip side, you may want to consider the following disadvantages as you weigh whether to use annual subscription billing:

  • Reduced revenue: Most businesses offer annual payment discounts to entice customers to purchase the annual plan. When compared to the revenue monthly billing brings, annual payments often represent a between ten and twenty percent revenue cut.
  • Higher customer acquisition costs: Selling a customer a ten-thousand-dollar annual subscription requires a greater investment in education, marketing, onboarding, and a host of other customer acquisition efforts, which will drive up your CAC.
  • Risk to revenue: Losing a customer paying one hundred dollars a month is less of a risk to your business than losing a customer paying one thousand dollars a year.
  • Invisible churn rate: If a customer chooses to drop your service, you will not know until the year is out. Annual payments, therefore, require consistent follow-up with customers to ensure they are happy with the service.
  • Difficult to increase prices: Any price increment you make will be in the tens or hundreds of dollars, which for some customers may seem like a very steep increment even though you may have only bumped it up by a few percentage points.

Monthly Subscription Billing Advantages

Annual vs. Monthly Subscription Billing (Or Both)?

Let’s now turn our attention to monthly subscription billing. Here are some advantages to using this approach:

  • Faster/cheaper customer acquisition: The low upfront commitment of a monthly subscription makes it attractive for customers shopping around for a solution who are not yet ready to make a big commitment.
  • Higher revenues: Typically, monthly billing allows a company to charge more for its services because the higher cost is hidden by the broken-down payments.
  • More engaged customers: When a customer is paying every month, they are usually more engaged in how they use the service. They are also usually more willing to leave feedback regularly.
  • Less chargeback risk: Most customers are willing to allow a one-month payment slide as compared to a one-year payment. Also, if a customer is unhappy with your service, it is easier to refund a small one-month payment than it is to refund a hefty one-year payment.
  • Easier price hikes: If you want to increase your service price, you can do so by adding a few dollars to the monthly subscription. In some cases, you can even get away with doubling the price if the initial price was low enough.

Monthly Subscription Billing Disadvantages

Likewise, monthly subscription billing as its fair share of disadvantages, which include:

  • Higher churn rate: When a customer can cancel their subscription at any time with no major cost implication to them, it increases incidences of churn, which is bad for any subscription model business.
  • Volatile revenue projections: Monthly subscriptions introduce revenue volatility due to churn rate and other factors. For the business, this makes it hard to generate accurate and predictable revenue projections.
  • Higher processing fees: Because of the increased frequency of transactions, the businesses can end up paying higher merchant fees as compared to annual payments.
  • Inconvenience to the customer: If you run a B2B business, your customers may find monthly payments to be inconvenient. This is especially the case with corporate clients whose purchases must go through a procurement department.

Annual or Monthly or Combined Subscription Billing?

As you can see, each approach has some major advantages and disadvantages. So, which one should you pick? First, if you are a B2B company, you are better off going with an annual billing model.

Why?

Because businesses typically operate on annual budgets, which aligns well with an annual subscription. Similarly, if you run a B2C business, you are better off picking a monthly approach because it makes it easier for customers to sign up for your service quickly.

Nevertheless, for most businesses, a hybrid approach works best. By offering an option to pay monthly or annually, you give your customers the freedom to choose how they wish to pay.

You can do this by having a pricing page that toggles between annual and monthly billing. The two options can also reflect the cost implications associated with each (for instance, 20% off when you purchase an annual plan).

Wrapping Up

Whether you want to use annual billing or monthly billing, PayKickstart has the tools to help you deploy either or both approaches in your business. Moreover, with the PayKickstart platform, you can easily try one way of billing and then another to see which one works best for your business and customers.

Whatever permutation of billing you chose, our robust billing platform can handle all your payment needs. Additional tools our platform offers include analytics and insights, a subscription management dashboard, and enterprise-level security.

To find out how the PayKickstart platform can benefit your business, start a free trial today, or contact our team today.