A mere one-fifth of SaaS companies allow their customers to choose between monthly and annual payments. Even though, it had been shown that increasing a customer’s options (e.g. payment methods, shipping methods, etc) boosts conversions. Having a choice is important at all stages of the sales cycle, but perhaps, it’s most essential when it comes to payment.
In this video, you will find the 3 main advantages and disadvantages of each billing cycle frequency.
Annual billing cycle advantages vs disadvantages at a glance
Annual billing cycle advantages
- Cash flow improves as payment is made in one lump sum.
- Revenue becomes more predictable as customers commit for a full year.
- Discounted rates are easier to offer when the contract is longer.
Annual billing cycle disadvantages
- Discounts commonly used to incentivise new customers may reduce overall revenue.
- Cost of customer acquisition is higher as more marketing and education is needed to convince buyers of the value.
- Customers who prefer to pay in increments may not be able to afford the lump sum.
Monthly billing cycle advantages vs disadvantages at a glance
Monthly billing cycle advantages
- Barriers to conversion are lowered as the cost is less daunting than a lump sum.
- Cost of customer acquisition lowers as the sales cycle is shortened.
- Customers feel less trapped when they can cancel at any time.
Monthly billing cycle disadvantages
- Cash flow may be less as you receive smaller payments in increments.
- Increases churn rate as cancelling a subscription has little cost implications for the customer.
- Costs more to implement if your payment provider charges based on the frequency of transactions.
Offering a hybrid billing frequency will give your customers the power of choice.
Given the range of the pros and cons of both annual and monthly billing, there's no reason not to offer both. Each billing cycle frequency will appeal to a different target market.
Still unsure about whether to choose a monthly or annual billing cycle?
Where should I manage both monthly and annual billing cycles?
When it comes to managing finances for both monthly and annual billing cycles, you want to invest in a solution that not only integrates with your current software, but handles both subscription billing and accounting, saving you the hassle of working between systems for different functionalities. Read about how Binary Stream and Solver team up to bring you the best-in-class subscription management solution