Do you have a SaaS business and are looking over your finances? Or are you simply interested in entering the industry?
Either way, you will have to think about your subscription model, since this is the lifeblood of every SaaS company.
Now, there are two main types of models to choose from – annual and monthly – each with its own advantages and drawbacks. Because of that, it’s worth going over them both to get a clear idea of how to proceed and what can benefit your business most. In the rest of this text, we will examine what these models do for your cash flow, how your clients can react to them, what they bring in terms of workload to you and much more. There is indeed quite a lot to discuss, so let’s get going, shall we?
OK, we’ll start things off with the annual subscription model for SaaS businesses.
What are its advantages? Well, first and foremost, the fact that they are annual means that your clients will be much closer to you and you will be able to handle their business for at least one year. That’s big because the churn-out rate is much lower: whoever pays for the whole year upfront is not very likely to stop using your product any time soon. You have a lot of time to build a relationship with them and show them just how good your business really is.
And since we’re on the topic of paying in advance, if you charge your clients like this, it will do wonders for your cash flow. You will gain a huge influx of cash at once and will, therefore, be able to make bigger moves/investments into your company.
Finally, receiving money in one big haul means fewer expenses you will have to cover when it comes to transaction costs, as your PSPs (payment service providers) will only be able to charge you once. In addition to that, if renewing subscription has to be done manually, that’s obviously a lot less work for you, and a lot less time you have to waste on that.
Now, that all sounds pretty good, but the thing is that new clients are usually reluctant to make a commitment for such a long period of time.
That’s why the annual subscription is best used if you already have an established product, a good reputation, and customers who have already done business with you and know what they can expect. In other words, it’s pretty hard to attract new people if you’re asking them to pay for the whole year in advance.
Then there’s the issue of pricing – the price of an annual subscription is usually lower than the price of twelve-monthly subscriptions combined (especially if you offer both options, but we’ll get to that a bit later). Additionally, making any sound predictions regarding the demand for the whole year is much harder than if you have to plan only for a month in advance. Things can change a lot in an industry in a year.
… Or Monthly…
You should consider monthly subscription plans if you are a business looking to make its presence known on the market.
This approach will allow your potential new clients to thoroughly test the product you’re offering without having to make a long-term commitment. Besides, people prefer this kind of billing because they have much more control and can cancel their subscription at any time, and that’s just a fact.
Not only that, but the fact that a business offers monthly subscription means that a smaller number will be displayed on the customer’s screen. It’s not the same if they see, for example, 100$/month or 1200$/year. Psychologically speaking, displaying monthly billing rates works to the company’s advantage. Furthermore, once you add everything up at the end of the year, you will have likely earned more from 12 monthly subscriptions than from one annual subscription because, as already mentioned, annual subscriptions usually come with some sort of discount.
Another important advantage of monthly billing your clients is that you can get a more accurate read on what people like and don’t like. You interact with them much more often and can easier predict their behavior. Finally, opting for a monthly billing method can help a business a lot when it comes to acquiring its merchant account. Transactions won’t be rejected nearly as many times as is the case with annual subscriptions, and the whole endeavor is much less risky.
The main problem with monthly subscriptions is that the rate at which your clients churn out can be very high. Simply, there is nothing keeping them attached to you for more than a month. A consequence of this is that you won’t be able to make as many long-term plans as is the case when you know that you have a client with you for at least a year. All of this means that the return of investment on the money you spend on attracting clients is much lower.
From the financial side of things, the PSP will charge you 12 times each year, instead of once, which can lead to some considerable transaction costs. Another problem may occur if the subscription renewal is not done automatically. Not only does that mean more work, but it can also lead to more transactions that are being rejected. The same applies to chargebacks, i.e., the more transactions there are, the more chargebacks can occur.
Also, if a customer is looking for a reliable product to which they are willing to make a long-term commitment, monthly payments may put them off because they usually end up costing both the business and the client more.
All of this means that introducing a subscription model is not something that should be taken lightly. The decision demands a thorough analysis of a business and its goals and clients. However, they may be a third option…
… Or Both!
According to some estimates, only about 20% of SaaS companies out there allow their customers to make a choice between monthly and annual subscription models.
So, if you have the ability to do so and want to stand out on the market, why not allow the people who visit your website and are interested in your product to choose the preferred model?
That way, you may be able to avoid the downsides of each model, and providing your potential clients with more options is never a bad thing. However, if you are going to implement this strategy, there are still certain things to be mindful of.
First, analyse the structure of your prices. You want to keep the design of the pricing page clear and simple, which can be a bit tricky if you have many price tiers (you will have to double everything if you decide to offer both subscription types). Therefore, good design is incredibly important: your potential client has to be able to easily choose between the subscription models and have all the necessary info readily available to them.
This can be solved relatively easily by implementing a toggle button which will swap the plans on the page showing all the packages. A nice trick to use here is to break down the total price a customer will have to pay for an annual subscription into dollars per month and thus reduce the shock caused by the inevitably high number that accompanies that type of subscription.
If you opt for this approach, always give the clients who choose to stay with you for a year some benefits – usually, this comes in the form of a discount, and the sweet spot here is about 20%, give or take 5%. It is also a good idea to contact the people who sign up for a monthly subscription plan once they become due for renewal and offer them an annual subscription along with the discount it entails.
But how to conduct a proper analysis? How to correctly determine what the best model for your business is? Well, while all businesses do differ, there are three key questions to ask yourself.
How established is my business right now?
The rule of thumb is: new companies are much better off with monthly subscriptions. You need to be able to attract customers, and they are not likely to be willing to commit for a whole year if they can’t test things out first. On the other hand, if you have a well-established product on the market and loyal customers, by all means, include an annual subscription into your offer. It will allow you to plan quite a lot ahead.
What about my metrics?
Because clients interact with you on a more regular basis if they go for a monthly subscription plan, it will be much easier to collect metrics data and get feedback from them. That being said, as mentioned earlier in the article, monthly subscriptions are more expensive both for the business and for the client. But data is valuable, so investing in monthly subscriptions could pay off in the long run. Besides, as your business gains loyal customers, you will eventually be able to switch to or simply add annual payments. In a nutshell, monthly payments once again turn out to be better for newcomers.
What do my clients want?
Obviously, no clients means no business, so while you really should look out for yourself and try to find the model that suits you perfectly, you shouldn’t ignore the needs of your customers, either. If they will need to change tiers depending on what they’re working on or if they want to change the number of subscriptions they have with you, restraining them with rigid annual subscription models only can turn out to be quite a drawback, especially if that model has features they don’t need or don’t plan on using. Do your best to allow potential clients to be flexible if that is what they are looking for, which is best done by implementing a monthly subscription model. Again, this is something that requires a fair bit of analyzing.
Both annual and monthly subscription models for SaaS businesses have their pluses and minuses, so choosing which one to utilize is something that will have far-reaching consequences for your company and should therefore be done after careful consideration.
The main thing to keep in mind is how firmly established the company is on the market and how many dedicated clients it has.
Because of that, annual subscription models should primarily be used if your clients have already seen you in action and know the quality of the product you offer. New companies, on the other hand, will want to focus on monthly subscriptions in order to attract new clients and showcase their products.
This, of course, doesn’t mean that you absolutely must choose that one model – quite the contrary, if your analysis shows that the other one can benefit you, go for it – but that is the general rule.
If possible, consider implementing both models. Your offer will be much more flexible that way and your clients will have much more to choose from. Not to mention that you will stand out from the crowd since not a lot of SaaS companies offer this kind of choice.
Ultimately, though, everything rests on the analysis you conduct. Determine your goals and resources, and then do your best to incorporate the wishes of your potential clients into them. To do that successfully, you have to be aware of the pros and cons of every model. Hopefully, this article has helped you with that. Good luck!