SaaS Subscription Guide: Annual vs Monthly Plans

Today I'm going to explain the benefits and reasons why you should offer yearly billing to your SaaS customers.

I noticed that lots of bloggers mention how useful it is for SaaS services to offer yearly billing from a cash flow perspective. And that’s perfectly understandable. After all, if you have the money now rather than later you can focus on innovating your product.

But cash flow shouldn't be the main reason to start offering yearly billing plans.

What is it then?

Water lily, living its life unaware of the pain of credit-card declines — photo by Vicente Villamón
Water lily, living its life unaware of the pain of credit-card declines — photo by Vicente Villamón

It is Serenity

Annual billing offers serenity both for you, as a Founder, but most especially for your customers. Read on for more details.

Credit card declines are a massive pain for everyone

Credit card declines are frustrating for you and for your customers (yes, even if you use some “dunning” management).

The problem is that declines can happen for a number of reasons, not just due to the expected event of an expiring credit card. Sometimes declines occur because the card has hit a weekly limit, or temporarily doesn’t have enough funds available, or the issuing bank is offline without STIP in place, or just due to some random errors beyond our control.

It’s frustrating for your customers to get that unexpected email and then have to determine why they experienced a decline, and it’s frustrating for you to realize you didn’t net the subscription fees you were expecting.

Annual billing means 12 fewer opportunities per year for a credit card decline. This translates to less frustrations for you and your customers, a better product experience and much less hand-holding for everyone!

Less accounting for everyone

Imagine 12 invoices per year, per customer. If you have only 50 customers, that already adds up to 600 PDF documents!

Even if you use CSV reports, there is still more work and more risks of errors for you and your accountant when you have to reconcile the data to close your fiscal year.

Similarly, your users stack up quite a bit of receipts. If they do reconcile their bank data on a regular basis, one bill instead of 12 reduces their paperwork and data entry.

Dividing the number by 12 reduces the silly paperwork for everyone. Yay!

Longer-term relationships

Before going yearly billing, your SaaS customers will have to project themselves into the future. Is your app worth it to them? Will they truly stick with it?

I’m a big fan of long-term relationships in business. Not only are good quality, long-term relationships good for your cash flow, they also mean fewer administrative tasks. You can focus more on building and improving your product, and your customers don’t have to spend as much time choosing new business tools.

Yearly billing is another opportunity to build these enriching long-term relationships.

Fewer transaction fees for everyone

No matter if you bill in USD, EUR, you will usually have customers who operate with a different currency. Many times a currency exchange means additional fees. Reducing the number of transactions from 12 per year to one per year can cut down on these fees, saving your customer money.

For you, as an app builder and SaaS provider, this may cut down on a small percentage of fees involving your billing system, too. Fewer transactions are a win/win when it comes to currency exchange and foreign transaction fees.

Cheaper for customers!

It’s worth it to offer your customers an incentive to enroll in annual billing. For example, you can offer one month free. Well, one month free - who wouldn’t want one month free? You need to offer them a little extra advantage.

There are tax advantages for your customers

Also think about the right timing when to start offering annual billing plans. Consider offering annual billing plan in December, when many of your customers will be searching for ways to make business expenses that would translate into tax deductions. It will be gratifying to see many of your users to take the advantage of annual billing.

You could start manually, today

Most billing providers support yearly plans, but stil there is a bit of work required to integrate that in your application.

However, you do not need to integrate first.

You could “manually” ask your users to subscribe annually rather than implement annual billing in your SaaS offering right away.

Ultimately you simply email all of your customers, and offer them new yearly plan. Then reply manually to users who want more information.

If you do it in December, you will easily convert 10-15% of your customers to a yearly plan. Not bad considering that all it takes is one mass-email!

Do you offer yearly billing? Tell me a little about it in the comments.

Author: Drasko Georgijev

I'm a financial technology professional with 15+ years of experience in payment cards, eCommerce, card machines transaction processing and switching.
From time to time, I'm sharing some helpful tips, tactics, and news about Digital Commerce and Fintech.
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