Annual vs monthly subscription billing schedules

For a company selling products, services or software by subscription, finding the right billing schedule is vital. Partly, this is about deciding what’s best for your business and its cash flow, but it’s also about understanding how your customers want to pay. Typically the choice of billing schedule comes down to a choice between monthly or annually.

In this article we’ll outline the pros and cons of both monthly and annual subscription plans and take you through the best practices when using your chosen billing schedule.

What are the advantages of an annual subscription billing schedule?

For subscription businesses, retention is king, and keeping churn rate low is imperative to growth. With annual subscriptions, customers commit to a service for at least 365 days before they could potentially churn.

It also allows a business enough time to establish a relationship with a customer, showing them enough value that they’ll be willing to renew their subscription at the end of the year. Companies with annual billing cycles see dramatically lower churn than those who only offer a monthly option.

Predictable revenue is another key advantage to consider. Companies that collect annual subscriptions from clients know with much greater certainty how much money they’ll make from customers over a 12-month period. This is useful when it comes to long-term financial plans and growth forecasts. A predictable revenue and income stream makes it easier to invest cash into activities that will help grow your business.

From your customer’s point of view, annual subscription pricing models are often cheaper than opting for a monthly one (as long as the monthly equivalent is displayed alongside). It’s common practice to offer a discount if a customer selects the annual subscription option, because they’ve committed to your service for longer.

What are the disadvantages of an annual subscription billing schedule?

Annual subscriptions can be off-putting to some customers. Paying a lump sum upfront for a whole year is a big commitment, and doesn’t always suit their financial situation. Customers who prefer more flexibility and the ability to pay in instalments will likely decide against an annual subscription model and opt out of subscribing at all if it’s the only option.

And it also depends on how long your new subscriber needs your service for. If they want to use your service for a few months, an annual subscription model will likely drive them to a competitor that can offer shorter billing cycles.

What are the advantages of a monthly subscription billing schedule?

Firstly, there’s the perk of high customer appeal. For customers, monthly subscription plans give them the flexibility to cancel at any time, plus there’s a much lower barrier to making a payment roughly 12 times smaller than the equivalent annual subscription payment.

There’s also the subscriber’s perception of a monthly payment. A £10 monthly subscription is more costly in the long run than a £100 annual subscription, but for the average subscriber £10 isn’t a noticeable outgoing, so the urge to cancel is lower.

And finally, considering the lower barrier for subscribers, it’s a powerful tool for growth. It becomes a lot easier to build a critical mass of subscribers with a small initial payment compared to a larger annual one. However, if user growth is your primary aim, you might want to consider a freemium model.

What are the disadvantages of a monthly subscription billing schedule?

Higher churn rates can be an issue with monthly subscription billing schedules. According to McKinsey, over one third of subscribers who sign up for a subscription service cancel in less than three months, and over 50% will cancel within six months.

And that high churn, mixed with a lack of revenue predictability can make it hard for companies relying on monthly subscriptions to invest and grow reliably.

Consistently high churn — even if you’re replacing them at a faster rate with new subscribers — is an expensive strategy. Acquiring a new customer is anywhere between five and 25 times more expensive than retaining an existing one.

How to utilise both an annual and monthly subscription billing schedules

Depending on your business’ main aim — be it growth or revenue predictability — one type of billing cycle may seem more appealing than the other. But that doesn’t mean that you should rule out offering a combination of the two. It’s possible to offer both annual and monthly subscription options to customers and leave it up to them to decide on their preferred plan. Amazon Prime is a notable example of this, as it offers a monthly membership of £7.99 per month or £79 per year.

When both options are available, customers can weigh up for themselves the pros and cons of each model. They can also clearly see the money they will save over time by opting for an annual subscription over a monthly one.

Usually, annual subscription is 15-20% cheaper than a monthly plan, like with the above Amazon Prime model, and you can promote the discount to customers to convince them to make a more long-term commitment.

This blended approach will give you a mix of subscribers to manage. Those who sign up annually clearly see the ongoing benefit of your service and with them you gain predictable revenue. Those who sign up to the monthly option will need careful nurturing to reduce the likelihood of them churning, but you can also eventually move them to annual billing if they too realise the value your service offers.

What are best practices for annual and monthly billing?

As well as offering customers appropriate billing schedules, there are certain practices you should have in place to maximise the success of your annual and monthly subscription offerings:

• Provide a better customer experience with omnichannel payment processing, letting customers choose their preferred payment method.

• Offer a clear and comprehensive cancellation or refund policy, which the customer is aware of before subscribing. This will lessen the possibility of a subscriber requesting a chargeback.

• Consider a freemium model, in addition to subscription models, if user growth is your main priority.

• Measure subscriber churn regularly to calculate the percentage of customers cancelling their subscriptions.

Are variable recurring payments set to transform subscription payments?

Direct debits and card-on-file are two popular ways to collect recurring payments for the likes of subscriptions and instalments. But payments take days to settle using either method, and both lack some key security features. Direct debit doesn’t include strong customer authentication (SCA), while card-on-file payments store sensitive information, vulnerable to security breaches and fraud.

Variable recurring payments (VRP), which the biggest UK banks are required to implement, will offer a better way to collect recurring payments. Powered by open banking, VRPs give users more flexibility and visibility over their subscriptions, and SCA is baked in for better security. Businesses get real-time settlement, no chargebacks and lower churn — because VRP doesn’t require re-authentication or re-authorisation.

TrueLayer is the first organisation to deliver VRP through a single application programming interface (API). With TrueLayer’s API, businesses will be able to connect to select UK banks to take VRP from their customers — including utility bills, subscription payments and rent instalments. Our VRP API also allows businesses to transfer money between two accounts belonging to the same customer, which is known as sweeping.