Annual vs monthly billing: how to choose the best billing model for your business

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Billing

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  1. Introduction
  2. What is monthly billing?
  3. What is annual (yearly) billing?
  4. Pros and cons of monthly vs annual billing
    1. Monthly billing
    2. Annual billing
  5. What kinds of businesses use monthly billing vs annual billing?
    1. Businesses that tend to use monthly billing
    2. Businesses that tend to use annual billing
  6. How to decide between monthly and annual billing for subscriptions
    1. Understand your customer base
    2. Analyse your product or service
    3. Evaluate financial implications
    4. Identify market competition and positioning
    5. Assess operational capabilities
    6. Implement trials and feedback
    7. Offer flexibility and adaptability

Choosing between annual and monthly billing is a significant decision for businesses, particularly those in the subscription market. With subscription e-commerce expected to generate more than US$38 billion in revenue by 2023, tapping into the right model for your business is key. But the choice isn't just about pricing structure – the decision can influence a business's relationship with customers, as well as revenue stability and market positioning.

For businesses, opting for an annual billing cycle can mean a more reliable income stream. Securing a longer commitment from customers can help with financial planning and budgeting. This model can also encourage customer loyalty, since the longer billing cycle fosters an extended relationship. However, it's not without risks – especially with regard to customer acquisition, as a higher upfront cost can present a barrier to some customers.

Monthly billing, on the other hand, offers greater flexibility to customers, which can be a compelling factor in attracting a wider customer base. This approach can align well with customers who prefer lower upfront costs and the ability to opt out without significant financial consequences. While this can mean a more unpredictable revenue stream for the business, it's a trade-off that can lead to a broader customer base and potentially greater long-term revenue through volume.

Below is an overview of the basic facts and considerations that businesses should bear in mind when deciding what type of billing schedule to offer customers.

What's in this article?

  • What is monthly billing?
  • What is annual (yearly) billing?
  • Pros and cons of monthly vs annual billing
  • What kinds of businesses use monthly billing vs annual billing?
  • How to decide between monthly and annual billing for subscriptions

What is monthly billing?

Monthly billing is a payment model in which businesses charge customers for services or products on a regular, monthly basis. In this setup, businesses charge customers a fixed fee at the same time every month, which provides a predictable and consistent payment schedule for the customer and a steady revenue stream for the business.

What is annual (yearly) billing?

Annual billing, also referred to as yearly billing, is a payment model in which businesses charge customers once a year for their subscriptions to services or products. In this arrangement, the customer pays for a year's worth of service upfront, typically on a date that coincides with the beginning of their subscription period.

Pros and cons of monthly vs annual billing

The choice between monthly and annual billing models has important implications for both businesses and customers. Each model has its advantages and disadvantages.

Monthly billing

Pros

  • Lower entry barrier for customers: The lower upfront cost of monthly billing lowers the barrier for new customers to sign up, especially for those who are cautious about committing a large sum of money at once.

  • Increased flexibility: Customers appreciate having the flexibility to cancel or change their subscription without being tied to a long-term commitment. This is particularly attractive in rapidly changing industries in which customers might want to switch services frequently.

  • Steady engagement: Regular monthly interactions with customers provide businesses with more opportunities to build strong relationships.

  • Regular cash flow: Although individual monthly payments are clearly smaller compared to annual billing, monthly payments ensure a regular, predictable cash flow throughout the year.

Cons

  • Higher administrative costs: Processing payments every month can incur higher transactional and administrative costs.

  • Unpredictable revenue stream: Monthly subscribers might cancel their subscriptions at any time, contributing to a less predictable revenue stream.

  • Increased churn rate: Monthly billing can lead to higher churn rates, as customers have no long-term commitment and can leave the service easily.

Annual billing

Pros

  • Improved cash flow management: Receiving a full year's payment at the onset of the billing cycle provides the business with a lump sum that can help with cash flow management.

  • Customer commitment: Annual subscriptions can lead to a more committed customer base, since customers use the service longer before they have the option to cancel.

  • Lower administrative costs: Less frequent billing reduces transactional and administrative efforts and costs.

  • Discount incentives: Businesses can offer discounts for annual subscriptions, which can be an attractive selling point for customers.

Cons

  • Higher initial cost for customers: The immediate cost can present a barrier to some customers, especially for higher-priced services.

  • Longer commitments required: Customers might be hesitant to commit for a full year, particularly if they are new users or the market is highly competitive.

  • Revenue recognition: From an accounting perspective, businesses must recognise the revenue from annual subscriptions over the entire year, which can affect financial reporting.

  • Customer retention challenges: When the time comes for customers to renew their annual subscription, businesses might face challenges in convincing customers to renew, especially if the service hasn't met their expectations.

In summary: Monthly billing offers flexibility and lower price points for customers, but it comes with higher administrative costs, as well as potentially higher churn rates. In contrast, annual billing secures more significant upfront revenue and customer commitment, but may deter some customers due to its higher initial cost and long-term commitment. The choice between these two models depends on the nature of the business, customer preferences and overall market dynamics.

What kinds of businesses use monthly billing vs annual billing?

The choice between monthly and annual billing often depends on the nature of the business, the industry in which it operates and the preferences of its target customer base.

Businesses that tend to use monthly billing

  • Streaming services: Monthly billing is common with streaming services such as Netflix and Spotify. This model appeals to customers who are uninterested in making long-term financial commitments, given the wealth of competing products.

  • Software-as-a-service (SaaS): Many SaaS companies, especially those targeting individual professionals or small businesses, prefer monthly billing. This allows for a lower barrier to entry and greater flexibility.

  • Telecommunications: Mobile phone and internet service providers often use monthly plans, because these plans align with the ongoing nature of the service and customer expectations of regular payments at manageable rates.

  • Subscription boxes and meal kits: These services, which offer regular deliveries of goods such as food or lifestyle products, often use a monthly billing model. This aligns with the continuous, recurring nature of the service.

  • Gyms and fitness centres: Monthly memberships are common in this sector, because they are ideal for individuals who prefer the flexibility to change or cancel their memberships without being tied down to a year-long commitment.

Businesses that tend to use annual billing

  • Enterprise software providers: Companies that offer software solutions for large businesses or corporations often use annual billing. Generally, their customers prefer annual contracts for budgeting and financial planning purposes.

  • Professional associations and memberships: Membership organisations, such as trade associations and clubs, often use annual billing. Typically, members will commit for a full year in order to benefit from ongoing professional development, networking and resources.

  • Premium content and news services: Some online publications and research services offer annual subscriptions, targeting customers who value the content and are willing to commit for the long term.

  • Educational and training platforms: Platforms that provide courses or professional development often use annual billing, especially for comprehensive or ongoing training programmes.

  • Managed IT and support services: For businesses that offer ongoing IT support or managed services, annual contracts are common. This approach provides stability for the business and ensures a long-term service commitment.

In general, businesses with more customer-focused, flexible or regularly updated services prefer monthly billing. Businesses that provide more comprehensive, high-value or B2B services – and therefore have customers who are willing to commit for the long term for higher perceived value – opt for annual billing.

How to decide between monthly and annual billing for subscriptions

Deciding between monthly and annual billing for subscriptions means carefully considering several factors related to the business model, customer preferences and market dynamics. Here's how businesses can approach this decision:

Understand your customer base

  • Demographics and preferences: Consider the financial habits and preferences of your target audience. Are they individuals or businesses? Are they likely to prefer lower upfront costs (and favour monthly billing) or value long-term commitments with potential savings (and favour annual billing)?

  • Risk tolerance: Assess your customers' tolerance for risk. Monthly billing can be more attractive in industries where customers prefer to avoid longer financial commitments, especially if they're new users and unfamiliar with the service or product.

Analyse your product or service

  • Value proposition: Consider how customers use your product or service. Is it something customers will use regularly throughout the year or will its value diminish over time?

  • Update frequency: For software or content services, think about how often you update or add new features. Frequent updates might make a monthly plan more appealing for customers.

Evaluate financial implications

  • Cash flow needs: Evaluate your business's cash flow requirements. Annual billing can provide a lump sum that might be instrumental for funding operations or growth.

  • Revenue recognition: Understand the implications each model would have on your financial reporting. With annual billing, businesses must recognise revenue over the subscription period, which can affect financial statements.

Identify market competition and positioning

  • Competitive analysis: Find out what your competitors are doing. Matching or countering their billing strategies can be a good place to start.

  • Differentiation: Decide if your billing model can be a point of differentiation. For instance, offering a monthly plan when competitors only offer annual plans could attract a different segment of the market.

Assess operational capabilities

  • Billing and administration: Assess your ability to manage the billing process. Monthly billing requires more frequent invoicing and customer service interactions.

  • Technology infrastructure: Make sure that your systems can handle the chosen billing model efficiently, particularly in terms of managing recurring payments and customer accounts.

Implement trials and feedback

  • Pilot programmes: Consider running pilot programmes with both billing models to gauge customer response and preference.

  • Customer feedback: Collect feedback from your customers about their preferred billing models and the reasons for their preference.

Offer flexibility and adaptability

  • Hybrid models: Don't overlook the possibility of offering both options. A hybrid model can cater to a wider range of customer preferences.

  • Review and adapt: Review the performance of your chosen billing model(s) regularly and be prepared to adapt to changing customer needs and market conditions.

Ultimately, the decision of whether to opt for annual or monthly billing should come down to balancing what's financially sound for your business with what makes sense for your customers. Conducting thorough market research, examining customer insights and gaining an understanding of your business's financial and operational capacities are key to making an informed choice.

Learn more about Stripe's dynamic support for different billing schedules and what it can offer customers.

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