Annual vs monthly billing cycles | Pros and cons of subscription payment frequencies

Subscription Billing Suite

Published on: May 10, 2022

Deciding whether to implement an annual or monthly billing cycle is one of the most challenging aspects of migrating to recurring revenue streams. Yet, it’s an integral part of choosing the right subscription billing strategy and cannot be ignored. You may struggle to understand which billing frequency is best. You may even find yourself asking a lot of questions. For instance, what if some customers prefer annual and some prefer monthly? Would some subscribers want a hybrid approach?

One of the most important secrets of successful pricing psychology  is giving audiences enough choice without overwhelming them with options. It’s not unusual for customers to have different preferences, and as a result, it’s best not to approach the puzzle of billing frequency with an either/or mindset.

Often, brands ignore pricing psychology and instead opt for whatever is easiest for the accounts team to implement. Worse still, some decide based solely on what their competitors offer. Although this is a standard approach, it fails to put your customer’s expectations front and centre. This risk may result in high churn rates and will not allow you to tap into the full benefits of building a subscription base.

Studies show that only one-fifth of SaaS companies let their customers choose between monthly and annual payments. A surprising number for an industry built on customer-centric innovations. Options are essential at most stages of a customer journey and never more so than when it comes to payment. After all, a well-executed strategy can increase your customer acquisitions.

Depending on your subscription billing model, bi-monthly or quarterly billing may make the most sense for your target audience. You might want to implement a strategy that breaks down the cost of monthly payments with an annual fee paid upfront (this approach requires you to understand revenue recognition best practices).

This blog explores multiple subscription billing frequencies (detailing more than just the most common conversation around monthly vs annual billing cycles). Learn the nuances of this aspect of subscription management to decide what works best for your customers.

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Defining annual, monthly, quarterly, and super-frequent billing cycles

What is a billing frequency?

Billing frequency is always equivalent to the length of a billing cycle. The period billed to the account is set out in the user contract. For instance, if users subscribe to a monthly service, their billing frequency will be monthly and reflected in the billing clause of the service contract.

What is the most common subscription billing frequency?

The most common billing frequencies are monthly and annual billing cycles. However, given the sheer range of services moving to the cloud and launching subscription strategies, there’s been an increase in frequencies. Many find that quarterly, bi-monthly, or even super-frequent billing better suits the expectations of their audience.

5 most common billing frequencies

What is an annual billing frequency?

An annual billing cycle covers the cost of an entire year of the service in a single yearly payment. In the instance of subscription billing, the customer is locked into an automated cycle, which will bill them once a year unless they cancel. Annual subscriptions are common across a wide range of billing models, for instance, it can be a particularly effective frequency for hybrid and user-based strategies.

What is a monthly billing frequency?

A monthly billing cycle breaks the annual cost down into monthly recurring payments. Generally, customers can cancel at any time as it doesn’t lock them into a year-long contract. SaaS companies with tiered and feature-based billing often use this as their core billing frequency.

What is a quarterly billing frequency?

A quarterly billing cycle breaks down the cost of the service in 90-day periods. It’s not always aligned with quarterly calendars and can depend on sign-up periods or vary according to when a company accounts for year-ends. It’s particularly effective for utility companies who engage a usage-based billing model and is equally popular with some insurance companies.

What is a bi-monthly billing frequency?

A bi-monthly billing strategy is a high-frequency approach that bills users twice a month. It can be problematic as months vary in length, meaning payment dates might not always align. It can be tricky to implement effectively.

What is a super-frequent billing cycle?

A super-frequent billing strategy may bill customers more than twice a month, and in some (unusual) cases customers might be billed daily. It’s highly variable and best suited to companies with an extremely short user lifecycle. Smaller companies often rely on super-frequent billing in the early stages as cash flow might be stagnant otherwise. However, it should be noted that this requires high levels of admin and may result in a frustrating user experience. Meal plan subscription boxes such as Hello Fresh tend to use super-frequency billing cycles.

What is meant by annual plan billed monthly?

An annual plan paid monthly means that the user commits for the entire year, but the bill is paid on a month-by-month basis. Customers are usually rewarded with an additional discount than say a typical monthly payment (where it’s easier to opt out after 2-3 months) plan because they’re contracted to a year of service.

A video explaining the differences between annual and monthly billing

 

 

A complete breakdown of annual billing cycle pros and cons

Annual billing cycle at a glance (1)

Annual billing cycle advantages

  •  Improves cash flow because payment comes in one upfront lump sum.
  • Often lowers churn rate and increases the predictability of revenue as customers pay for the full year in advance.
  • Costs less for the customer as you can afford to offer them a lower overall price for an annual commitment.
  • More convenient for both you and the customer as it requires only one invoice per year.
  • Costs considerably less to implement if you’re using a payment system that charges per transaction.
  • Longer commitment gives you more time to help customers get the full value out of your product.
  • Reduces your monthly accounting costs as you don’t need to facilitate monthly payments.

Annual Subscription Billing Disadvantages

  • Reduces revenue if using discounts to entice customers to sign up for an entire year.
  • Increases the cost of customer acquisition as it requires more education and marketing to convince buyers.
  • Lacks full visibility of churn rate as customers may drop the service mid-year, and you may not know, therefore losing the opportunity to check-in and educate them.
  • Increases risk to revenue as losing a customer is more of a risk given that they pay upfront.
  • Might be a barrier to customers who prefer to pay in increments or cannot afford the lump sum.
  • Licensing can become problematic for companies who may require a different number of licenses at various points throughout the year.
  • Revenue recognition and deferred revenue become more complex (read our blog about revenue recognition for a deep dive into this complexity).
  • Customer retention often requires a more significant communications effort so that customers feel they get the full benefit of the service.
  • More extended time allowances for chargebacks can lead to administrative complications.
  • Upfront costs can be daunting to first-time customers and may seem like too much of a commitment without a trial period.
  • Customers can forget the service and the charge and are more likely to dispute charges a year later.

A complete breakdown of monthly billing cycle pros and cons

monthly billing cycle at a glance

Monthly billing cycle advantages

  • Lowers the barrier to entry for new customers who may find the upfront cost is less daunting than a lump sum.
  • Shortens the sales cycle so that the cost of customer acquisition is often lower.
  • It allows you the opportunity to regularly engage with customers and see if they’re using your products.
  • Ideal for B2C customers and smaller B2B companies that may be reluctant to sign up for longer-term services as they do not have the same budgets as bigger organizations.
  • Increases revenue as you can charge more for your services when broken down into monthly payments.
  • Monthly invoices and payments remind customers to engage with your service and make it hard for them to forget to use it.
  • Customers tend to give feedback more frequently when making recurring payments.
  • Lowers risk of hefty chargebacks as customers are more likely to let a monthly payment slide than an annual one.
  • Easier to administer refunds to unhappy customers without heavily impacting revenue.
  • More flexibility to increase prices as hikes in cost will seem much less when diluted down to a few extra dollars a month.
  • Customers feel less “trapped” as they can usually cancel at any time.

Monthly billing cycle disadvantages

  • Increases churn rate as cancelling a subscription has little cost implications for the customer.
  • Forecasting revenue can be volatile as it’s hard to predict churn rate.
  • Costs more to implement if your payment provider charges based on the frequency of transactions.
  • Larger B2B companies may find monthly payments inconvenient, mainly if multiple departments are involved or they assign budgets annually.
  • Customers may cancel before they realize the value of your service.
  • Difficult to recoup the customer acquisition cost from customers who cancel early.
  • Increases the complexity of tracking payments and following up on missed payments.
  • Cash flow may be less as you receive smaller payments in increments.

Should you choose annual or monthly billing frequency for subscription billing?

As you can see, both billing frequencies have a range of advantages and disadvantages. As a result, the final decision comes down to the type of service you offer and the market you’re targeting. It may also be wise to step outside the annual vs monthly debate and embrace one of the other billing frequencies mentioned about (i.e., super-frequent, bi-monthly, or quarterly). Even so, annual and monthly billing are the most common frequencies for a reason, and many customers will expect to be given these options at the very least (particularly when it comes to SaaS).

Many B2B companies targeting corporations will find that annual billing may be a better choice as this suits the customers they want to attract. In contrast, a B2C company or a B2B company targeting smaller businesses may want to consider the monthly billing frequency as it may be more attractive to their customers.

However, most companies won’t fall easily into these two brackets, and even within these examples, there will be notable exceptions. As a result, most SaaS companies find that a hybrid approach is best. Given the diversity of the pros and cons of each frequency, there’s no reason not to offer both. Each billing cycle frequency will appeal to a different target market. Offering a hybrid allows you to lower the barriers of entry and increase customer conversion by merely giving users more choice.

 

Complete guide to subscription management 2

 Monthly billing cycle disadvantages

  • Increases churn rate as cancelling a subscription has little cost implications for the customer.
  • Forecasting revenue can be volatile as it’s hard to predict churn rate.
  • Costs more to implement if your payment provider charges based on the frequency of transactions.
  • Larger B2B companies may find monthly payments inconvenient, mainly if multiple departments are involved or they assign budgets annually.
  • Customers may cancel before they realize the value of your service.
  • Difficult to recoup the customer acquisition cost from customers who cancel early.
  • Increases the complexity of tracking payments and following up on missed payments.
  • Cash flow may be less as you receive smaller payments in increments.

Annual vs monthly billing cycles | What should you choose?

As you can see there are no easy answers when it comes to annual vs monthly billing cycles. Both billing frequencies have a range of advantages and disadvantages. As a result, the final decision comes down to the type of service you offer and the market you’re targeting.

Many B2B companies targeting corporations will find that annual billing may be a better choice as this suits the customers they want to attract. In contrast, a B2C company or a B2B company targeting smaller businesses may want to consider the monthly billing frequency as it may be more attractive to their customers.

However, most companies won’t fall easily into these two brackets, and even within these examples, there will be notable exceptions. As a result, most SaaS companies find that a hybrid approach is best. Given the diversity of the pros and cons of each frequency, there’s no reason not to offer both.

Each billing cycle frequency will appeal to a different target market. Offering a hybrid allows you to lower the barriers of entry and increase customer conversion by merely giving users more choice.

Managing revenue recognition and deferral schedules for different billing cycles

Choosing the right billing frequency is only part of the subscription management puzzle. It’s important that you fully understand best practices for revenue recognition and deferral schedules, as well as terms like dunning. One of the biggest challenges you will face will be meeting compliance standards such as ASC 606. Below is a short list of resource that will provide you with the relevant information you need to take the next steps.

1. Understanding revenue recognition for subscription billing  
3. Everything you need to know about ASC 606  
4. Master dunning to reduce recurring revenue leakage

So, what next?

Choosing the right billing frequency is only part of the pricing puzzle. Make sure you read our complete guide to the various SaaS billing models and strategies to get the full picture.

annual vs monthly billing cycles for recurring billing

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