If you’re a company that sells services or software as a service rather than products or hard goods, establishing a billing system so you can get paid is one of the most crucial first steps. In addition to finding a reliable billing platform, you need to decide what kind of billing schedule you’re going to offer. For most companies, this means either annual billing, or charging customers on a monthly model. Each revenue model has its own pros and cons for you and your clients alike. Let’s take a look at a few.
The Benefits and Disadvantages of Annual Billing
Annual, or yearly, billing is a popular option for many companies because it provides a full year of revenue all at once, and guarantees 12 months customer retention. That’s a big deal in terms of the lifetime value of each of your customers, and it allows you to demonstrate the long-term benefits of your service to encourage renewal after the first year. Logistically, annual billing is less of a hassle (insofar as it occurs eleven fewer times per year).
On the other hand, more money and commitment required up front means that annual billing can sometimes dissuade potential customers from signing. Large, infrequent lump payments can also lead to clients mistakenly disputing bills or refusing to resign.
The Benefits and Disadvantages of Monthly Billing
Monthly billing has become the standard for the vast majority of companies (in one survey about 70% of companies offered monthly billing exclusively). This is because it provides a much more manageable upfront fee, encouraging potential customers to sign up. With automated recurring billing, monthly bills might even fly under the budgetary radar of many clients, leading to a longer-term commitment overall than an annual billing plan would.
On the downside, monthly billing makes it easier for customers to cancel the service after only a few months, at which point acquisition costs may have been barely recouped.
Why Not Both?
Of course, there’s no reason not to offer both pricing models to your customers and letting them decide which is best for them. This will encourage companies more inclined to either to sign on, instead of alienating a proportion of potential clients.
Many companies offer monthly billing as a standard, while providing customers incentives to sign annual contracts to increase up-front revenue and reduce churn rate. Annual contract incentives can include “one month free,” or “20% discount over monthly pricing.” Offering billing cycles somewhere between annual and monthly, like twice-yearly, bimonthly, or quarterly might also provide similar incentives.
Other Recurring Billing Best Practices
In addition to providing customers a choice of billing frequency, you may also want to consider practices like these:
- Support multiple payment types. In addition to major credit cards, offer customers the option of paying via PayPal, ACH payments, and others. Be sure only to work with trustworthy payment companies.
- Provide options for billing dates. Some customers might prefer to be billed on the 1st of every month, others on the 15th, and so on. Allowing customers to specify their billing date by special request could lead to higher levels of satisfaction.
- Have a clear refund policy in place, and agreed to up front.
- Perhaps most importantly: make sure signing up is simple. The more difficult it is for people to sign up for your services, the fewer will do it. A simple form or even a free trial in exchange for an email address is crucial to conversion optimization.
Use Subscription DNA for All Your Billing Needs
Whatever billing practices you decide on, if you’re a company that relies on recurring billing, Subscription DNA has everything you need in an easy-to-use SaaS package. Subscription DNA’s recurring billing software allows for tokenization, PCI compliance, multi-period recurring billing, terminal and one-time payments, batch transactions, and more. Subscription DNA also supports subscription management, paywall and premium content management, group enrollment, group communication, and more.
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