U.S. consumers have not been yet worn out by subscription-based services. In fact, the love affair continuously blossoms (even during the pandemic in the spring of 2020). More than a third of U.S. consumers say that they are likely to increase the number of subscriptions they have.
Westmonroe analyzed 2500 American budgets and found that, on average, people spend $237.33 per month on various kinds of personal subscription services. The report doesn’t account for professional subscription services (such as payroll, bookkeeping, POS applications), which undeniably would make the amount even larger.
Today, I want to look at how choosing between an annual and monthly subscription can affect your wallet and your business.
Cases for choosing a monthly subscription
A monthly subscription can look seducing, especially if the price per month is not very high. Besides, not every subscriber can afford to invest a significant sum of money at once, preferring to stretch the payment in time. There are several types of subscribers for whom monthly subscription might seem a better fit.
- New business
Monthly subscription fits well when you can’t afford a commitment. It will fit new businesses that haven’t figured out what their expenses will look like and don’t have a well-stacked budget. Besides, businesses won’t be able to afford an annual subscription at the beginning of their operations when there are many other costs, such as purchasing expensive equipment, paying a rental deposit, hiring staff, etc.).
- Businesses in transition
It is also good for businesses in transition that currently aren’t sure in what way their business will evolve. It can be, for example, a delivery service that currently takes orders by phone but is investigating opportunities for building a website or producing their own, albeit simple app. So, businesses that anticipate a significant change of their business model would do well with equipping themselves with a monthly subscription for services that they need, at least for some time.
- Seasonal business
The most popular segment for monthly-purchased subscriptions is seasonal businesses. Anything from agriculture to education that only spikes up during certain times a year can be purchased monthly to save costs. It seems logical, as otherwise, you are paying for a service you cannot use because of the understandable limits of your business. However, if you run a long-term seasonal business, it can end up costing you more in the long run. You can do the math to see if the discount you might be getting for an annual subscription is more than you would save by unsubscribing in your “low” months.
- Impulsive shoppers
There are also typical monthly subscribers that I would call impulsive shoppers. Like many of us, some small business owners and entrepreneurs purchase more subscriptions than they need. It usually happens because they do not yet understand would an app be valuable to them. And precisely for that reason, if you suspect that you don’t completely trust your own instincts, and might not need a certain app very soon after you subscribe, a monthly subscription might be a good idea, especially if it’s solely for entertainment.
Here a note can be made to look at the nonprofit sector. Those nonprofits that see their donations come in only around 1 or 2 national holidays will do well with monthly subscriptions to professional services they need. However, since nonprofit expenses are usually tight, it might be a good idea even for them to see whether a discounted annual subscription will end up costing less. Those nonprofits that see constant donations should look into discounted annual options to keep the costs at bay.
Cases for choosing an annual subscription
While a monthly subscription seems more affordable, in many cases, an annual plan can fit the bill ways better. Annual subscriptions have their benefits, and many businesses can profit from them. So let’s break it down.
- Half-a-year plus old business
Businesses that have been in operation for longer than six months are highly less likely to shut down. For them after being able to pull their game for half a year comes a time to start thinking even more long-term. Gone are the early days of being completely unable to predict the future of your company. Now, of course, nobody can know exactly what the future entails (ask anyone who has opened a new business in February 2020), but one thing is certain: there comes a time when your business will be able to see its business strategy if not set in stone, then at least quite clearly, and this is the time to think about long-term costs.
For example, if you use payroll software, and you know that you will have some staff, and its number will probably increase, there is no use to go for an overall more expensive monthly subscription for that software since you will be using it in any case.
- Growing retails
The same goes for any retail business that has seen their sales reach a certain threshold, beyond which it doesn’t go for at least six months. Now you can invest in automated solutions that you need in any case (such as payment processors, bookkeeping automation tools) to have them working for you, often on the background, while saving on a typical discount when you purchase annual subscriptions.
The key here is to check whether your business will need this service six months from now. If you need it anyway, the best idea to at least save something on paying for it.
- Large business
Annual subscriptions will fit mid and large-sized businesses. If there are subscriptions necessary for the operations of your business, an annual method of payment is highly recommended. The largest benefit arguably being the fact that you will go through your internal procurement process only once a year.
Anyone who has ever purchased anything on behalf of a company knows how tiresome the process of corporate bureaucracy can be. Why would anyone in their right mind want to inflict this on themselves every month during an entire year? Annual billing solves this problem for you, at least 11 out of 12 times.
- Business aiming at simpler bookkeeping
A clear benefit for any business that purchases subscriptions once a year is a massively simplified bookkeeping. It is quite logical, as keeping one record instead of 12 is easier. One shouldn’t underestimate this point, because it means not only one piece of documentation, instead of 12. It is every month’s bank account reconciliation that includes the amount paid to the merchant, bank fees, any possible conversion rate fluctuations if a subscription is charged in foreign currency, etc. It all can mount up to several hours of work a year, just for a single subscription. Now, what is the hourly rate of your bookkeeper? Exactly.
According to research by Price Intelligently, only one in five of the 270 SaaS companies they studied offer both monthly and annual pricing. However, if you talk to an average user about their customer preference, you will find a multitude that speaks of two contradictory trends: that the customers prefer little commitment, and that’s why a monthly option seems to fit them better, but at the same time app users agree that between choosing an option that is overall, cheaper, and a more expensive one, they would go with the cheaper one, which often describes annual models, that usually provide a discount.
That’s why this overview can be ended with the idea that variety is a very important factor for you as a consumer. If you encounter a service that offers both options, as well as pricing without extra complexity, it can be said that you are on the right track. No service is exactly the same and there’s no customer that is absolutely identical to one another, and that’s where having options makes a huge difference.
Which model do you find especially beneficial for you? Is there anything else that you have found to be important when deciding between a monthly and an annual subscription? Feel free to share your thoughts in the comments.