When deciding how often to bill customers, subscription companies must juggle a range of factors to ensure a steady income without pricing out new users. Which options are available, and what are the benefits and drawbacks of each approach?
Your subscription business’ billing strategy is just as important as your price. In fact, the rhythm at which you invoice your customers can affect customer uptake just as much as how much you charge. A 2017 study in the Journal of Public Economics
showed that customers (in this case, of a water company) increased their consumption by between 3.5% and 5% when their billing frequency was dropped from bi-monthly to monthly.
Though automated billing removes much of the financial busywork, a frequency for invoicing must be settled on that balances your cash flow needs with the payment preferences of your customers.
How often should subscription businesses consider billing their customers, and how does this vary for B2B and B2C services?
Annual billing is most often used for enterprise products and services with a long-term lifecycle, but also widely used as an option in the consumer market where customers can be tempted by discounts if they sign up for an annual plan – e.g. 12 months for the price of 10.
Though billing only happens once a year for each individual account, it must still be fully automated to manage new customer sign-ups and renewals, as well as dealing with changes and add-on services that are sold in the interim period. Subscription businesses must also be able to recognise revenue accurately over the duration of their customer contracts.
Customers will, naturally, find one annual invoice more convenient than monthly ones, particularly if they are making offline payments (e.g. by bank transfer), and studies suggest they can be less likely to fall victim to churn
at the end of their contract period.
Annual billing is good for the service provider, as they have cash upfront for the whole year, and also good for the customer who benefits from a healthy discount, if they can afford to pay the lump sum and are confident that they will use the service throughout.
Though invoicing comes but once a year, businesses must up their marketing efforts to maintain communications with customers who would otherwise only hear from them annually, particularly if their consumption of the product or service begins to falter – because no-one likes to learn they’ve been paying for something they don’t use
For those customers who may baulk at such a high upfront spend or are not yet sure how much they will use the product / service, monthly billing reduces the barrier to entry with a lower headline price – this can be just as attractive for startups and SMEs as it is for B2C customers. Though many companies still use monthly billing with annual contracts, there is a growing trend towards rolling monthly plans that don’t have a long-term commitment. However, that flexibility usually comes at a price, with customers being charged more for the convenience of being able to cancel at any time.
Monthly billing is one of the most used billing frequencies for consumer products, services and streaming platforms, but there is now an increase in monthly billing for B2B services too, particularly where the price varies from month to month based on usage, and with companies increasingly accepting the use of automated payment methods. As with annual billing, it remains important to be able to bill accurately for product changes, add-ons and upgrades part way through the billing period.
One of the key reasons monthly billing is so popular is that it aligns with business accounting periods and when consumers are typically paid their salaries, so service providers benefit from regular cash flow and a much lower risk of customers not being able to pay. What’s more, according to research, a monthly billing model means customers making more use
of a service, giving the product more of an opportunity to underscore its value.
Businesses that use weekly billing tend to do so because it is aligned with a product which is delivered on a weekly schedule – for example, food delivery boxes such as HelloFresh, or weekly magazines / newspapers – rather than an “access” product which provides on-going use of a system or digital service.
If these products are billed monthly it can create a confusing customer experience, as some months there will be 4 charges and in others there will be 5. Nevertheless, you often see subscription businesses quoting a weekly price (sometimes even daily), which provides an attractive headline, but then still billing on a monthly or annual basis.
Other billing frequencies
Though the above frequencies tend to be the most popular, some businesses may offer other options such as bi-monthly
or bi-annual billing
. However, these are likely to be a compromise in customer-specific negotiations for high value B2B services - a nice option for your sales team to have up their sleeve, but not something that is offered to all.
So how do you decide what’s right for your business?
When determining the best billing frequency or frequencies for your subscription business, there are a number of important factors to consider:
- Are your customers B2B, B2C or both?
- Do you sell physical products or digital services?
- How mature and proven is your product / service?
- Do you need (or want) to be able to prorate charges?
- What payment methods do your customers prefer?
Whatever business model you choose, make sure you clearly and plainly demonstrate the different options available for your customers so they can decide which billing frequency best suits their needs, without letting your pricing page become a confusing mess of contradictory and confounding options. It is also crucial that you automate your billing processes to ensure that you create a robust and scalable business.
Cerillion Skyline gives you the power and flexibility to offer your customers multiple different billing frequencies, payment methods and more – contact us now for a personalised demo or to discuss your needs further.