Is yearly subscription for a new SaaS a bad idea?
We're working hard on a new SaaS idea. We're bootstrapping as much as we can and are not looking for outside investment. Our goal was start charging for the service on a yearly basis, in our minds this means we get more money upfront and know we're in it for a year at least.
Is this a bad idea? Do a lot of people use the monthly subscription model for any particular reason?
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If you were the customer of your own product, would you prefer to pay annually or monthly? – Frenchie 12 years ago
4 Answers
You're making the mistake of not thinking like your customer. Right now, you're approaching the problem from the position of "how can we stuff our bank out the fastest?" but you should be asking "what is most appropriate for our customers?".
When a potential customer is deciding whether to subscribe to a service or not, they're considering ROI and risks:
- ROI/value:
- For how long will I need this?
- How quickly will I get some value out of this?
- If I subscribe for 3/6/12/24/etc months will I continue to receive benefits after X time?
- Do I have the funds to pay for 3/6/12/24/etc months at once?
- Risk:
- What will happen if I no longer need the service but it had been pre-paid for X time ahead?
- What will happen if the company no longer provides the services but it had been pre-paid for X time ahead?
@bangdang has made a good point that sometimes monthly subscription charge is too low and isn't financially feasible so you have to charge in larger packages. However, it all still comes back to the value and the risk: if you pre-paid for a year of $2/mo. service ($24) and the company folded after 8 months, you lost only $8, a negligible amount, as oppoosed to $80 or $40 had the service cost $20/mo. or $10/mo.
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Additional point to consider: Your customer has transaction costs too. If you bill them monthly, they have to check their accounts monthly for correct billing. If your product is "sticky" (e.g. webhosting) it is usually a good idea to offer variable length pre-paid packages: 3 months, 6 months etc., maybe with a small discount to make them attractive. – Johannes Rudolph 12 years ago
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@dnbrv Thank you, very clear and important points. So my yearly price is in fact quite low (around 39€ for the year), factoring in all my costs and such this number works. I'm in a situation where getting a monthly subscription (aside from PayPal) is quite difficult (living in Germany but have my business bank account in UK and no credit history) and I wondered that offering yearly first (basically, it's a one off payment as such) this would help me establish customers and then I can introduce monthly when I have more resources and have the third party services worked out to do this properly. – Littlejim84 12 years ago
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@littlejim84 Have you looked at Chargify and similar services? 39€/year is borderline high-risk for private individuals, especially if year-long value isn't too clear *to them*. You should look into 4- or 6-month billing. – Dnbrv 12 years ago
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@littlejim84: dnbrv has a good point, SaaS is quite capital intensive. You should really try to bill in longer intervals. If you offer a free trial month (or 14 days, whatever is appropriate), you don't need to worry about creating a hig bar for entry – Johannes Rudolph 12 years ago
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@dnbrv Maybe knowing more about third-party services that handle subscriptions could be useful. Chargify looked nice, but very expensive for the number of customers I was looking for having. Maybe 6 months charging maybe a better option. I have a freemium option too, which maybe enough for people to see the service value. I would love to use Stripe but it's only available in the USA, PayPal seems like my only option right now. Hmmm... so my quest continues it seems. – Littlejim84 12 years ago
Factor in the overhead costs as well. What does it cost to manage a monthly subscriber versus yearly subscriber. One area to consider is how you will accept payment. Will you accept credit card payments? If so, what's the per-transaction charge? What's the likelihood and frequency of chargebacks?
Xmarks and lastpass charge $1 per month but will only bill in yearly increments. If they charged monthly $1/mo, the overhead costs for the transactions alone could eat half the revenue. In some instances, managing monthly subscriptions could net you a loss depending on the price point and associated transaction costs/fees.
I don't think it's a bad idea. Why not offer monthly subscription and year subscription? Yearly subscriptions will be cheaper by 5%?
Monthly memberships are offered as a more cost effective plan to people who are on the fence about your product. What looks better to you when you come to a site you don't know that much about, but you want to try it out - $10/month or $100/year. I would rather spend the $10, try it out, and if I like it, up my subscription.
Plus, some people may only need it for 3 months, so why would they want to pay for the whole year.
I see it purely as a cost issue. I really only go for bigger subscriptions when I am confident that I will use and enjoy the product for that long. An example would be my hosting. I went month to month or yearly on 4 different hosting providers before I bought 3 years worth of BlueHost.
