Annual vs. Monthly Subscriptions
Dear Reader,
By now, you're a master of the core four subscription metrics —MRR, ARR, Churn, CLTV. (If not, check out Part One.)
This is Part Two, where we'll look at one of the most popular areas of experimentation for growth designers working on subscription products: annual vs. monthly plans.
As a consumer, the last time you purchased a monthly subscription, you were probably nudged to buy an annual plan instead. Let's unpack why a longer plan benefits the business and, contradictorily, when a shorter plan can be better.
Subscribing to your growth,
Jen Byyny and Molly Norris Walker, Growth Design Leaders
Annual plans are usually better business because a monthly plan creates a decision to continue or cancel every month. With a yearly plan, subscribers only make this decision every twelve months, significantly decreasing their likelihood of churn. The user can benefit from reduced admin and discounts of an annual plan, but they can also be abused with lock-in and early termination fees.
Annual Plans have lower churn.
In B2B, annual plans are generally win-win for buyers who have found product value as the incentives are aligned to reduce billing admin and increase the seller's reliable revenue. eWebinar's CEO and Co-Founder Melissa Kwan named waiting to build annual pricing because of extra development work, as one of her top five pricing mistakes. "Not having annual plans meant we couldn't collect cash up front even when customers wanted to pay annually. It also meant we couldn't offer bigger commissions with partners and affiliates."
Annual plans provide sellers with more predictable cash flow and annual recurring revenue (ARR), which is more important for investors than monthly recurring revenue (MRR).
Annual plans also offer a chance to build strong customer relationships – you have a whole year to work on impressing your customers and show off new features and updated releases.
On the downside, annual plans are much harder to sell. There's a discounting bonanza for annual plans due to customer reluctance to commit to a year over a month. It’s common to offer savings of 10 to 25% percent for subscribing annually instead of paying monthly. Numerous visual design treatments also help nudge users toward annual plans, including the higher price struck out, recommended ribbons and tags, and default selections for yearly plans.
Moreover, showing the savings in time rather than getting a percentage off is even more effective because the value is more literal and requires less thinking to understand. For example, Strava's current promotion is 14 months for the price of one year. You can see the headline emphasizing two months free is a clearer sell than a discount of 17%.
Monthly plans attract more customers.
Monthly plans bring in customers who need more time or know they don't want to commit. Monthly plans also encourage word of mouth. Make your short-term customers happy, and they may recommend you to other people. Word of mouth was a big win when Jen was at B2C companies like Strava and even B2B companies like Looker.
One hidden benefit to monthly plans is that they can be much easier for businesses to manage through payment gateways like Stripe and Adyen. As pricing changes, it's difficult to manage accounts with different terms depending on when they purchased their annual plans. Monthly subscriptions through direct debit eliminate administrative overheads, and pricing changes can take effect within an entire userbase every 30 days.
In Conclusion
Monthly plans are the bread and butter of B2C companies because of their lower acquisition costs and larger customer counts. Low-commitment, monthly plans create less friction for virality and word of mouth.
The golden rule for growth designers at B2B companies is to encourage more accounts to convert from monthly to annual plans. Why? Retention and revenue expansion through product cross-sell/upsell are more critical to B2B companies with fewer customer accounts than B2C and higher acquisition costs.
More interesting reads on the topic:
- 7 tips to boost cashflow using annual pricing by community member Theo Ohene
- Annual subscription vs. monthly billing by GoCardless
About the Authors
Jen Byyny is an experienced product design leader focused on driving innovation for business success. She’s based in Denver, CO and moonlights in the mountains as a ski instructor.
Molly Norris Walker is a serial head of design at high-growth startups at the intersection of data and UX. She’s one of the leaders of GrowthDesigner.co. Her home base is an island in the Puget Sound.
