Discounting your products can be an excellent way for your business to attract new customers and generate more sales. But how do recurring revenue businesses structure discounts?
Offering discounts on monthly subscription plans is one approach, but customers often perceive they’re getting a better deal if the discount is offered on an annual pricing plan.
People like choice, so by offering a few payment options (monthly and annual) and a few different packages (bundling products), you’re throwing out a broader net. Having a few payment options opens the door for those customers that prefer to pay annually and those that wish to keep their payments low.
Generally, smaller businesses tend to prefer monthly payments because it suits their tighter budgets and cash flow situations. They may even be willing to spend up to 20% more to do it. Medium and large businesses on the other hand will often prefer to pay annually because it eliminates the accounting headache of frequent recurring payments. And if there’s a discount involved in an annual payment plan, all the better.
The key is to keep the pricing structure simple and include discounted offers to entice new customers and to retain existing customers.
The benefits of annual subscription plans
There are many benefits to offering your subscription customers more than one plan option—both monthly and annual subscriptions. The biggest of these is customer retention. Reducing your churn rate and increasing your customers’ lifetime value (LTV) is the key to profitability in a SaaS business. And when you only offer a monthly recurring payment option you could end up not recouping your customer acquisition costs (CAC).
This can ruin your chances of covering costs such as marketing, software development, and personnel costs, and it can lessen your business’s chances of survival. It can also reduce upfront cash flow and limit your business’s product development efforts, which are critical in an ever-changing business environment.
But by offering an annual plan option, you guarantee the customer will be with you for at least 12 months. This can cover numerous operational costs and will increase the MRR and average customer lifetime value.
Yet, customers will want to have some reward for committing themselves to your product for 12 months, so they may expect a discount. Many businesses offer customers a “cancel anytime” option, as customers place tremendous value on flexibility.
By offering customers a chance to buy access to your product for 12 months for a discounted price, you are giving them an incentive and demonstrating how much you want their business.
Flexibility and automation make for a seamless shift to annual pricing
Recouping your customer acquisition costs can be at risk when you only have customers on a monthly subscription. They might leave your business early and this can disrupt your business’s financial goals and cash flow runway. By offering annual subscriptions, you can generate significant funds that will cover your operating costs and create investment opportunities.
To make annual plans more attractive for current customers, consider offering them a discount to show you value their commitment. An adaptive subscription billing platform makes it seamless for customers to migrate between plan offerings. These systems also manage any price proration required if customers migrate mid-period. And any discount offered to customers as incentive to move to an annual plan can be managed automatically based on the terms specified by your business.
All of this means no disruptions to your customer’s service, and no manual effort for your team.
Empower customers to pay how they want to pay
Whether your average customer prefers paying monthly or wants to pay for a year upfront, the key is to offer options.
By allowing customers to pay the way they want to pay, you eliminate barriers to entry for your potential customers. By sweetening the deal on that upfront annual pricing option, you also guide those that can afford that option toward a longer lifetime value with your business.
And your current customers? Offering a discount to migrate to an annual plan is a great way to retain their business and reward them for their loyalty.
FAQs about Discount for Annual Pricing
Q: What is the benefit of offering discounts on annual pricing plans?
Discounts on annual pricing plans have multiple benefits. They serve as an incentive to attract new customers, retain existing ones, increase the average customer lifetime value, and enhance customer retention. Additionally, they help in faster recovery of customer acquisition costs.
Q: Why do larger businesses prefer annual payment plans over monthly ones?
Larger businesses often favor annual payments over monthly ones as these eliminate the recurring accounting tasks that are associated with frequent payments. If a discount is associated with an annual scheme, it increases its desirability.
Q: How can discounts appeal to different customer sectors?
Smaller businesses, with tighter budgets and cash flows, tend to prefer monthly payments and may be willing to spend up to 20% more for this flexibility. Conversely, larger businesses, not constrained by regular cash flow, often find annual payments with discounts more appealing and economically viable.
Q: Why are the options of monthly and annual subscriptions beneficial to a business?
Offering the options for both monthly and annual subscriptions broadens the payment choices, accommodating the diverse preferences of customers. It can potentially enhance customer retention, reduce the churn rate and increase lifetime value, contributing to business profitability.
Q: How does an annual pricing plan influence customer acquisition costs (CAC)?
An annual plan guarantees the business 12 months of a committed customer, which helps cover operational costs, CAC and increases the monthly recurring revenue (MRR).
Q: What are the effects of offering only monthly subscription plans?
Solely offering a monthly recurring payment option could pose a risk of not recovering your customer acquisition costs (CAC), disrupting the business’s financial goals, lessening your chance of survival, reducing upfront cash flow and limiting product development efforts.
Q: What role do discounts play in encouraging customer migration to annual plans?
Discounts serve as incentives for customers to commit to an annual plan. It displays the business’s value for their commitment and facilitates seamless migration between plan offerings through an adaptive subscription billing platform.
Q: Why should businesses provide payment flexibility to customers?
Payment flexibility removes barriers to entry for potential customers. By offering discounts on upfront annual pricing options, it guides those who can afford it towards longer lifetime value with the business. Offering a discount for customers to migrate to an annual plan can also be a strategy to retain their business and reward them for their loyalty.
