Last updated: August 1, 2023
With over 78% of adults around the world currently having an active subscription, it’s clear that this business model has huge potential. While a large segment of that figure is made up of payments for a service, subscriptions can be an incredibly useful tool for any business that sells a product.
For companies that have decided to offer products on a regular basis, determining a suitable length for subscriptions can be tricky. There are many time periods to choose from, with some businesses offering weekly, bi-weekly, monthly, and yearly options, alongside others.
In this article, Upscribe will be delving deep into annual subscriptions. We cover what they are, the benefits, drawbacks, and ultimately, help you to decide whether or not they are right for your business.
With a quick and easy setup process, Upscribe can help you to offer a better subscription experience for your customers. Create a checkout page that not only looks great but is responsive and free of lag. Learn more about how we can help your business today!
What is an Annual Subscription?
An annual subscription is a recurring contract between a business and a customer that lasts for a minimum of 12 months. All of the funds are paid in full upon signing up, with the business providing a service or product for the next year.
Annual subscriptions are often offered by businesses that provide software, streaming services, or other products or services that are used on a regular basis, often with a tiered pricing structure. The advantage of an annual subscription is that it can save the customer money in the long run, as they are not paying for the product or service on a monthly basis. Additionally, annual subscriptions can provide customers with access to exclusive content or discounts.
Some great examples of businesses that offer annual billing include:
When you decide to sign up for an annual subscription with any of the aforementioned businesses, you can look forward to receiving a steady supply of products at regular intervals.
Typically, these intervals can range from weekly to monthly, ensuring that you always have access to the items you need. In addition, you can expect to receive a personalized selection of goods tailored specifically to your preferences. To achieve this, each company will likely ask you a series of questions to better understand your needs and preferences before displaying their recommended packages.
Annual subscription vs. pay-as-you-go model
Annual subscriptions and the pay-as-you-go model are two different payment models commonly used for various services and products. Here’s a comparison of the two:
Duration of Payment:
- Annual Subscriptions: Users commit to paying for a service or product for a full year. They make a single upfront payment or regular payments over the year, securing access to the service for the entire duration.
- Pay-as-you-go: Users pay for the service or product as they use it, typically on a per-usage basis. There is no long-term commitment, and users can stop using the service at any time without further financial obligations.
- Annual Subscriptions: Payments for annual subscriptions are made upfront or periodically (e.g., monthly) for the full year in advance. Users often receive discounts or cost savings for opting for annual payments.
- Pay-as-you-go: Payments in the pay-as-you-go model are made after each usage or a specific time period (e.g., monthly), depending on the service or product. Users only pay for what they actually use.
- Annual Subscriptions: Annual subscriptions usually offer cost savings compared to monthly or pay-as-you-go options. The total cost for a year’s subscription is generally lower than if the same service were paid for month-to-month.
- Pay-as-you-go: Pay-as-you-go pricing is based on actual usage, so the cost may vary depending on how often the service is utilized.
- Annual Subscriptions: While annual subscriptions may offer discounts, they require a higher level of commitment. Users are locked into the service for the entire year, even if they stop using it or find a better alternative.
- Pay-as-you-go: Pay-as-you-go provides greater flexibility. Users can stop using the service whenever they want without any long-term financial obligation. This model is ideal for those who want to try a service without a significant upfront commitment.
Long-Term vs. Short-Term Use:
- Annual Subscriptions: Annual subscriptions are suitable for services or products that users expect to use consistently and regularly throughout the year. It’s beneficial for users who know they will make full use of the service over an extended period.
- Pay-as-you-go: The pay-as-you-go model is better suited for sporadic or occasional use. It allows users to pay only for the times they need the service, making it cost-effective for infrequent usage.
Refunds and Cancellations:
- Annual Subscriptions: Cancellation policies for annual subscriptions may vary, but users may not be eligible for refunds or may have to pay cancellation fees if they terminate the subscription before the end of the contract term.
- Pay-as-you-go: Pay-as-you-go services usually do not require cancellation, as users are not locked into a contract. There are no penalties for stopping usage, and users won’t have to worry about refunds.
Ultimately, the choice between annual subscriptions and the pay-as-you-go model depends on individual preferences, usage patterns, and the level of commitment users are willing to make.
Now, let’s explore the key differences between annual and monthly subscriptions.
Annual vs. Monthly Subscriptions
Annual subscriptions are often cheaper than monthly ones. In order to entice customers to choose a long-term plan, companies offer yearly subscriptions at a discounted price.
For example, let’s say a monthly subscription costs $30/month and the yearly one costs $300/year. If you divide the latter by 12 to get its monthly price, it comes out cheaper at $25/month.
Monthly subscriptions require less commitment since customers can cancel after a month. Annual subscriptions, however, must commit to one year before they can cancel payment. Customers who are unsure about a product may be hesitant to use yearly subscriptions, but there are ways to remedy this:
- Offer a free trial so customers can try out your service before paying.
- Make it easy for customers to switch between yearly and monthly plans.
- Use semi-annual subscriptions.
Monthly subscriptions tend to have higher churn rates since customers can easily drop out after a month or two. Annual subscriptions, on the other hand, give you more time to strengthen customer relations to prevent churn.
Monthly subscriptions usually struggle to provide predictable revenue for your ecommerce business, unlike annual subscriptions. With the latter, you receive more stable income in the form of yearly revenue streams.
Should Your Business Offer Yearly Subscriptions?
Annual payment options are suited to a large variety of businesses that offer products through a subscription service. If you’re not sure, here is some criteria to consider:
If you are new to subscriptions, the frequency of your product deliveries is something to think about. Does your business make or source products that are needed on a regular basis?
Think ingredients, items of clothing, beauty products, and other consumables. Any product that can reliably and consistently be used within a specific time period will suit an annual subscription model.
This can also be adapted to other products. Many businesses will have accompanying items that are typically used as an upsell. For example, if you sell kitchenware, then you could provide your customers with expert cleaning solutions and equipment. As these will be used regularly, you can deliver them monthly and charge annually.
As humans, most of us tend to get bored fast. In order to sustain a yearly subscription, offering a good variety of products will keep your customers interested.
For businesses that sell items such as food: Do you have a large enough range to send out different products every month? If the answer is yes, then a yearly model could work. Keep in mind that this doesn’t apply to necessity goods, such as shavers.
Giving your buyers flexible options is another way to keep them engaged. Perhaps you offer them personalized products, or simply send them an assortment of goods each month. In short, keeping things fresh can be crucial with annual subscription services.
Regardless of your business model, customers should always come first. So, will offering them an annual subscription benefit them in any way? This could include:
- Discounts for longer commitments.
- Exclusive items for yearly subscribers.
- Convenience of being billed annually.
- Express delivery times.
No matter what the incentives for subscribing are, these should clearly be shown within your customer portal.
With Upscribe, this is made easy. We know that getting new subscribers is important, but creating relationships that last is even better. All of your customers will be able to access our detailed but simple dashboard. From here, they can easily manage their subscription, while also staying in the loop when it comes to important updates.
Annual Subscriptions Pricing Strategies
When it comes to building a profitable ecommerce business, choosing the right pricing model for your subscriptions is key. Decide how you want to charge your customers. For instance, are you charging per user? Or are customers paying for certain features? Consider the most important aspects of your service and what your customers value.
To help you get started, here are four pricing tactics to easily grow your revenue:
Fixed or Flat-Rate Pricing
Fixed or flat-rate pricing is where you charge a set annual price for a single product or collection of features. For example, Nature uses this pricing model, offering 51 issues plus online access to their articles at a fixed price of $199.00/year.
Flat-rate pricing is one of the simplest pricing strategies — customers know exactly what they’re paying and what they’re getting. Unlike tiered subscription models, there are no plan upgrades, just different billing cycles. This one annual fee should give customers access to all your features.
Nowadays, this pricing model is mostly used by ecommerce businesses that sell physical products (each product is given a set price). Fixed pricing doesn’t allow you to scale your subscriptions, so your revenue gain is capped. Many platforms that originally adopted fixed pricing have now changed to other pricing models to grow their ecommerce subscription business.
Per User or Unit Pricing
Per-user pricing is where you charge a monthly price for every user (with annual billing). For example, Zoho’s Standard subscription plan costs $14 per user. The more users there are, the more expensive the subscription fee.
Some platforms even allow customers to input the number of users in their team to give them a better idea of how much each plan costs.
Most SaaS platforms use per-user pricing since they allow customers to scale their subscription plans to accommodate their team. This way, you can target both small and large businesses with little issue.
Per-user pricing is also easy to understand, so customers know what they’re paying for. There are still downsides, however, to using this pricing strategy. Users can share logins to reduce the amount they pay, which impacts your potential revenue.
Fortunately, there are ways to remedy this. For example, companies often combine per-user pricing with tiered pricing to further increase their revenue.
Tiered pricing involves offering multiple subscription plans, with each one providing a different set of features. For example, Statuspage offers four subscriptions, which all vary in price. The more expensive the plan is, the more features it contains.
Companies often have three or four pricing options, with the addition of a custom plan. Custom plans are tailored to suit a client’s specific needs, and the pricing varies depending on what features are included. This type of pricing is usually designed for larger businesses who require more advanced services.
With tiered pricing, you can accommodate varying budgets whilst allowing customers to upgrade their services if necessary. Just be careful about offering too many pricing tiers — any more than four can overwhelm customers with too much choice.
Usage-based pricing charges customers according to how much they use your service. For example, Google’s Cloud Storage adopts a pay-as-you-go pricing strategy, where customers only pay for the storage they use. There are different prices for each region, but they all charge a set fee per GB on a monthly basis.
This is a less common pricing model — it’s mostly used by IT and telecommunications companies, which charge you for data consumption. Customers get more control over how much they pay, which can entice them to subscribe. However, this does make it hard to predict your revenue since there are no fixed monthly or annual fees.
Default Subscriptions & Discounts
Default Annual Subscriptions
Many SaaS companies offer both monthly and annual subscriptions, but they showcase their annual plans by default. This is usually done when they offer discounts for their yearly subscriptions.
Since customers are first shown the cheaper plans, if they switch to the monthly subscriptions and see the higher prices, they’ll be more likely to choose an annual plan. For example, GitHub offers a discounted monthly price for their annual plans (in the first 12 months), along with 1-month free.
Default Monthly Subscriptions
Alternatively, you can showcase your monthly plans by default but make it easy to switch to your annual subscriptions. For example, Jira displays their monthly subscriptions by default, but it doesn’t include the pricing for their Enterprise plan. Instead, they ask customers to switch to annual billing if they want to view Enterprise’s cost.
Using Only Annual Subscriptions
You can also choose to only offer annual billing for certain plans. For example, Workable Premier is only available if customers commit to a year-long plan. Similarly, they made their Starter plan accessible solely to monthly billing.
Their Standard plan, however, accepts both monthly and annual subscriptions, which makes it all the more enticing. It’s set to annual by default since it comes at a discounted price (customers save $732).
The Benefits Of Using Annual Subscriptions
Of course, charging on a yearly basis has a handful of benefits over monthly alternatives. Some of these advantages include:
Access To Revenue Immediately
As previously mentioned, running this business model can give you access to a year’s worth of funds straight away. For those who budget correctly, this could be hugely beneficial.
By spending this money on acquiring new customers, you can quickly grow your business. If these new customers also opt for yearly payments, scaling can be done at an exponential rate.
Keep in mind that you should reserve a good portion of funds for maintaining daily operations. You will still need to spend throughout the year in order to fulfill each subscription. Even if you already have a large inventory, delivery costs and other fees can add up fast.
Some customers may use monthly subscriptions like a trial. If they aren’t impressed immediately, then they may cancel the renewal. However, longer subscriptions give you more opportunities to impress with your products.
It’s no secret that when it comes to running a business, mistakes happen. Products can get damaged and deliveries can be late. With an annual subscription, you can still win back customers by using a variety of methods:
- Offer them superb customer service.
- Send replacement products.
- Give them an additional month of products.
- Remind them of the value proposition.
A study conducted by Wonderment states that 64% of respondents feel more connected to a business that offers a direct subscription. For any company that makes its own products, or ships to the customer without using a fulfillment center, this is a promising sign.
Receiving a payment for a year’s worth of product can really assist with cash flow calculations. It allows you to prefill a segment of your yearly revenue.
You can also calculate the costs for the next 12 months. This can be done by adding all of the active subscriptions and multiplying it by the cost to source or make each one. Knowing this information in advance will also assist with inventory management.
Finally, predictable revenue is a trait that gives confidence to many investors. If you’re looking for an injection of cash into your eCommerce business, then mentioning these figures in your pitch could be highly useful.
When some executives approach investors, they can only give predictions for the next year. By using a 12-month subscription model, you can share your minimum revenue earned to date.
The Drawbacks Of Using Annual Subscriptions
Now the advantages of annual subscriptions have been covered, it’s time to look at some of the potential drawbacks. We have also included some possible solutions to the problems listed below!
Sure, your customers may be saving money when opting for a yearly subscription. However, sometimes the convenience of paying in smaller increments can seem more appealing. This may also be the only choice for a customer if they do not have enough money available to commit to a 12-month subscription.
When paying monthly, you also have the option to cancel your installments at any time. For first-time buyers, this is an appealing prospect.
To counteract this, your longer subscription periods should be as incentivizing as possible. Customer portals should clearly display the prices of yearly vs monthly packages. The potential savings should be made crystal clear to the customer.
This business model will require in-depth planning. While you can accurately predict revenue with annual subscriptions, some businesses may struggle if they only receive payment on a yearly basis.
In addition to this, the price you pay for products may increase throughout this period of time, decreasing your profit margins as a result. In fact, it could even lead to you turning a loss, as the business will need to comply with the annual subscription contract.
With a monthly subscription in this instance, you could simply notify existing customers that a change in pricing will occur. They will have the option to cancel or agree with the adjustments.
Losing a few customers is bad, but operating at a loss can cause some serious issues.
Planning effectively will allow you to stay on top of daily operations. Keeping enough money in the bank can also tide you over, should an unforeseen event happen.
Give Customers the Freedom to Choose
To wrap up this article, we would like to point out that offering both yearly and monthly plans is another option working well for businesses. Giving your customers the freedom to choose is almost always a positive thing. Providing discounts for longer subscriptions can also increase customer loyalty, average order value, and lifetime value.
Upscribe can help you to increase the conversion rate and subscription duration of customers. We deliver a seamless experience for both businesses and customers. By improving the experience of each visitor, we can help to ensure that buyers return time after time. Get in touch with a member of our team to book a demo or gain access to our comprehensive tools today!