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 plan is one approach but customers perceive they are getting a better deal if the discount is offered on an annual pricing plan.
People like choice, so offering a few payment options (monthly and annual) and a few different packages (bundling products), you are throwing out a broader net. Having a few payment options (month and annual) opens the door for those customers that prefer to pay annually and those who wish to keep their payments low. The key is to keep the pricing structure simple and include discounted offers to entice new customers or retain existing customers.
The Benefits of Annual Subscription Plans
There are many benefits to offering your customers more than one plan option - both monthly and annual subscriptions. The biggest of these is customer retention - this is the key to profitability in a SaaS business. When you only offer a monthly recurring payment option you could end up not recouping your customer acquisition costs.
This can ruin your chances of covering other costs such as software development or personnel costs and can lessen your business’ chances of survival. It can also limit your business’ 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 average customer lifetime value (LTV).
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.
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’ financial goals. By offering annual subscriptions you can generate significant funds that will cover your operating costs.
To make annual plans more attractive, consider offering customers a discount to show you value of their commitment.
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