In the realm of SaaS and cloud solutions, there are various types of subscription models and pricing strategies to consider, from one-time payments to recurring charges at regular intervals.
The SaaS pricing page generally offers two primary payment options: monthly and annual. The differences between the two plans can be anything from 2 months off to more detailed performance metrics.
We've written in the past about how SaaS vendors make it difficult to find enterprise-level pricing, and they do the same thing with monthly vs. annual subscriptions — they display annual pricing as a default because they want to nudge you toward year-long subscription plans.
These annual one-time fees might be good for maintaining your vendor's customer retention rates, but which option is better for you: monthly or annual subscriptions?
See below for more details and insights on how to choose the best subscription model for your business and use case.
Understanding common types of SaaS subscription models
In the SaaS marketplace, vendors often aim to conduct business on their terms, controlling the customer lifecycle and the intricacy of processes like subscription management. This includes decisions about monthly and annual subscriptions, with the default being annual pricing, subtly nudging customers towards year-long plans. However, the power to choose lies with the individual customers.
The choice between monthly and annual subscriptions has significant implications on subscription procedures, cost management, and the overall customer experience. To gain a deeper understanding, let's explore the key considerations for choosing the best subscription model for your business, focusing on customer satisfaction and a seamless customer experience.
Choosing an annual subscription: advantages and considerations
The annual subscription business model is beneficial for both SaaS vendors and users. It takes into account various factors such as software licensing models, payment methods, resources, and customer loyalty. Here are five reasons why an annual subscription may be more suitable for you.
1. Annual SaaS subscriptions usually qualify for discounts
The main appeal of annual subscription time periods is pricing and reduced complexity. Almost all SaaS tools, from basic subscription management tools to advanced analytics systems, offer significant discounts for annual payments. This cost-effective access to software services makes the annual pricing model highly attractive.
While startups grappling with revenue challenges might find it challenging to pay upfront on an annual basis, companies with a steady cash flow and consistent revenue can benefit from 2-year or 3-year plans.
In contrast, monthly plans provide more flexibility, allowing teams to test new SaaS tools and familiarize themselves with the software before making a long-term commitment.
Monday.com offers an 18% discount across all of its subscription agreements if you choose an annual plan over a monthly one. Some SaaS tools offer even better discounts or incentives like white-glove customer service when you pay yearly.
You have to pay a lump sum upfront, which can be difficult when purchasing an enterprise-level SaaS plan that charges a steep subscription fee. It can also be hard for startups that are fighting revenue challenges. But, for companies with healthy cash flow, the discount available when choosing an annual subscription makes the initial lump sum worth the investment.
Of course, this is not a good approach if you’re exploring new SaaS tools. You don’t want to make a large upfront investment during the testing stage. During testing, opt for monthly pricing so that your team can become familiar with a SaaS tool before making a longer-term commitment (more on this below).
You can also blend the benefits of an annual contract with the low regular payment of going month-to-month. Many SaaS providers will let you sign an annual contract at a discounted rate while paying monthly or quarterly.
2. Annual SaaS subscriptions offer additional features
While monthly plans always include the basic version of a product, certain features are often exclusive to annual subscribers. For example, Squarespace makes available a free custom domain to all-new annual subscribers. It cannot and does not offer a free custom domain to monthly subscribers, because the cost of buying a domain on the open market is almost as much as the price of a month’s subscription at Squarespace’s lowest service level.
If you click the “Pay Annually” radio button on Squarespace’s pricing page, the “Free Custom Domain” line is checked across all pricing plans. But, if you click the “Pay Monthly” radio button, the checkmarks next to “Free Custom Domain” disappear. Which makes perfect sense.
You are more likely to access additional features through annual subscriptions when using less costly SaaS. As you get into enterprise-level SaaS tools, you are more likely to find that features are hidden behind higher (and more expensive) levels of service.
But, if your team is using a basic tool at a lower price point, make sure all the features you want and need are available with a monthly subscription before you make a buying decision.
The good news is that any SaaS tool will let you upgrade to an annual subscription if you discover that a must-have feature is unavailable through your monthly subscription.
3. Annual subscriptions are convenient
There’s nothing worse than filling out lengthy expense reports month after month. When you choose a one-time payment on a yearly basis, there’s less administrative work to be done and more convenience to be enjoyed.
With recurring invoices for monthly subscriptions tied to company credit cards, you also run the risk of the card on file expiring. If and when your card expires, you may experience an interruption of service until a valid card is added.
In many cases, companies use email addresses tied to departments rather than individuals to create SaaS profiles (like sales@ or contact@, or marketing@), which can make getting alerts about soon-to-expire cards and temporary service disruptions harder to keep up with.
Choosing an annual subscription over a monthly subscription significantly diminishes this risk. You make a payment once a year, and administrative tasks take up a fraction of the time they take with monthly subscriptions.
4. Partnerships and customer relationships
Believe it or not, SaaS vendors need you just as much as you need them. The start of a SaaS contract creates a symbiotic relationship.
Vendors provide users with access to a tool that helps improve their work lives and performance. In return, users provide a revenue stream to SaaS vendors, as well as valuable feedback on the performance of the tool and features that should be added to the development roadmap.
Annual subscriptions reinforce the partnership, signaling a user’s commitment to the platform in exchange for the vendor’s commitment to providing outstanding service. In some cases, you may find that you receive better support and service when opting for an annual subscription.
You may even be able to schedule regular calls and check-ins with a customer success representative. When you create a true partnership with your SaaS vendors, you’re more likely to maximize the benefit and value you receive from using their tools.
5. Annual subscriptions offer more certainty
SaaS vendors want users on annual subscriptions because it creates revenue certainty. But there’s a certainty to be had for users, too. When you choose an annual plan, you can rest assured that your price will remain the same for 12 months — vendors can’t retroactively raise your price after you’ve paid upfront for a year.
That’s not the case with monthly subscriptions. Consumers are accustomed to receiving price-increase notifications from streaming platforms, gaming communities, and other vendors. These notifications typically put a positive spin on the price increase, noting additional features available through the service and the need to ensure the long-term viability of the provider. But the bottom line remains the same — the consumer is going to pay more.
The same is true of B2B SaaS tools. In many cases, SaaS vendors are venture-backed, and they start by acquiring users at monthly rates that do not drive profitability. As the venture money disappears, though, vendors pivot to pricing that will support the long-term viability of the company. If you are paying month-by-month, there’s nothing you can do to avoid these price increases. But, if you’re paying annually, you lock in the lower rate for a 12-month term.
Finally, when you choose the certainty of an annual plan, you eliminate risk. If you pay monthly and your credit card expires or otherwise declines, you run the risk of an essential, around-the-clock tool going down for your company. That's a risk that is too high for many SaaS companies.
Understanding the benefits of monthly subscription plan
While annual subscriptions offer their own advantages, monthly subscriptions also have merits in certain situations. Let's explore three key benefits of opting for a monthly SaaS subscription, including scenarios where a monthly plan may be more beneficial than an annual one.
1. Monthly subscription plans are flexible
Flexibility is the most prominent benefit of choosing a monthly subscription plan. There’s no long-term contract to worry about, and your company can choose to switch providers at any time. Yes, you will likely pay more than you would on an annual subscription plan, but some circumstances make this trade-off more than worth it.
Before you choose a monthly subscription plan, make sure you own your data and have the ability to download it should you choose to cancel. In our SaaS Buyers’ Guide white paper, we emphasize the importance of data ownership. If you choose a monthly subscription plan for flexibility, you may find that the flexibility wasn’t helpful if you can’t take your data with you.
2. Monthly subscriptions have lower barriers to entry
Anytime you make a buying decision that will affect a year or more of company operations, you want to invest a lot of time and research into making the decision. The time and research required to make a 12-month decision create a much higher barrier to entry than when choosing a monthly subscription plan.
As noted above, monthly subscription plans require more administrative work as you file expenses month after month and as you update credit cards and other profile information to remain current. But sometimes companies need to get moving with a SaaS tool and the capabilities and value it delivers. In these cases, opting for a monthly subscription is just fine.
3. Monthly subscriptions are perfect for testing software
Monthly subscriptions are ideal for testing multiple tools. For example, suppose your marketing department is considering SEMRush, AHREFS, and Moz for search engine marketing.
Each tool offers discounts for an annual plan, but you can use monthly subscriptions to determine which tool best meets your needs. After the test period, you can switch to an annual plan to save money.
Monthly vs. annual subscription examples
The bottom line: when to choose monthly vs annual subscriptions
Here’s a simple way to choose between monthly vs. annual subscriptions for SaaS tools.
If your company has identified the right tool for its needs, an annual subscription is best. Annual subscriptions will give your company cost certainty and overall savings in exchange for access to a tool that delivers the capabilities and values your company needs.
If your company is testing various tools or is otherwise uncertain about what tool is ideal for the long term, a monthly subscription is best. Monthly subscriptions will give your company flexibility and a low barrier to entry in exchange for time to spend testing out one or more options.
Get SaaS procurement support
One of the biggest challenges with choosing the right plans is knowing when you’re getting the right features at the right price — and knowing when you’re paying more than is necessary.
No matter which subscription services or model you choose, you can make your overall experience of buying and managing software significantly easier by leaning on modern subscription management software.
Procurement platforms like Sastrify integrate with your accounting software, simplify subscription processes and give you 360-degree visibility into how many active users your tools have. Plus, you'll also get complete control over your billing cycles and unlock self-service options for enterprise contracts.
At Sastrify, we offer a SaaS procurement platform and services that equip our clients with the tools and knowledge they need to make smart SaaS buying decisions. Get started with a free SaaS analysis that identifies opportunities to optimize your company’s SaaS spend.