What's in a billing cycle, you might think. A lot more than what meets the eye. How frequently you charge customers can affect customer behavior as well as your metrics. Each type of billing cycle has its own pros and cons and strong reasoning behind why it suits a certain type of business.
In this chapter, we'll discuss the most prevalent billing cycles in SaaS - monthly and annual, and when and why each of them are used.
Use it to: Shorten sales cycles because the initial price to get started is relatively low and it's often an easier decision to purchase a monthly plan. Get more short-term users who need to test a service.
Use it if: You're targeting smaller companies and startups who cannot break their banks by paying a large sum up front.
Ex. - HootSuite, a social media analytics tool, has four distinct plans, each of which is billed monthly.
Use it to: Earn back your acquisition expenditure almost instantly, instead of having to wait for 12 more months to revel in positive cash flow.
Use it if: Your product inherently has a variable usage pattern and an annual billing cycle will enable your customers to justify that downtime with their yearly cost.
Ex. - Salesforce, a sales CRM software, offers only annual plans. And it works for a company of that scale, that has a mature sales force within their company who can bring out the value in their service to lock in the bigger deals.
Most companies leave the choice of billing to the customer because different billing cycles appeal to different customer segments. And if you find that annual billing is more fruitful for your business then try to make it more enticing by adding a discount to it.
Ex. - PandaDoc, a quote customization software, has four different plans and for each plan, they let the customer decide between monthly and annual billing.
Non-SaaS equivalents tend to veer from the traditional monthly and annual billing. They even have billing frequencies set for every 45 days, once every 2 weeks, etc. depending on the business type.