Pros and Cons of Yearly vs. Monthly Billing

SAAS companies love annual billing!

But how do monthly subscriptions compare to annual subscriptions?

Let the data speak for itself. Among the Forbes Cloud 100 with public pricing, 68% offer annual plans with a prepay. To get the commitment and cash, they typically discount their product by 20-30%.

To be fair, at first glance the logic is quite sound. In return for predictable revenue upfront, I will give you a discount. 

This seems like an ideal arrangement for you and for the customer. If customers pay upfront for one, two, or even three years, retention rates will improve, CAC payback will improve, and cash flow will increase, right?

Unfortunately, as with most things, as we look under the hood this logic is deeply flawed. 

Monthly Billing Frequency Wins In The Long Run

Unless a refund or early termination occurs, you are likely to retain an annual customer for at least one year. You can count on this. However, do  subscription based businesses with an  annual bill plan have better retention than those with monthly plans? 

The simple answer is no.

When it comes to gross dollar retention (GDR), there is not much difference regardless of how long the contract is (or how much it is). The median GDR of companies with all of their revenue on monthly/quarterly contracts is 90%, while the median GDR of companies with all of their revenue on annual or multi-year contracts is 85%. Overall, companies that use monthly contracts retain their revenue better than those that use annual contracts. 

The case for annual contracts is flawed even if gross dollar retention is equal-because of the 20-30% discount, you need to see a big jump in retention to justify the discount.

Monthly contracts also win on CAC payback

It is also possible to recoup most or all of the costs of acquiring that customer by pushing them to annual plans. As a result, if you make your CAC payback for 12 months, you can be certain you won't lose money on that customer.

Again, companies with all of their customers on monthly contracts exhibit better metrics than those with annual contracts. And the metrics certainly don’t improve as you move across the spectrum. 

There are better metrics among my annual plan customers!

Customers on an annual plan are likely to exhibit better metrics than customers on a monthly plan, if you already offer them. It's not that annual plans are good for retaining customers, but rather that your more loyal customers will opt for those plans, stay on your software for longer, and ultimately do better. Meanwhile, customers who are less confident in your product will choose monthly plans and likely churn more quickly. By thinking that annual plans will improve your metrics, you may be led down the wrong path by this self-selecting bias.

Benefits and Cons of Monthly Billing

Benefits and Cons of Annual Billing

Should We Stop Selling Using The Annual Subscription Model?

It has always been and will always be cash that reigns supreme. Moreover, rising Days of Sales Outstanding (DSOs) can be a nightmare that brings your business to a halt. If you’re not sold on this annual payment fallacy, you may want to at least consider reducing your discount or deemphasizing it in your go-to market strategy. Here are a few things to consider before you launch quarterly incentives for annual pre-pay contracts. 

1. You may be elongating your sales process

Working to have your sales team execute an annual commitment can lead to increasing levels of scrutiny and procurement involvement. Particularly in situations where you don’t have a robust free trial or freemium motion, this can lead to hesitation for buyers and allow time for fear, uncertainty, and doubt to creep in. 

Pro tip: Let customers into your product and allow them to get to value before you start asking for an annual commitment. Not only will this allow you to decrease the threshold required to get this commitment (e.g. going from a 20% discount to a 5-10% discount), it also may increase the size of the overall contract as they discover new use cases.

2. You may be undervaluing your product

It is common for larger customers to prefer annual plans because they simplify budgeting and invoicing. However, these customers may also be willing to pay more for your product.

Offering an annual discount to customers who are seeing the greatest value in your product is a surefire way to lose money. Those who would purchase annual plans at a discount are also more willing to pay. 

You should evaluate your discounting structure for annual plans to ensure you're not over discounting. In recent surveys, it was found that diminishing returns exist above 10% (for example, 30% of customers would accept a 10% discount, and only 33% of customers would accept a 20% discount). In order to get an annual plan, you can lower your discount or use other levers.

If you rely on contracts for 1-3 years, you may create the wrong habits

Providing value to customers is a must for companies with monthly plans. You have probably seen a support ticket or feature request from a big customer get escalated to your leadership team because "this customer is up for renewal in three months." Inherently, building the right habits around retaining customers in the long run is a result of creating the right habits of always providing value to customers across R&D and customer-facing teams. 

A pro tip: Build your customer-facing teams to focus on customer value consistently, not just in the three to six months before renewal. Churn issues don't go away in the last three months of a contract. It is possible to ensure that contract structures don't prevent you from building the right retention motion by linking OKRs and/or employee compensation to product usage metrics.

Billing Vs Invoicing | What's The Difference?

Billing vs invoicing... The age old question.

The terms invoice and bill are used interchangeably by businesses and customers. This is because both documents identify goods and services delivered to customers. 

These terms are 2 sides of the same coin, used by different parties in the same transaction

In this article we’ll go over the factors that distinguish bills from invoices. As well as their importance and use in business. 

This article will cover the following: 

When Is The Term “Invoice” Used

Invoice is a term used by a business looking to collect money from its clients. For example, after mowing your lawn a landscaping company will issue an invoice . 

When Is The Term “Bill” Used

Customers use the term bill to refer to payment they owe for goods and services. For example, the same invoice from the landscaping company would be referred to as a bill. 

What is an Invoice?

Invoices are commercial documents that summarize the amount due for services rendered. They provide customers details on the goods and services provided. 

Companies issue invoices after the goods or services are delivered. It's issued to request payment with a specified payment term. A Payment term describes the date on which the payment is due. Payment terms are necessary with invoices as cash is not received immediately. 

elabs invoice

Invoices provide businesses with a record of the goods or services sold. Companies use this information for record keeping & accounting purposes.

Invoice Components:

 

What Is a Bill?

Bills state how much money the customer owes the company. This document specifies how much a consumer owes for goods and services that he or she received. The statement shows the total amount the consumer owes.

Bill & Invoice - Key takeaways

Invoices and bills convey the same information about the amount owed as part of a business transaction, but an invoice is generated by businesses that provide services, while customers receive invoices as bills to be paid. This is just a matter of who is referring to the document. 

We can illustrate in this example. 

  1. A business renders a service to a customer, and issues an invoice.
  2. The customers receive a bill
  3. The customer pays the bill

Good accounting invoicing software will simplify payment collection.

An electronic billing and invoicing software like eLabs can make it easy to issue these documents and automate payment collection. Click here to book your demo and simplify recurring payment management for your business!

What is a Receipt

The invoice is used as a request for payment, whereas the receipt serves as proof of payment. Receipts serve as confirmation of payment for goods and services. As well as proof that the customer received what they paid for.   

What is a receipt, issue a receipt

Providing a receipt is not required by law. Yet, in almost all transactions businesses provide their customers with receipts. 

Companies issue receipts to their customers in either physical or electronic form. Brick and mortar storefronts usually print receipts. While e-commerce stores often issue receipts digitally.

It's time for security & alarm companies to aggressively embrace subscriptions.

Allow me to introduce you to your ideal customer — not just one of them, but an entire group that will redefine the long-term opportunity in the security market. 

They’re young working professionals, often under the age of 35. Their family income is usually over $100,000. 

And while they might initially buy home security systems or smart doorbells at retail, they are increasingly interested in subscriptions that offer access to premium services. 

According to the Home Automation Ownership & Usage Report from NPD Group’s Connected Intelligence published, 41% of consumers see subscriptions as a source of additional value after buying smart home security devices. It includes 24/7 continuous video recording (CVR), the top most-wanted service by 29%. 

A high-level look at security subscription service possibilities 

That may be just the beginning, however. 

NPD reports that 41% of people who subscribe to security services own five or more types of smart home devices, compared to 25% of non-subscribers. 

With more technology woven into the fabric of their everyday life, these customers are poised to explore new ways to protect what’s most valuable to them. It could include: 

Beyond the traditional desire to keep their family home safe, more consumers continue to work from home than ever before as companies introduce greater flexibility through hybrid work policies. It means they need to ensure laptops and other equipment are properly secured and make a multi-level security subscription attractive.

Subscription billing is not necessarily new to the security sector and is limited to consumers. However, growth will also come from businesses that want to achieve the benefits of optimizing building access control, network security and more. 

The tech foundation that successful security subscriptions will require

The challenge is that the increased market opportunity to expand into additional services will call companies to reevaluate how ready they are to provide an outstanding customer experience.

While the initial driver for subscriptions might be coverage across multiple devices, long-term loyalty will depend on how you treat customers at every phase of the journey. They will want: 

  1. Highly targeted, relevant promotions to make them aware of additional services — such as smart lighting, heating or network security, for instance — that could be added to an existing subscription.
  2. Frictionless capabilities to manage their subscription, whether adding new services or changing their profile.
  3. Quick and seamless access to customer support or any resources required as part of the onboarding process.

Companies without a subscription billing platform in place will need to devote considerable resources and effort to provide this kind of customer experience consistently and at scale. 

Those that make a move — and do so early — will be in a better position to differentiate themselves from competitors and enjoy a greater customer lifetime value.

Choosing the right partner for security subscription services 

However, when SecurityInfoWatch reported on the initial shift to security subscription services a few years ago, vendors reported difficulty setting up billing and provisioning systems for themselves and their channel partners. 

Those were basic subscriptions, while the opportunity in 2022 and beyond offers far more dynamic and flexible options demanded by tech-savvy customers. 

Choosing the right partner for subscription billing doesn’t have to be complicated. But, first, make sure the vendors you consider can answer questions like:

Ultimately, expanding the range of subscriptions for security customers ensures they stay current with the latest technology. It means less time and effort for vendors to replace existing customers with new ones. It will also bring more streamlined and efficient operations, leading to a better employee experience. 

The time to act, therefore, is now. Your ideal customers are waiting. 

Five Steps to Selecting the Right Subscription Billing Platform

The benefits of subscription-based billing are becoming apparent that almost anyone can start making a rock-solid business case. 

Recurring revenue, fewer late payments, a better customer experience — there are plenty of reasons to make the move. The problem is the business case is just step one of a long journey. 

This includes the time it takes to research options and select the right subscription billing platform. You can choose a system that is reliable, customizable, and scalable and still run into headaches. It is important to consider the broader impact that a subscription model will have on your company and to manage the transition accordingly. 

For example, in most organizations, many of the most essential business processes were established to support individual or one-time kinds of transactions. Entering the subscription economy could involve significant changes in technology but other resources needed to manage, including your team members. 

Consider the level of manual work that might be involved in managing data and serving customers before and after a sale. Automation brings incredible advantages, but only if it’s clear to everyone what the new workflows will look like, and where you’ll need to integrate your billing system with other sources of truth across your business. 

None of this should put you off from adopting a subscription-based billing system, of course. In fact, the keys to a successful implementation can be counted on one hand:

1. Clearly define your business model

Every successful IT project is a “before” and “after” story. In this case, you should begin by developing a comprehensive vision of what “after” will look like. This includes account types (e.g. commercial, residential, wholesale) and classes (e.g. currency, internal systems, tiers), and all the services subject to recurring billing. 

A critical part of subscription-based billing is the flexibility that it offers you and your customers in how services are managed and experienced. Beyond documenting the service’s name, value, and SKU code, think about the unique characteristics of each subscription.

For some services, for example, an annual bill might be more compelling than a monthly bill. Customers may expect you to allow proration so they can upgrade, downgrade or make other changes to their subscription at any time. 

Depending on what you’re offering or what your customer base will support, billing in advance will make more sense than billing backward. 

Subscription-based billing affects sales and your marketing strategy, where you might offer discounts or referral codes that need to be integrated into the experience.

How often will customers take advantage of their subscriptions? You'll want to charge different rates based on usage in certain cases, so it is important to understand the degree of variability in this area.

Regardless of how much you’re charging, there will be other differences in whether you’re billing at an account level or service level for a subscription, along with discounts and price tiers. 

Unless you’re a local business, you’ll need to be prepared to support payments in multiple currencies and all the tax compliance, exemption handling, and fees or levies that come with them.

Internally, a successful subscription billing system deployment will align with key accounts receivable (AR) handling processes. Review how you currently work with invoices, payments, adjustments such as credit or debit, interest, write-offs, and credit back. 

Finally, come back to the moment of truth for most subscription-based businesses: which is the payment. Take into account what your model requires in terms of credit card authorization, PAD/ACH setup, and check processing. Don’t forget to factor in late payment fees.

2. Identify if your existing accounting/enterprise is capable of delivering and supporting an in-house billing process

Offering subscriptions can be a huge catalyst for growth — but with growth can come unexpected trade-offs. 

Conduct a "Day in the life” exercise in consultation with your accounting team. What level of invoices do they typically handle versus the larger volume that a subscription model might generate within 24 hours? How will an automated payment collection system help them or allow them to focus on other activities? 

Beyond your team, examine what order creation and support systems are currently in place and how you’ll ensure real-time integration with the subscription billing system you’ve selected.

Given that many of these processes are tied to those with institutional knowledge, this is an excellent time to draw upon the internal expertise of your best people. Try to identify an in-house specialist who understands billing and who will help ensure you piece all the elements together as the project moves along. 

3. Look on the market for turn-key billing software or solution that will address your needs (SaaS or an enterprise system)

As mentioned earlier, this may be where some organizations start. But if you’ve gone through the previous steps, you’re in a much better position to make the suitable investment. Even here, though, there’s other homework to complete first. 

All companies have some kind of existing legacy technology. Review your existing solutions’ functionality and the features that will be affected by the move to subscriptions. 

Next, determine who will be the internal champion for this project outside of IT. This helps in having a single point of contact for feedback and encourages collaboration and buy-in across different stakeholders and lines of business. 

If you haven’t already done so, estimate your implementation costs along with your target go-live date for the new billing system. Expect the unexpected, though, whether it is changes to deadlines or hidden costs that spring up along the way. It is may be where you need to decide whether to hire consultants to assist with your deployment.

4. Decide if you are in a position to hire your own software development team to write custom billing software for your unique requirements

Build-vs.-buy is always a debate within companies, and subscription billing software is no exception.

The best way to figure out if a bespoke application is appropriate for your organization is to map out the full set of resources that are typically required and how that will affect your ability to reach the desired outcomes. 

It can take between one to three years to produce an initial release of custom subscription billing software. It will be a team effort that involves a project manager and developers and a data analyst, a user experience (UX) and user interface (UI) analyst, and DevOps engineers and testers to ensure quality.

The cost to create a system also needs to be balanced with what it will take to run the team that supports it annually. 

Longer-term, think about what it will take to retain any of these specialists because when they leave, you may not have the complete documentation of the billing system you need.

5. Engage with a reputable billing solution partner 

All this seems overwhelming, but it doesn’t have to be, especially when you recognize that you don’t have to go through this journey alone. 

The right partner can answer many of the key questions and address many of the considerations outlined in this post. As long as they have a proven track record and a deep level of experience, they can provide guidance based on best practices they’ve learned from supporting other customers in similar industries or contexts. 

A reputable billion-dollar solution partner can offer an enterprise-class system and provide the kind of customer support that maximizes the benefits of using it. Your move into the subscription economy will be as seamless as it is successful. 

9 Awesome Benefits of Online Subscription Billing Software

In the past few years, subscription billing software has become a staple of the modern business world. 

Managing recurring payments and subscriptions for your business' products and services is made easier with subscription billing software.

In this blog post, we will explore nine ways that online subscription billing can benefit your business.

  1. Easily track customer payments

Unless you use a subscription billing system, it can be difficult to keep track of customer payments. It is easy to track who has paid and who has not with online recurring billing software. As well, it helps to prevent subscription fraud and lowers the risk of late fees.

2. Time-savings

You and your clients will save time with automated recurring billing software. You will spend less time manually sending subscription bills or chasing down late payments with subscription management software. Subscription management software helps you track recurring invoices and send reminders to your customers. It also reduces the number of follow-ups because recurring billing software will do it for you.

3. Cost-effective

Subscription management software can save you money by automatically billing your customers. With recurring billing software, you can set up subscription fees using a customer's credit card. The billing software will automatically process subscription fees without manually billing customers. In this way, you will save money on subscription account management fees and keep your subscription assets organized and current.

4. Reduce subscription cancellations

With subscription billing systems, cancellations can be reduced. Recurring billing software makes subscription management seamless for your customers. With subscription billing services, you can easily track recurring payments. Furthermore, subscription management software will send reminders to your customers before their subscriptions expire, reducing the number of cancellations.

5. Flexible system

Subscription billing systems are flexible, and they can be used for a variety of subscription-based payment models. It can be deployed in verticals like SaaS, education, food and beverage, apparel, home and commercial security, and telecom. 

Subscription billing software allows you to edit subscription preferences. Fees, due dates, and durations can be changed on the fly! A client's subscription can be changed to a monthly, quarterly or annual plan, for instance.

6. Free from PCI compliance issues

One of the main benefits of subscription billing software is that it is PCI compliant. With subscription-based payment models, your business can comply with credit card security requirements by storing credit card information in recurring billing software rather than on your servers. Subscription billing systems also allow for greater control over how subscription payments are handled.

7. Easy to use

Subscription billing systems are easy to set up and manage, allowing companies to devote more time to other tasks. Subscription-based payment models are easy to use, allowing your customers to use subscription billing services easily as well.

8. Expand your business globally

With subscription billing services, you can grow your subscription base internationally. It makes a subscription billing platform an excellent option when working with companies in different countries. 

9. Get paid faster with recurring billing

When you use a subscription management platform to process subscription fees, you'll get paid faster since payments are processed on time. A subscription billing platform allows business owners to process subscription payments from anywhere in the world because the software can be accessed online.

Conclusion

With subscription-based payment platforms, you can increase revenue, decrease cancellations, and manage payments easily. A subscription billing platform reduces costs and increases profits. Subscription billing also delivers steady cash flow as payments are automatically collected from customers on a regular basis.

Learn more about how eLabs can meet your subscription billing needs. Talk to an expert.

There’s a New Subscription Billing Player. Meet eLabs! 

The subscription market is booming.

According to UBS, the global market will grow from roughly US$650 billion to US$1.5 trillion by 2025, implying a compound annual growth rate of 18%. 

As more companies see the benefits of recurring revenue rather than one-time transactions, subscriptions are becoming an increasingly attractive business model that generates steady cash flow and customer loyalty.

As we looked at the subscription market’s growth, we recognized a tremendous opportunity for eLabs to capitalize on the demand for billing technology that provides fast-growing companies with strategic, tactical, and financial flexibility.

Companies need a subscription billing platform that can seamlessly handle ongoing sales, promotions, new product launches, and onboarding customers and integrate with existing technology to succeed and establish a competitive edge.

That’s eLabs.

We have been in the recurring revenue business for more than 20 years working with small, fast-growing businesses and Fortune 500 companies. Our corporate roots are deep in the telecom sector, which has leveraged a subscription model for decades. 

When you think about telecom companies offering products like local service, long-distance packages based on time of day, length of calls, and countries, you can understand how they needed a robust billing platform.

After years of working with clients with complex billing requirements, we are incredibly excited to offer our flexible and scalable platform-as-a-service for small to mid-sized subscription-based companies.

Unlike SaaS solutions, our flagship product, BOSS40, is not a one-size-fits-all proposition. 

BOSS40 is flexible, supports different subscription models, automates critical processes, and seamlessly integrates with your existing workflows, systems, payment gateways, and legacy payment platforms.

It automates and streamlines high-volume and time-constrained subscription billing processing and delivers real-time visibility and predictability into the billing and collection process via custom dashboards and reports. 

So, what does BOSS40 deliver?

We’re focused on companies looking to upgrade their subscription billing capabilities. They are growing quickly and require a dependable, accurate platform that will scale as their business accelerates.

BOSS40 is an excellent solution for large companies looking to move into the subscription market. eLabs has the expertise, experience, and technology to seamlessly integrate with legacy enterprise systems like ERPs and MSPs. 

While the subscription market is big and getting bigger, it’s arguably still early days. Nevertheless, the subscription model is difficult to resist because it delivers financial reliability and meets customers’ needs looking for new ways to purchase products and services.

We’re excited about doing business in a market ripe with potential. Our deep industry experience and world-class platform make us the ideal partner for companies that want to seize a massive opportunity in front of them.

Learn more about how we can power your subscription billing.

Talk to an expert

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