Introduction
The fine print in the image above. Read it carefully. That’s why this article is written. That small print = major impact. Choosing a monthly vs an annual subscription, one can be either a great, or a terrible financial decision.
Unlike with other kinds of software, you don’t usually pay a one-time license fee to purchase a SaaS solution. Instead, SaaS software is only available on a subscription basis. Within a subscription model, there are two common payment plans – monthly and annual.
While the subscription model brings a wide array of different benefits to the table, the truth is that it can also be a bit of a headache – particularly for professionals who might not be that well-versed in the SaaS world. Both monthly and annual models have their advantages and disadvantages, which means that there’s not a clear-cut answer to the question of monthly vs annual subscriptions for SaaS software.
To help you decide which subscription model works best for your business, we’ll break down monthly and annual SaaS subscription models below. We’ll go through each model’s main pros and cons so that you can make your own informed choice.
Key Points
- There are two main types of SaaS subscription models – monthly and annual. With the monthly model, you pay a fixed fee at the end of each month. With a yearly subscription, you pay a smaller fee – but in a single upfront payment.
- The main advantage of the monthly subscription model is how flexible it is – if you’re not making the most out of your SaaS software, you can stop paying for it the next month. Unfortunately, monthly subscriptions are more expensive and harder to manage than yearly subscriptions.
- The biggest pros of annual subscriptions are (a) their reduced cost compared to monthly subscriptions and (b) how easy they are to manage. However, they’re not ideal for new companies that are figuring out what their software landscape looks like.
- If you truly want to ensure that you’re getting the best bang for your buck, use a SaaS management platform to make data driven decisions and decide what kind of SaaS subscription is best for your business.
SaaS Subscription Models: Monthly vs Annual
Before delving deeper into the differences between both subscription models, it’s worth spending some time clarifying what actually constitutes a SaaS subscription. Put simply, a SaaS subscription is a way of purchasing online software by which payments are made periodically instead of on a one-time basis. And another area where SaaS subscriptions differ from the traditional model of software purchasing is hosting.
Traditionally, companies bought software licences and installed the applications they’d just bought locally. With SaaS, it’s the complete opposite. All applications and services are hosted by the vendor and delivered online. SaaS software can be accessed through an app or a web browser. This is all thanks to cloud computing, which has improved the flexibility and availability of software products to an unimaginable extent. Apart from the rights to use the software, SaaS subscriptions (as detailed in the contracts) also include the following perks from the provider’s end:
- Updates and patches to fix vulnerabilities, add new functions and improve the software’s efficiency.
- Software maintenance, error tracking and debugging.
- Customer support to resolve the customers’ queries post-sale.
Now, let’s discuss the differences between the monthly and the annual subscription models for SaaS.
Monthly subscription models for SaaS – the pros
With the monthly subscription model for SaaS, you pay a fixed fee at the end of every month. This kind of subscription usually renews itself on a rolling basis – unless you unsubscribe, you’ll be charged the exact same fee every month without having to confirm that you want to go on using the service. Because monthly SaaS subscriptions are very popular, the vast majority of SaaS vendors offer them for their products.
Here are some of the main advantages of the monthly subscription model for SaaS software:
Growth adaptability
One of the things that set start-ups apart from other kinds of companies is that they’re more likely to achieve rapid growth out of the blue. Just take a look at some of the fastest-growing companies in the last few years – such as the web dev start-up Stackblitz, which has seen a 2,800% growth in the past 5 years. And then there’s the example of the Danish virtual learning company Labster, which has grown 600% in the past 2 years thanks to the rise of remote learning.
What we mean by this is that growth can be very unpredictable. And you want to be prepared for a scenario where your company suddenly begins to take off. Being prepared entails having the right tools to grow sustainably, which can be hard to accomplish when you’re tied to stifling yearly contracts for SaaS solutions that no longer suit your business requirements.
So, if you hope that your company is about to take a big leap, you might want to look into monthly SaaS subscriptions. That way, you can scale up your software options if your requirements change drastically overnight. And this also works the other way around – if your business isn’t growing as fast as you expected, you can lose some deadweight by getting rid of unnecessary SaaS subscriptions.
Flexibility
Without a doubt, the biggest benefit that the monthly SaaS subscription model brings to the table is flexibility. For example, let’s say that your company is venturing into a new niche. You have a clear idea of the services you want to offer, but you’re not that sure about the software you need to use to get from point A to point B.
In this scenario, you always want to go for a monthly SaaS subscription. If it turns out that the SaaS software isn’t quite right for your business, you can opt out of your subscription and try a different application. And because you’ll only have paid for a couple of months, it won’t be a heavy burden on your finance books.
Monthly SaaS subscription models – the cons
For all of their benefits, the monthly SaaS subscription model also comes with its fair share of negative aspects. Here are some of them:
Higher cost
The biggest negative of the monthly SaaS subscription model is that it’s not as financially convenient as the yearly model. On average, a monthly subscription will cost you around 20% more than an annual subscription. This might not seem like much money on paper, but if your company subscribes to dozens of different SaaS services, that 20% can end up being thousands of dollars at the end of the year.
Harder to manage
Have you ever signed up for a free trial for a streaming service and forgot to unsubscribe before your paid subscription kicked in? Well, it’s the same thing with SaaS software. Because monthly SaaS subscriptions are automatically renewed at the end of every month, it can be hard to stay on top of all of them and ensure that you’re not paying money for software you’re not even using.
A good idea to minimise unnecessary spending is to use a SaaS management tool like Quolum to automatically track your SaaS usage and make sure you’re only paying for the services you’re using.
Now, let’s have a look at the yearly subscription model for SaaS software.
Annual subscriptions – the pros
As the name suggests, annual or yearly subscriptions work differently than their monthly counterparts – instead of paying a fixed fee at the end of every month, you pay a one-off fee every year for the right to use the SaaS software. Annual subscriptions are ideal for established companies that know exactly what kind of software they need. However, they can put off newer companies that might still be trying to figure things out.
Here are some of the main benefits of the annual SaaS subscription model:
Low cost
Because you are required to pay for a full year upfront, annual SaaS subscriptions always come with a substantial discount compared to the monthly model. This is particularly helpful for companies with enough cash flow to pay for an annual subscription in full.
Custom contracts
Certain SaaS developers offer custom contracts for clients who pay for the entire year upfront. For example, a client can ask for tailor-made features or priority support options. This a win-win situation for both vendor and buyer – the former wins a loyal client and gets all the money upfront, while the latter gets a better product.
Increased convenience
Signing up for an annual SaaS subscription will lift a heavy weight off your cash flow management. Unlike with a monthly SaaS subscription, with an annual model, you don’t need to constantly review your usage data and decide whether your subscription is worth keeping. You’ll only have to go through the re-evaluation process once a year, which makes managing your budget a lot easier. Of course, this can also be a downside if your business gets stuck using a larger plan than necessary for a whole year.
Annual SaaS subscription models – the cons
It’s clear to see that annual SaaS subscriptions can be very convenient for established businesses. But are they for everyone? Not quite. Let’s see what the main negatives of the annual SaaS subscription model are.
Lack of cash flow
Setting up a new company is a difficult process, especially when it comes to deciding which software you’re going to use. Most companies pick their staple applications via a trial-and-error process. They’ll spend a few months using a SaaS service – if it turns out that it’s the right one for them, they’ll keep it. If not, they’ll unsubscribe and move on to the next available option.
The issue with annual SaaS subscriptions is that there’s no trial-and-error option. If you sign up for a yearly subscription, you’re stuck with it (and with the financial burden it represents) for the next 12 months. That might not be a problem for tech behemoths with millions of dollars to spare. But for a small start-up trying to make ends meet in a competitive environment, it can be a fatal financial blow. It also means that SaaS contracts need to be carefully reviewed before they’re signed, which can be extremely time-consuming.
Perhaps more importantly, paying for a yearly subscription upfront can potentially damage your company’s cash flow – which in turn might hamstring your business plans for continued growth.
On the other hand, sellers love the cashflow gains from an annual subscription. Check this thread out for some example!
Forgetting to cancel can be very costly
Forgetting to cancel a monthly SaaS subscription can be annoying, but it doesn’t come close to the price you’ll pay (quite literally) if your annual SaaS subscription is automatically renewed. As with monthly SaaS subscriptions, you can easily remedy this by using a SaaS management platform take care of your subscriptions. That way, you won’t have to worry about the cost of forgetting to cancel your subscriptions.
More and more companies are looking for ways to cut costs now as investor funding dries up and the world enters a recession. Thus, sticking to monthly subscriptions you can shed within a month if necessary can be a wise measure for many larger businesses that are looking to stay lean throughout the next few years.
It doesn’t help that cancelling SaaS tools can be notoriously difficult.
Manage your SaaS subscriptions effectively
As you can see, there’s no one answer when it comes to choosing monthly vs annual subscriptions for SaaS software. In the end, it all depends on the kind of business you run or work for and on your available cash flow. One thing is clear, though – whatever subscriptions you decide to go for, you should always rely on a SaaS management tool to take care of them.
At Quolum, we have developed the only SaaS management platform available on the market. Quolum will empower your SaaS buying decisions while taking away all the stress and all the unknowns.
But how does it work?
Let’s say that the renewal date for one of your SaaS subscriptions is coming up…
- The SaaS management software will track all of your employees’ usage of their SaaS software. That way, you’ll be able to calculate the ROI of your SaaS products. Your power users- Get them an annual plan. Everyone else can be monthly.
- But when do you analyse that? Well Quolum shares reminders for you, as it ingests all your contracts and tracks this data for renewals.
- In fact, we can even take care of the negotiation side of things for you – so you can rest safe in the knowledge that you’re always getting the best bang for your buck!
- Basically, you’ll be making smart business decisions based on accurate, in-depth data. Our customers are already saving an average of 30% on their SaaS expenses.
It’s a no-brainer. To learn more talk to a savings expert today and see with your own eyes everything that Quolum can do for you.
Frequently Asked Questions (FAQs)
Are yearly subscriptions cheaper?
Yes, they are. As a general rule, annual SaaS subscriptions come with a substantial discount to offset the economic impact of having to pay for them in one go. On average, this there’s a 20% price delta between a monthly subscription vs an annual one.
Is it better to pay subscriptions monthly or yearly?
It’s very context specific. If you manage a new company and you don’t really know which software you should use, go for a monthly subscription. If you run an established company and you know exactly what software you should be using, choose an annual subscription.
How does a yearly subscription work?
With a yearly or annual SaaS subscription model, you make a single payment for the rights to use a SaaS application for 12 months. Usually, yearly subscriptions also work on a rolling model – meaning they’ll be automatically renewed at the end of the period.
What is a SaaS subscription?
A SaaS subscription is a kind of online subscription that gives you the right to use a Software-as-a-Service (SaaS) product in exchange for a monthly or annual fee. A monthly (or annual) Zoom subscription is an easy example.