Should I charge more or less for monthly-subscription payment (vs the single one price)?

I'm building a software product that I will charge for X amount per license. Also, I want to give customers the chance to pay a monthly-subscription. Note: In both cases they will have access to the forum, downloads, etc, thus there is no difference in what they obtain.

Initially and assuming a yearly new release of the product, I calculated that the equivalent monthly price should be X/12. Then, I thinked... "If it is more financially safe and convinient to have the less money earlier ASAP vs more money later", then I should charge less (let say X*0.8/12) for the single payment to encourage that option, considering that some customers may cancel they subscription.

But, to my surprise, I've seen other software products that charge more for the single paymet vs the monthly subscription.

So... should I charge more or less for a monthly-subscription?

This question falls under how to do your budgeting and whatnot.

If you think as a company you can budget better on recurring cash flows, I would do that. If however you need to get more money up front to support development and whatnot, give incentives to encourage your customers to go that route.

The companies that charge more for single payments are generally looking at it as a way to discourage that payment option. Many business people would rather have a continuous flow of cash, so that they know what they have to work with on a monthly basis.

My company is in a similar situation. We have a client that really just wants to buy a perpetual license of the software we have created, but for us that will end up being a budgeting nightmare if we have a lot of clients doing that, so we have decided to only allow the user to pay yearly.

That might be a good way for you to go as well, but it's up to you.

This also depends on whether or not your monthly payments are contractual. If you want to secure a certain amount of money from each client, it would benefit you to give incentives to contract for a certain length of time.

I think you will find the answer you are looking for very much depends upon variables unique to your product and space: your customer base, the product itself, its price, etc.

The conventional wisdom from an accounting stand point is that a yearly subscription is more advantageous than a monthly subscription. That is because the cash for the subscription is captured up front, but the revenue is "recognized" over the course of the year. But I think the benefit of this is only relevant if it is compatible with your accounting model.

What I think you have grapple with is the price sensitivity of your customers. Some customers, purely from a psychological standpoint will find it much easier to pay $10 per month, rather than $100 per year, even though they would save money doing so -- simply because $10 is easier number to wrap their head around than $100.

Given that my answer to your question all hinges upon the cop-out response of "well, it depends," then here is what I suggest to hopefully get you pointed in the right direction:

Conduct thorough A/B testing.

What is A/B testing? For those that don't know, A/B testing is when you segment users into two groups. Group A gets presented with one option and group B with another. Then you compare your results to see which group tracked in a more desirable direction with regards to behavior, conversion or acquisition. This approach requires a scientific mind - not literally, but procedurally. Go into every A/B test with a hypothesis. Then be sure to segment your groups so that the conclusions you draw can be clearly correlated to a single variable (or two). Consider also to maintain a "control group" in which no variables change as a baseline. Then look at your results, see if your hypothesis was supported, and if not, try to ascertain why. Was the experiment flawed? Was there an error in execution? Is the hypothesis flat out wrong? etc.

So if your goal is to acquire more customers, and your question is "will the choice of a yearly subscription at a lower cost help me acquire more customers?" Then I think your A/B test, or experiment, will be pretty straight forward. Give some users the choice, and others the same choice they have today. Or perhaps your question is, "at what price will a yearly subscription become more appealing than a higher priced monthly alternative?" And so then it is all about trying out different price points and seeing how that impacts acquisition.

Both approaches are possible. So let's look at how you should make your call.

I consult on pricing to corporations [who often make big pricing mistakes :-) ], and my maxim is that:

The right price is the highest effective price So your job is to make the best judgement (by analysis, by engaging with customers and by split testing) how the following three factors play out.

Choice Having two ways to pay (regardless of the relation between the numbers) could be neutral, favorable or adverse in terms of conversion. That sometimes plays out differently between purely online sales on the one hand and sales involving personal interaction on the other.

According to what you find, you may either actively want to introduce choice for its own sake, or make annual payment a quiet option, essentially for customers who demand it.

Fairness / Fitness Effective pricing tends to be that which customers see as right. Ideally, this is seen as 'fair' - but the base test is better called 'fit,' because sometimes people know that pricing in this particular category / industry works a particular way, so pricing that fits the norm may be most effective.

So go through the exercise of working out how to present an annual fee that's each of the options (12xMonthly, <12xMonthly, >12xMonthly) as fair / fit.

Retention / Repetition Effective pricing will encourage loyalty - repeat purchases and long-term retention. Looking at your target market and their buying processes will tell you how monthly and annual subscriptions interact with those two factors.

Decision time Getting under these three factors may give you a single clear answer. More likely you'll find some tension. Then you'll be far better armed to make the judgement call - or to work out the final A/B test that will be decisive.

Take a look at Adobe's subscription plans: http://www.adobe.com/products/creativesuite/cssubscription.html From the point of a consumer (me), I'd rather pay month-to-month subscription for Illustrator for occasional jobs than the full price, since the license is so expensive. Even if that means paying extra for a subscription that I can cancel at any time.