Monthly or Annual Subscriptions? Or Both?

I wanted to know what people's opinions were on monthly versus annual subscriptions. If I did go with annual payments it would offer a discount over the month-to-month costs for the year.

Anyways, does anyone see disadvantages to offering a yearly plan or is it better to have recurring monthly revenue versus recurring annual revenue. Is it better for a company to give customers more pricing options or less?

EDIT

I wanted to say thanks for everyone's input, it has been invaluable and has given me a lot of perspectives. As of right now, I plan to go with a monthly plan that users can opt-out of when they want. If it makes sense, I can add additional payment options like yearly or quarterly.

In my opinion, even with the reduced revenue from a discount, there are several potential advantages to the yearly plan:

1) The customer commitment - you've essentially locked them up for a one year term which reduces potential churn.

2) Since you've received the payment in advance - all of the funds are available immediately and no potential collections issues.

3) Save costs on monthly invoicing.

Having an annual payment requires a little more discipline on the accounting side if you have recurring monthly costs associated with those accounts. Otherwise, if you business model supports it, I would definitely offer an annual plan.

I used to offer an annual plan option. I got rid of it, though customers can still opt into it by contacting me. Why? Two reasons:

1. It's giving away money. Offering a discount for annual payment leaves money on the table. Of course, you don't have to offer a discounted rate.
2. Attrition rate is higher. I probably lose twice as many customers to attrition on the annual plan vs. monthly. One of two things will happen: their credit card will expire and they'll not renew, or they'll see that big charge coming up and start looking at my competitors. The monthly payment is a nice, gradual trickle of money, but the annual payment is something they really have to budget for, and sometimes even get approval.

In my opinion, I would offer monthly subscriptions as the default. Don't even bother offering a yearly discount. If you go yearly, you are limiting your options in the future to expand your customer base.

Monthly Pros

• Less risk for the customer could lead to more conversion
• Ability to offer a free trial, which is no risk for the customer and could convert to paying sales
• Make customers happier by offering the ability to leave at anytime without having to issue a refund
• More evangelical customers because the unhappy ones will leave
• Less sales work on your end
• Ability to build a referral system (because you can give away free months)

• Get upfront revenues to fuel your growth
• Lock the customer in for a year (could also be a negative from the customer's perspective)
• You wouldn't need to build automatic billing for at least a year

I'd say go for both, and maybe even quarterly, if it's not a hassle, but the responses you'll get will depend on the nature of your service and the price point.

For instance, I use some business software with a support license that I could pay monthly, quarterly, or annually. Since there's no question of me wanting to drop it, and the annual cost isn't too high, I'm happy to pay it annually and not have to bother with more frequent payments.

On the other hand, I also study martial arts at a dojo where you can prepay monthly, quarterly, semi-annually, or annually, with increasing discounts for the longer terms. The monthly cost is about $250-300, so even with the discount, you can imagine an annual payment is kind of a blow to the wallet. Also, I've occasionally had to drop out for months at a time due to work or other reasons. So I've decided it makes more sense to do it quarterly.

1. Consider offering a free product to increase the size of your total funnel.
2. Totally agree with SteveD's point, the LTV of annual subs tends to be different than the life-time value of monthly subs.
3. Consider highlighting the annual option at a discount but also offering a monthly option.
4. Watch out for the paradox of choice. I tend to disagree with jimg...too many options can confuse customers. Seems like many great internet subscription businesses rely on 3 pricing plans (not including a free trial).

I never choose the yearly option unless it's a domain name of which 1 year is the minimum. You're saving money on a yearly plan, but you have to front more cash upfront and a lot of people can't afford to pay large amounts of cash upfront even if they're getting a discount in comparison to the monthly plan.

I pay by the month because it's the most sensible option in terms of hosting and web applications that I might not need in a couple of months time. If I paid for a service for a year and discovered a better app 3 months later, I just lost 9 months worth of cash and any choice of moving to another service.

Monthly plans give you flexibility and choice. Some prefer yearly plans as well, so why not offer both? It can't harm your business.

IMHO, better to add more options than less. If you haven't been in business long, 1 year could be considered a risk. Hosting companies typically offer month, quarter & annual plans (with discounts of 0, 3% & 15% being typical).