If you looked to buy any software for your business since 2011, there is a great chance that you looked at a product or service that is offering you a subscription in order to use it successfully. A lot of the time, that subscription comes in two variants. Monthly with the option of canceling at any time or annual subscription with cancellation happening after the first year.
You also must have seen that companies are offering some sort of discounts if you take the annual subscription. By this point, you may have thought to yourself: “Of course they are offering a discount. They want to make me take the annual subscription and make more money off their clients”.
But is the sole reason for annual subscriptions to make more money or is something else behind it? Let’s dive deeper into this topic!
Discounts explained
SaaS as a competitive market is often offering discounts for their products. Those discounts can be immediate ones in the case of monthly vs. annual subscriptions where you would usually get a month or two for free. Or, you could get discounts from the salesperson selling you the solution.
Let’s have a look at the next situation when you are buying a product:
| Monthly license cost: 1000 USD Yearly license cost: 10.000 USD Monthly license after 15% discount: 850 USD The yearly cost of that monthly license with 15% discount: 10.200 USD |
On the other hand, if you purchased an annual subscription, the situation would look like this:
| Annual license after discount: 8500 USD |
When buying a monthly subscription with a discount, you are also losing money.
If you took an annual subscription you would already get a discount of 17%. On top of that, you could still maybe get that 15% discount. As explained above, the company you are buying from is not going to lose money.
So, in total, you are getting a 30% discount with an annual subscription instead of the 15% you looked for.
Security and risks
As you probably know by now, SaaS companies are running all the software on their servers. Thus, all you need is an internet connection and a web browser to use those types of products.
Although software companies are very focused on the security and reliability of their services, sometimes bad things can happen:
- There can be a bug that is preventing you from using the product to its fullest.
- Sometimes the whole server is down and you can’t even access the product you are paying for.
- Data can get lost or worse, stolen.
As StatusCast reports:
“Most SaaS companies will promise 99% uptime, many will even promise 99.9% uptime. However, on average, companies continue to experience 12 incidents of unplanned application downtime every year, each of which lasts 1-2 hours if it’s a critical failure and gets immediate attention, or more than 3 hours if it’s non-critical.
To be clear, 99.9% uptime still allows for more than 8 hours of downtime each year, but usually, this is meant to cover scheduled maintenance, stress testing, disaster recovery testing, etc.”
As a paying customer on a monthly license, there is a great chance that you haven’t signed a contract. Or, you may have accepted the terms and conditions valid at the moment of paying for the service.
Opt for a contract, even on a monthly license
If something happened, you would not be as secure with the monthly license as you would be with an annual one.
Hence, your contract should clearly note what happens in different cases. For instance, situations like not being able to access the product or having your data disappear.
Say you have a monthly license without a contract and face such an issue. You could contact the support department of the company. Hopefully, the problem is not that big and can be resolved. But, you can’t do much from the legal side.
So, even if opting for a monthly subscription, ask for a contract. That contract will not usually tie you in a way that you can’t cancel. But, it will give you the right amount of security and the ability to mitigate the risk of using the system.
If you want to read more about covering the security and risks in SaaS contracts, you can check out CSO’s article about best negotiation practices.
The long-run: annual subscription benefits
SaaS companies will always count on you for the long run. With the development of customer success and customer support roles, you are in a more favorable position than ever before. The reality is, the customer is the king.
1. More value for money
As said in Profitwell’s article, the average rate of cancellation of subscriptions is around 5-10%. What does that mean for you?
There is a great chance that you will use a system that you are buying for at least 10 months. You should keep this in mind if you are opting for a monthly subscription.
As explained earlier, annual subscriptions mean you are usually paying for the 10 months and getting the twelve months. Hence, opting for the monthly subscription due to the freedom to cancel it anytime means you could actually be overpaying the service.
2. Partners over vendors
In today’s world, no one is buying software or a product without having a problem that needs to be solved.
Because of that, SaaS companies know that they are not just another vendor for their customers. Rather, they are acting as complete partners or sometimes even as subordinates to their customers. Their goal is to truly help you and make your business better.
The unique thing here is that the success of a SaaS company is relying heavily on the success of their customers’ companies.
Bear in mind here that you are starting a partnership, not just buying a product.
3. Future features at today’s price
On top of that, SaaS companies usually have a roadmap of features and upgrades waiting to roll out to make your experience even better. Upgrades or some new features, depending on the package that you take, are included in the price you paid.
So, you are not just paying for today’s software, but everything that will come in your time of using it is also included.
The worst thing you could do here is to take a monthly license and then cancel it and take another. While you are using the system you get all the upgrades. But if you cancel and buy it again, don’t be surprised if the license is suddenly 20-30% more expensive because of all the things added to a product.
Don’t forget to think about the future. Ask what is going to come and if this software may be even better in the future, but at today’s price.
How to get the most out of a free trial
You are taking a monthly license for the main benefit of being able to cancel anytime.
But a lot of companies today are offering free trials. Usually lasting from 7 days up to 30 or more, they give you the ability to test everything free of charge. With the right preparation, this gives you more than enough time to evaluate if it fits the bill and opt for an annual subscription.
When choosing a restaurant for a date, you are probably going to google every single thing about it. When you finally choose one and go there, you will probably know more than the waiter working there. You would be surprised how many people are not doing this kind of preparation when buying software that can transform their company.
Key preparation tips
Don’t get pulled to a million free trials being offered to you. Here’s how to get the most out of free trials:
Start with the requirements list
Talk to people in your company that will use the software, analyze your business process, talk to the people you know from your industry that have solved similar problems.
Based on that, create a list of things that are important for you to have in the product you are looking for.
Research the market
Google everything. Find the list of potential vendors and pull out their features from their websites. Compare everything that is important for you.
From that list, choose a couple of vendors (not more than 5) that seem most appealing to you.
Write the use cases
A use case is a set of actions that you need to perform in software that will get you to the desired outcome. Adapt those use cases based on the differences you see from the software you have shortlisted.
Start your trial
This is the step where you are finally asking for a free trial. Usually, people take the free trial first and then spend the next 7 days confused about what to do with it. You, on the other hand, now know exactly what you’re looking for.
Test everything
Based on your use cases, try out all the features.
Mark the ones that are not good or have not passed your test.
Contact the salesperson
Don’t be afraid to talk to the sales of the company. A modern SaaS salesperson is probably wired to help you and not trick you into buying the things you don’t need.
Don’t forget that if you cancel anytime before the 10-month mark, the company is losing money. This is a unique time where a salesperson is absolutely forbidden to trick you. On the contrary, they are more trained than ever to help you.
Go through the use cases that did not pass in your test and see if there is a solution to that. If so, have the salesperson demonstrate that to you.
Finally, negotiate the best deal for an annual subscription
With this type of preparation, seven days are more than enough to test everything and to make sure you are not making a mistake when choosing the exact software.
After you have all this sorted out, it is time to negotiate on the price and get that best deal of an annual discount, knowing that you are not going to cancel and that you are getting a much better deal.
And there you have it. Armed with these tips, you can test the ins and outs of any tool to decide if it’s the right choice for your business. While you’re at it, get the best deal possible.
To sum up on the monthly vs. annual subscription dilemma
There is a common misconception about annual contracts being the way companies tie you in and make money off of you. In reality, it is as far from the truth as it gets.
Here are the main takeaways from this blog:
- Annual contracts are truly much more valuable than monthly subscriptions with companies averaging a minimum of 10 months of software usage.
- Even if taking monthly subscription plans, always look to sign the contract so you can protect your company from anything that can happen. In contrast, annual contracts usually let you opt-out if the service is not being provided.
- Always plan to use the software or be with the vendor for the long run. It is a situation where both parties benefit most and you can really feel the impact of the software you are paying for. You are not just buying today’s software, but also buying the whole roadmap of features and benefits ahead.
- Invest more time and preparation in buying the system and don’t take the free trial for granted. Know what to look for and be ready to test everything important in 7 days.
- Talk to the salespersons. They are really trying to help you because they will directly lose money if they trick you and you cancel the deal.
- And most importantly, take the annual license because you will build great relationships with the vendor and they will help you to get the biggest return of investment possible. If you succeed with their product, their company also is succeeding and that is more important than ever given the number of SaaS companies opening on a yearly basis.
Ready to utilize these tips? Book a demo with Determ so we can grow together and help you make the right business decisions with relevant real-time information.
P.S. Don’t forget to prepare well! 🙂