Last week we talked about how important it is to price your product or service correctly. But that’s not all you need to know about pricing. Now you have to decide between charging your users on a regular basis, or laying your cards on the table and going with a one-time payment. There’s an easy answer, right? Nope, but I’ll try to make it less painful for you.
One-Off and Recurring Payments: Pros and Cons
Let’s look at this question from our perspective as software makers. It’s true that we could tackle this from the point of view of our future users, but since we are the ones who have to make a living out of this, let’s see what is more convenient for us.
|Recurring Payments||One-Off Payments|
|Cash Flow||Grows along with your business||Limited until next time you ask for payment.
Advisable in cases where you really know much you will spend
|Churn Rate||Requires more focus on retention and acquisition||Initially, longer retention
Can return slightly higher retention in the long run
|Failed Charges||Can always be a problem||Can always be a problem|
|Break Even Point||Slower than one-off payments||Faster than recurring payments|
First things first: Money. One of big pros of one-off payments is the fact that this method will boost your bank account in considerably less time than recurring payments. However, recurring payments have intrinsically higher conversion rates. If you opt for a recurring payment method, you will have to face the pressure of managing and spending your revenues to keep growing your business. You will find yourself allocating more to retention techniques, for instance, which isn’t so important if you choose a one-time option (or more spaced out payments – aka yearly payments).
No matter what periodicity you choose, you will have to test out everything: from the packages and tiers you are going to list, to discounts and ways of presenting your offers to make them more appealing to your customers.
You won’t come up with the perfect pricing in the first attempt. Instead, expect a process of test and learn, test and learn, eliminating mistakes with each iteration until you arrive at a strategy that works for you. This isn’t blind trial and error, but neither is it an exact science.
Initially, having a lump sum drop into your bank account seems like a pretty great idea. If you choose one-off payment though, that lump sum is all that you will get from your customers until the next time you ask for more money – if you do. Meanwhile, you still have repeating bills and overheads. I’m pretty sure that the initial costs calculation you might have done in your first month will differ a lot from upcoming months.
If you opt for OOP, your users will usually opt to keep using your tool. You’ll feel like a vendor, rather than a supplier – your software is something they own, and they’ll want to get their money’s worth.
Recurring payments make you feel like a service, and customers might feel like going somewhere else. The nature of your software has an effect on this, but if you choose recurring billing you’ll need to pay a lot more attention to retention and remarketing to retain customers. After the first month, you’ll typically begin to face escalating churn rates, marketing – in particular, acquisition, retention, and remarketing – will be a cornerstone of your business.
If you’re interested to see how churn rates can work out in a case like this, Tomasz has some great research showing annual renewals and monthly renewals with the same churn rate during 3 fictitious years, ending up with around -12% churn rate in the annual method.
Failed charges can kill your business. Failed charges are a fact, and you should be afraid of them. There are really great new products like Stunning that help you deal with failed charges, but nothing can eliminate them completely and you’ll occasionally end up with users that have not paid you.
With recurring payments, the chance of this happening is far higher but the individual payments are of course far lower. The shorter your periodicity, the more probability of credit card issues cropping up.
Break Even Points
Reaching the break even point of your business is essential: the sooner you get your benefits covering your costs, the better.
Reaching your breakeven point with RP will take more time if you don’t find ways to speed up your growth rate, because even though each customer lifetime value might actually be higher with RP, the money is coming in small increments. A customer who will pay you $10 a month for 2 years is actually worth $240 to your business – but only $10 to this month’s balance sheet.
What some companies are doing
Not so long ago, Microsoft was selling its star product, Microsoft Office – offering prehistoric but still useful tools such as Word and Excel – based on a one-time payment strategy. You bought the software, as if Microsoft was a vendor. But these days – in 2015 – Office has begun to be available as a service and is free on smaller devices.
Even other big gorillas like Google or Adobe have joined the SaaS models for some of their most valued products. SaaS with recurring revenue models have consolidated themselves in the market, to the extent that it’s now the default, but not all SaaS have to base payments on RP.
Jesse Mecham runs YouNeedaBudget, a tool that helps you to create a budget for your finances without any hassle – and without having to ever touch an Excel sheet. YNB is priced at an OOP of $60 USD. Whether you use it one day, or once a day for the rest of your life, you’re paying the same for it. I emailed Jesse to ask him if he thought that was a good choice, and here’s his answer:
If I were to start over again, I wouldn’t do the one-time payment option. I would likely do an annual plan. (…) Why an annual plan? First reason, it would lower the initial price, so more users would give our service a try and see that it really works for them. and 2) It would remove our needing to “gear up” for a big upgrade sale every 18-24 months. I’ve always found it to be a bit disingenuous that we hold back features that are ready so we can make a bigger splash (…) within the next upgrade (…)
I see the annual plan as a way to align the business interest with the customer interest, in that we are required to consistently deliver value (always selling), and the user is required to consistently evaluate the value they’re giving and receiving.
Basecamp is another case to pay attention to. A new user can choose from any of its recurring plans (starting from $20/month to $150/month) but at the same time, they have a pay per project pricing too.
They are conscious that their current users might be interested in using the same tool they use at their offices, but for their personal projects. So why not let them, and make profit from it by offering an affordable plan that fits budgets for personal use? Smart strategy.
Now it’s your turn. You have to take a decision based on the status of your product, available resources, and the way you expect customers to interact with your product.
Want feedback about your pricing strategy? Please reach out (contact info below). I’ll be glad to help you out!