How Consumers Respond to Billing Cycles

It’s no surprise that churn rates for businesses that use recurring billing models tend to spike in synchronization with billing cycles. If a customer has been considering cancelling a service, nothing will prompt him or her to make the decision and take action like receiving a bill. Since even minor changes in retention rates can have a significant impact on revenue, it’s important to consider how consumers respond to billing cycles and what a business can do to reduce churn.

Subscription Based Sticker Shock

Although billing cycles come in various lengths, most businesses simply make a choice between monthly billing and annual billing. Both have pros and cons for the business, but from the buyer’s perspective, the single most important factor will be the perceived price. One of the major advantages of subscription billing for churn management is the perception that prices are lower, as what would otherwise be a lump sum charge is instead spread out into smaller payments. Choosing an annual billing cycle can negate this and may undo the customer’s perception of value received.

Customer Loyalty and Promise of Service

On the other hand, some customers respond positively to annual billing cycles and feel that they are being guaranteed a certain level of customer service. This is particularly applicable to B2B sales, which are already predicated on establishing and maintaining relationships between buyer and vendor. In this case, some customers may believe that a monthly billing cycle implies a lack of long-term commitment to their needs or may indicate the potential for a sudden price increase.

High-Value Services

Somewhat paradoxically, a customer’s perception of sticker shock for longer billing cycles may actually decrease for the most expensive services and products. This is particularly true for SaaS (software as a service) companies that regularly sell software plans with final costs that reach six or seven digits. In circumstances like this, customers may view an annual billing cycle as a price guarantee, despite the large lump sum required each year.

Choice Matters

In the end, which cycle a customer prefers may be less important than the fact that they’re offered a choice at all. Studies on churn rates and retention have consistently shown that the most important variable from a customer’s perspective is that they’re able to decide on their own how and when they prefer to be billed. Above all, customers want to be presented with simple, easily understood options. They shy away from any billing plan that appears complicated or attempts to “hide” unwanted charges.

As with everything, we strongly recommend testing your pricing and pricing pages.

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