Why Consumers Are Drawn to Monthly Billing
When you buy a car, the dealer usually prefers to negotiate on monthly payments, and many software companies are switching to subscription models instead of one-time purchases. Even though the monthly approach often means consumers end up paying more, they usually prefer it. Here’s why.
It’s Easier to Swallow
When you quote a lump sum price, such as $1,000, consumers need to mentally justify making such a large purchase. When the price is only $100 per month and you can demonstrate value, consumers can quickly decide that the payment fits within their budget.
Repeat Use Means Repeat Purchases
Studies have found that the more often consumers use a product or service, the more likely they are to buy it again. Monthly billing periods often help drive use.
On an annual cycle, the consumer might use your service less and less throughout the year. Because they’ve already paid in full, they might see additional uses as free and not using the service as not costing anything. When it comes time to renew, they may have stopped using the service or feel that they’re using it too infrequently to justify the lump sum cost to renew.
With monthly billing, consumers are more likely to make sure they use your service each month to get their money’s worth for each individual charge. This in turn makes it more likely that they’ll experience value and keep their subscription going.
Perception Is Reality
When it comes to pricing, consumer perceptions are reality, and most don’t think logically. If you do the math, $50 per month for 12 months costs more than $500 per year. However, many consumers don’t do this mental math and view the $50 payments as less than $500 all at once.
If you can help consumers feel they’re paying less while adding to your revenue, it’s an obvious move to make.
One final reason monthly billing works is because even when consumers do the math, a large one-time payment might be out of reach. An individual on a tight budget or a growing small business may not have the ability to make a large purchase, but they might be able to make the monthly payment work.
Offering a monthly billing option can put you within reach of more customers. And if you feel it might upset some of your existing customers, it’s not an all-or-nothing proposition. You can add a monthly billing option to your existing options to get the benefits of both pricing methods.