Monthly vs. Yearly Pricing: An Analysis
One of the most difficult decisions a subscription business faces is figuring out how to price their product or service. This can be especially challenging when you offer both monthly and yearly plans for the same product. Set the yearly price too low and you could end up missing out on a lot of revenue down the road. Set it too high and the customer will have no incentive to commit to a longer term and may churn earlier than expected.
Recurly Research set out to find what are the most common pricing discounts offered in each industry for a product offered on both a monthly and yearly plan. We looked at over 2,000 different product/service offerings and calculated the first quartile, median (second quartile), and third quartile of their Discount Rates.
We used this formula to determine the Discount Rate, with M equal to Monthly Price and Y equal to Yearly Price:
For example, if Merchant X offers a product at a price of $10 per month, and the same product at $120 per year, there is little incentive for the subscriber to sign up for the yearly plan since they won’t be receiving a price incentive by doing so. However, let’s say Merchant X sets the yearly price at $108. Now the subscriber is getting a $12 discount, or 10 percent, for paying for a year upfront.
This allows Merchant X to have the subscriber locked in for at least one year, whereas that same subscriber on a monthly plan could have churned within the first year of their subscription. For example, if the subscriber churned six months into their subscription, Merchant X would only net $60 rather than $108.
Here is a breakdown of Discount Rates in each of the major subscription industries:
The data above shows that the industry in which you operate can greatly impact what amount of yearly discount is commonly offered. In general, all the industry medians fell between 10-30%. Offering a discount above 30% would seemingly devalue the incentive to sign up for a monthly plan, and a discount below 10% would offer no motive to sign up for an annual plan.
The most common Discount Rate across all industries was 16.7%. We posit that the reason for this is the prevalence of merchants setting their yearly price equal to ten times its monthly counterpart.
Monthly Price = $5
Yearly Price = $50
Discount Rate = 16.7%
This can be interpreted as the equivalent to giving a monthly subscriber two months free by signing up for the yearly plan.
As we dive deeper into the actual industry results we find that the Education industry offers the highest discounts to its yearly subscribers by a substantial margin. This is most likely due to seasonal summer churn that is common in this industry as a result of most students not being in school. Similar cyclical results are seen in the OTT industry, as significant numbers of signups are driven by live, seasonal events such as sports or awards shows.
Looking back at our churn benchmarks, we can see that those industries experiencing higher churn tend to offer higher Discount Rates. For example, Publishing/Entertainment has one of the lowest churn rates across all industries and also offers lower Discount Rates compared to most other industries. On the other hand, we see high-churn industries, Education and Consumer Goods, offering the highest Discount Rates compared to all industries.
Pricing and discounting are common elements that prospects and subscribers use to evaluate a subscription product or service. Understanding how your subscription business’ monthly vs annual prices compare to the peers in your industry gives you a measure against which to gauge these elements.
For more Recurly Research, visit this page. And look for upcoming blog posts with additional data and trends analysis from our Recurly Research team, such as how churn and geo location can impact pricing decisions.