You found new software, it’s free to try for a couple weeks, and it turns out to be perfect. All you need to do is to close the deal and pay.

Here there be dragons. You're signing up for a subscription, something you'll pay for over time. It's something you want to get right. Yet every part of the process feels confusing enough to throw you off.

It’s hard enough to decide which plan has the features you need. Then price. Is the $20/month what you’ll really pay?

After starting out as a way to get a discount for long-term commitment, most software subscriptions today default to annual pricing—with month-by-month plans available for the full price. But that’s not what’s shown on the pricing page. Instead, most SaaS pricing pages show the average price per month when billed annually. You see $35/month, but when you go to pay, you’ll actually pay $420 for a year upfront.

Or, less commonly, software will offer monthly billing, but with a year commitment to continue paying every month. Cancel early, and you’ll be charged for part of the remaining subscription.

Worse, there’s little standardization. How much will you be billed today, how much will annual pricing actually save, and what happens when you cancel early? We decided to check and surveyed 100 popular SaaS tools to build today’s definitive guide to annual software pricing.

How common are annual discounts for software?

Over half of software subscriptions offer annual discounts—and just over 10% require annual contracts.

When Salesforce first pushed web apps and subscriptions as the future in 2000, its CRM cost $50 a month, billed each month. The price went up to $65 the next year (and stayed there until 2016), but something interesting changed in 2011. That’s when Salesforce began requiring annual plans.

Over the past decade as software prices went up 62% on average, annual subscriptions became the new norm. Most software still lets you pay month-by-month if you want. But the majority show annual plans by default.

Discounts make the hefty upfront price of annual subscriptions a bit easier to stomach. And they’re common. If software lists pricing (as 85% of the surveyed tools do), 52% offer annual discounts. Another 12% require annual subscriptions (including Salesforce and many HubSpot and Adobe Creative Cloud plans), no discount needed as that’s the only option.

The software that’s least likely to offer annual discounts includes services billed by usage like Twilio or Amazon AWS, and those where your plan will change frequently including newsletter apps like MailChimp.

Perhaps it’s not the discounts that you need to watch out for, but rather the software that is only available with annual contracts or that doesn’t list pricing. Combined they account for over 25% of the market we surveyed—and are growing more common as software goes up-market.

Annual Discount Stats:

• 52% of software with listed pricing offers with annual discounts
• 12% of software with listed pricing requires annual plans
• 15% of software doesn’t list pricing
• 6% of software offers annual contracts paid each month

What’s the average annual discount for SaaS?

20% off annual plans is average.

How large of a discount would it take to get you to buy something different? A few cents off a common grocery store purchase might sway your choice, and buy-one-get-one-free might get you to buy something you didn’t intend to purchase.

Subscription software on average offers a 20% discount if you pay annually, though annual discounts can be as low as Box’ 5% or as high as Grammarly’s 61%. The most common discount is two months free, something over forty percent of apps offered. And if there isn’t an annual discount, ask—at least four of the products we checked say they offer discounts through sales, but don’t list how much.

What you have to watch out for is that annual pricing is typically the default pricing shown. When a percent discount is advertised, it’s likely already included in the price shown, and you’d pay that much more if you decided to not pay annually. And if you do want to pay monthly, those plans are often somewhat hidden.

Annual Discount Percents:

• Average SaaS Annual Discount: 20%
• Most Common Discount: 17% (2 months free)
• Smallest Discounts: 5% (Box and Algolia), 10% (InVision, Harvest, Zeplin, FreshBooks, Hotjar)
• Largest Discounts: 61% (Grammarly), 50% (Expensify), 44% (ClickUp), 33% (Adobe Creative Cloud and DocuSign)

When will you pay for annual software subscriptions?

Once a year.

Creative Cloud, Expensify, and a few other products offer discounts with annual commitments but monthly billing. You sign up for a year but still pay once a month for the software.

That’s the exception. 92% of SaaS that offers annual plans charges once a year for your entire plan. Say you want to buy Slack’s Standard plan for 50 people with the annual discount. That costs $6.67 per user per month, so you’ll pay just over $4,000 today—then that much again next year upon renewal.

What happens when you downgrade your plan or cancel your account?

Half of SaaS changes your plan at the end of your billing cycle. Another fourth changes it immediately and credits you for remaining time on your former plan.

When you pay for software each month, canceling is easy. At worst you’ll forget to cancel until right after your plan renews, and will have paid for a few weeks' more usage than intended.

Annual subscriptions put more at stake. Say you buy an annual subscription today, then four months later decide you bought too large a plan and want to downgrade. What happens?

That depends on the software. While the software industry seems to have nearly settled on annual pricing by default and 2 months free as a perk, the way SaaS companies handle downgrades and cancelations vary widely. Here’s what we found from the 46 tools we surveyed that list their cancelation policy:

52% of SaaS downgrades or cancels your account at the end of this billing period, including HubSpot, Salesforce, Asana, Dropbox, LinkedIn, G Suite, Trello, InVision, 1Password, Monday.com, Typeform, Ahrefs, Freshdesk, Grammarly, Balsamiq, New Relic, ClickUp, Harvest, Lucidchart, Mixmax, Box, Calendly, Docsend, and HotJar. Switch plans today, and you can continue to use what you paid for until the end of the time you paid for it—and then will be switched to the new plan. This is also how every subscription on Apple's App Store works: Cancel your subscription, and you can use the app until the end of the original subscription period. Note that some tools in this category, including HubSpot, Salesforce, and Box, only let you downgrade or cancel at the very end of your contract.

28% of SaaS instantly downgrades your account and gives you credit for the remaining time on your previous subscription, including Slack, Notion, Office 365 for Business, Zapier, Pipedrive, Airtable, Harvest, Basecamp, DocuSign, ActiveCampaign, Front, PandaDoc, and Zeplin. Switch plans today, and you’ll be instantly switched to the new plan, with credit from what you’d paid before applied to your new plan.

16% of SaaS instantly downgrades your account to the new plan but gives you no credit for remaining time, including Segment, Mixpanel, Figma, PagerDuty, Close, Freshbooks, Copper. That means you should likely wait and cancel your plan near the end of your subscription to get the most value out of it.

4% of SaaS will bill you for a percentage of the remaining contract—perhaps the thing to what for most when buying new subscriptions. Adobe Creative Cloud with annual commitment and monthly billing will charge you 50% of the remainder of your subscription to cancel. Expensify Business offers 50% discounts with annual pricing—but if you cancel before your year’s subscription, they’ll charge you the difference between monthly and annual billing that you’d otherwise saved.

→ Check our Software Annual Pricing spreadsheet to find how your favorite software treats downgrades and cancelations. 

Where to find software pricing?

To see what the company has to say about their pricing, 88% of SaaS products display something at productname.com/pricing.

These pages are often quite confusing, which is part of why we're building Capiche. To see what real customers are paying and how they negotiated, apply to join the Capiche community or track down someone who can give you an invite.

Are monthly or annual software plans better?

It depends.

Not everyone wants to pay yearly, even with a discount. In a Capiche discussion about software pricing, it seemed half of the arguments were for paying monthly, the other half for annual plans.

Monthly plans are a good way to test software, as @ samantha____a  shared: “I always prefer to start monthly for tools I haven't used before.”

Monthly plans free up money for other uses, as someone on LinkedIn shared that they prefer “Monthly for cashflow purposes, but if there is a big enough incentive to do it annually I can be persuaded.”

Monthly plans also provide some insurance against things going wrong, as @hhalvi mentioned: “If you hate the service 2-3 months down the line or the quality/uptime metrics degrade as you start using them it becomes a terrible thing to get out of.”

Annual makes sense when you’re ready to commit, said @jamoses92: “Once I’ve decided it’s business critical, I then subscribe to an annual payment plan for the savings.”

Annual plans also make more sense for enterprises, as @JesseBouman mentioned: “SMB prefers flexibility of monthly while larger businesses prefer annual for accounting reasons.”

And if the discount’s good enough, it’s easier to make the case for annual plans. @NBNite shared his team’s trick: “If the discount is greater than 18% when paid annually, we pay annually; any discount below 18% - we remain on a monthly payment plan.”

Question

Do you prefer paying for software monthly or annually?

Answer

@NBNite

10 points

Of course, there are a ton of factors that contribute to our decision making when onboarding a new platform, but if we're familiar with the tool and believe it will become an integral part of our stack, we follow the 18% rule:

If the discount is greater than 18% when paid annually, we pay annually; any discount below 18% - we remain on a monthly payment plan.

One approach to take:
1) Off the bat, you definitely want to exercise any free trial period with the software to test it out.
2) If you're unable to commit long-term after the trial and can't extend it, ask if your team can sign-up for a month-to-month plan and if within the first 1-2 months you can commit to the full year, have the remaining balance prorated at the annually discounted rate.

Depending on the time of year and size of the contract, you'd be surprised how often sales teams will honor this type of plan to appeal to new (and potentially long-term) customers.

Reply

View Discussion

Read twice, click once.

Buying a 99¢ app from the App Store requires little thought. Buying a business software subscription requires a lot more—as perhaps it should. The next time you sign up for a software subscription, it's worth double-checking how pricing works before you dive in.

First, check the pricing. How much will you save with an annual plan? If it's less than 2 months worth of the subscription, you're almost better off paying monthly.

Then, what happens if you change plans? It's worth searching the software's documentation for downgrade or credit to see their policy.

Finally, make sure you're ready to commit. Try the trial, make sure it fits your needs, and be sure you plan to use it for the long haul—or at least for the next year—before you click the Buy button on an annual subscription.

Explore our complete Software Annual Pricing Spreadsheet for details on 100 popular SaaS product’s annual discounts.

Addendum

Did you enjoy this post? Click here to tweet it (you can edit the tweet!)

Capiche is a secret society for honest conversations about SaaS. Learn more.

More on software pricing from Capiche

• The Software Inflation Rate: Software got 62% more expensive over the past decade.
• SaaS Pricing Fun Facts: It’s illegal to require people to call to cancel accounts in California, and more.
• The Case for Encouraging Churn: What Netflix can teach software companies about good billing practices.
• How to Negotiate Software Pricing: 15 tricks from the Capiche community to get the best software prices.
• Software Pricing Gotchas: Things to watch for in software pricing including hidden costs, limited time deals, and onboarding fees.

Image Credits: Header photo by Nathan Dumlao via Unsplash.