October 10th, 2012 by Craig Vodnik
In the past, we’ve written about how offline payments, such as PayPal, wire transfers, checks and convenient store payment methods are important for maintaining high conversion rates in certain countries. Conversion rates can increase anywhere from 2% to 20% by incorporating local offline payment methods for countries like Japan, the Netherlands, Germany and Brazil into your e-commerce store.
However, as more software companies transition from perpetual license to subscription billing, a subscription product has the potential to become a big hassle for customers using offline payment methods. For the best customer experience with respect to offline payment methods, avoid monthly billing subscriptions.
After all, how many of you would consider going to a Western Union location every month to pay your monthly Netflix subscription?
Offline Payment for Perpetual License
In general, software companies that sell perpetual licenses only charge customers once. So expecting a customer to login to their PayPal account to initiate a transfer, print out a receipt and walk to the convenience store, or write a check and drop it in the mail is an acceptable approach to license your software.
Offline Payment for Subscription License
But what if the product is actually a service, like website hosting or a CRM software? Would you be more or less inclined to sign up for the service if you had to manually initiate a payment each month?
There are two possible negative outcomes if you offer customers offline payments for subscription.
- The customer intuitively understands that they will be inconvenienced to initiate a manual payment once a month and will probably abandon cart.
- The customer won’t understand the future inconvenience and will go ahead and pay that first payment. In the event of a rebilling, the customer realizes they have to go through the hassle of submitting a manual payment each month. They might just decide to chargeback.
If you were presented with an offline payment method for a subscription product, I think that you would either reach for your credit card or look for another option, and that’s just the point! Think about it.
If you had to go through that effort, you would have to wait for the payment to be accepted. There is a real risk of your service expiring for a period of time until the payment arrives and is reconciled.
But does this mean that SaaS companies shouldn’t offer their customers offline payment methods? We’ve already acknowledged their importance in keeping conversion rates high.
See this example of Dropbox.
A customer’s two choices for a PayPal option here are $9.99 and $99.00, which is quite a price differential. Many e-commerce experts would suggest offering as few choices as possible so that people will gravitate towards the higher priced one because of its value.
However, when it comes to offline payments for subscription products, I would argue that there would likely be a much higher conversion rate if a quarterly price was provided. If SaaS companies bundle up a monthly offer into a quarterly or half-year offer, then that pain of manually submitting payment is less frequent. Who is to say that all of your customers would only choose an annual option over a shorter cycle option?
And since the bundled price of a monthly subscription is usually 20% greater than an annual rate, software companies can upcharge the quarterly and bi-annual fees to make it worth the effort of offering those offline payments.
Here’s a suggested price chart for a company offering a monthly and annual pricing schedule:
|Time Cycle||Per Cycle Cost||Annual Cost|
As you can see, there’s a slight discount for the customer the further in advance that they pay for the product. You can certainly adjust these prices any way that you like, but keep in mind that you want to incentivize the customer to choose the longer term option, not just because you get more money up front, but also because it will increase conversion rates while still providing for those who require a more affordable, short term option.
And though it goes without saying, I’ll say it anyway: Once you have the customer signed up for a lower initial payment, you should be upselling them to a more expensive one. The offline payment argument gives you an even better chance of getting customers in the door first, priming them for an upsell to an annual payment later.
Keystone: When offering offline payment methods for subscription/SaaS products, consider rolling up monthly price plans to quarterly or bi-annual to increase conversions and reduce churn.