Service Plans: Billing Monthly vs Annually
This Post Originally Appeared on Residential Systems on January 2, 2017
Why Billing More Frequently for Your Service Plans Improves Client Retention
My road to $100,000 of RMR as an integrator was riddled with potholes, and I think I hit every single one, including my decision early on to bill clients annually instead of monthly.
Our current search at OneVision for the best potential integration partners in the country has yielded many conversations proving that even the best, most savvy businesses have fallen into the same annual billing trap that seemed so promising to me. Integrators readily tell us the reasons why they prefer annual billing over monthly, the biggest of which is the perception that an annual plan makes for an easier sale, especially when including it in a project proposal. Annualized billing can also appear easier to sell when you’re asking for one payment instead of 12. If you’re not yet comfortable pitching service plans, this approach has obvious appeal.
Another reason that many integrators are drawn to annual billing is the perception that these accounts will be easier to manage. Monthly plans would appear to require more administrative work, e.g. manual invoicing or the setup of automated payment systems. In this sense, billing annually would appear to require a lot less administrative overhead. Very often integrators are also drawn to the cash-in-hand that annual plan payments present.
It was for many of these reasons that I was initially drawn to annual billing when selling service plans. Over time, however, it became apparent that this practice carries with it a number of drawbacks that make monthly billing a much better choice. The biggest challenges arose when the plan would come up for renewal. I found myself having to fight hard to retain the contracts every year. When faced with the lump sum payment, clients would question the value of my service, causing me to have to pitch the plan all over again. Not only did this make retaining the contracts a challenge, it made raising my prices to cover rising costs virtually impossible. Lastly, the lump sum payments on these plans were hard to collect, causing me to spend a disproportionate amount of time chasing accounts receivable or negotiating invoices.
The switch to monthly billing resulted in a number of benefits, some of which came as a surprise. The perceived complexity around monthly billing was easily overcome by setting up automatic credit card processing or ACH payment systems. In fact, multiple products exist in our industry specifically to address this challenge such as Ihiji’s Service Manager (full disclosure: I am an investor in Ihiji).
I also found myself facing far fewer challenges in terms of client retention. Instead of being forced to pitch the value of my service plans at every renewal date, my clients quickly became accustomed to the smaller monthly payment. The more granular nature of this billing practice also made it far easier to evaluate the profitability of my plans, and to incrementally raise prices over time if needed.
Billing monthly for service plans presents its own set of challenges, to be sure. Providing consistent value month after month may seem like a daunting challenge. To overcome this, you may be tempted to throw in incentives such as “free” bundled labor, a practice that should be avoided! You should trust the value of your offering (priority and proactive support) and not be timid about asking your clients to pay on a monthly basis.
Monthly billing will not only help you evaluate the profitability of your plans and improve cash flow, but will also have a positive effect on client retention. By providing your clients with highly valuable services such as 24/7 instant response, proactive monitoring, and prioritized onsite support, you can easily protect against them questioning charges, which, when billed monthly, quickly become routine.