The discount strategy for SaaS that no one uses, but most should.
We’re wired to ask for discounts.
I once read a book encouraging the reader to ask for a discount on the next Starbucks coffee. If asked why, they suggested replying “just because”.
Chances are, you’ll get a discount. Maybe not the first time, but eventually.
And that’s a problem for the seller, and in some cases also the buyer.
When talking about SaaS, quite rarely is budget the problem. And if budget is the problem, most likely, no one will end up being happy.
Ultimately, the customer wants to get the best price. But what if you can give everyone comfort knowing that they got the best price?
Well you can, and you’ll grow faster for it. To do it, you need to stop discounting your subscriptions.
I get that removing discounts is controversial, it’s an established practice. We feel that it helps us push a deal over the line.
But bear with me for a second.
In this article I’ll run you through the problems and benefits of removing discounts. I’ll also share how to remove discounts – or rather, how you can limit them to reap the benefits.
The article is based on a recent podcast episode of the revenue formula, so if you prefer you can listen right here.
The problem with discounts
Most articles you’ll read cover how to use discounts. How you’ll get more revenue.
But very few talk about the power of removing discounts, let alone the problems they create.
There are three areas we’ll jump into:
1. How it attracts the wrong customers
2. How it lowers LTV while increasing churn
3. How it breaks when having a sales incentive structure
1. Not your loyal customers
I’ve seen it before. When pulling a cohort of discounted customers, guess what they all had in common? A lower ACV and higher churn. Ugh.
They’re less loyal and more price sensitive. Needless to say, this will have an impact on your growth.
Now surely, if they want to buy it and we’re okay supplying it at a lower cost – what is really the downside?
But there’s a much bigger problem.
2. Lower LTV and higher churn
Because of discounts, you’ll lower your LTV. You’ll start to see an increasing CAC:PB, which leads to having fewer $ to acquire a customer.
Think of it this way:
“Imagine the impact of 20% churn on your business… well if you give a 20% discount you just churned 20%!.”Jacco Van Der Kooij
So it’s basically the same thing as churn. But if it’s like churn, then…
“It has the same impact on your CAC payback. It has the same impact on your lifetime value. It has the same impact on your growth. All of these things are the exact same thing, but you know, for many reasons.
And some of that is obviously investor sided, 20% churn feels so much more hurtful than giving a 20% discount.” (08:21)
To make matters worse, discounting impacts your LTV directly.
“And this is actually another thing from Patrick Campbell at Price Intelligently. So basically they’re saying, discounting lowers the LTV of a customer by more than 30%.
And now you think like well, wow, isn’t more than 30% kind of a large discount to have on average? Well, the problem is actually twofold, it compounds. It’s not only that you give maybe 20-25% discount, it’s also that the customer by itself will be more likely to churn.
So if you kind of combine both of these effects, you basically get to a larger than 30-35% reduction of lifetime value.” (10:49)
And just another point not to ignore, what happens when a customer is up for renewal? Well…
“On the renewal side of things, once you open the door for a negotiation on the new biz side, you kind of implicitly also open the door on that negotiation on the renewal side”. (10:57)
When incentives go wrong and urgency reverse
Potential customers will plan the negotiation. And just like a sales rep can use urgency – so can the buyer.
Have your reps ever been asked “when is your quarter ending?” Take this example as a cautionary tale:
“When I bought Salesforce a couple of years ago, what I did there on purpose was basically… I started the conversation in the first week of January.
And what maybe some listeners don’t know is that Salesforce year end is on January 31st, so basically the sales rep that I was reaching out to was incredibly lucky.
It ended up being a three year deal, more than $300,000, you know, it was a big thing even for the size that we were at that point, still it was a big thing for the rep.
He didn’t have time to go through all of those negotiation steps. He needed to get this deal closed in a month from now or less than that.
So basically, his only choice was skipping some discounting steps, going further down, much quicker. And basically we were capitalizing on this exact problem where the counterpart, they have a deadline. (…)
And again, does it really matter for the business whether or not that deal closes on the 31st of January or the 1st of February?. It doesn’t really matter all that much, but it matters for that salesperson. So therefore that salesperson will be incredibly incentivized to give you this discount, Right?” (21:02)
What’s happening is two things:
1) The incentive (on target earnings) has a negative impact on behavior. Rather than closing the deal next quarter at a high ACV, the incentive gets the rep to close the deal fast.
2) They will use all their negotiating power internally to push for a discount. The incentive creates urgency for the rep to close the deal and use discounts to do so.
So discounts are not really helping.
Wait.. Won’t discounts increase overall win rates?
Case in point:
There is no research to support that revenue will increase, we have at least yet to find it. While it might help individual sales reps in some cases, it will be at the sacrifice of long term revenue growth as we illustrated with the Salesforce example.
The benefits of removing discounts
Everyone wants to decrease churn, increase LTV and maximize the organization’s revenue potential.
If discounts are a way to do that, what are the benefits? Let’s dive in.
You’ll get a faster sales cycle
Don’t underestimate the importance of velocity, ie. the amount of deals one account executive can turn over. If it takes a year to turn over one deal, that’s one deal per year. If it takes a month? 12.
In other words, velocity is a major efficiency driver you need to pay attention to, and removing discounts actually decreases the sales cycle by sometimes 2-3 weeks.
“So why is that? Well, if you think about whatever you’re selling, there is even a stage in your Salesforce or a HubSpot pipeline that’s called negotiation” (15:10)
Take this real example Toni shared:
“We already decided that we were gonna buy Chili Piper because we needed it. And it was not like, ooh, you know, this $1-$2,000 more, that’s gonna break the deal. That was honestly not what this was about. And, I talked to my RevOps guy and he was like, Toni, they don’t give any discount.
First reaction, I laugh. First reaction. Yeah. Yeah. Sure. They don’t give any discount.
And by the way, this was not a junior RevOps guy. And he was looking at me with dead, honesty and certainty, and he’s like, Toni, they do not give any discounts.
And then I stopped laughing, and I paused, and then I was like, well, um, well then let’s just sign the deal now.
And the thing is what are you gonna do? Are you gonna waste another two, three weeks and push something that you won’t get anything for?
The effect that it has, instead of you playing this game for two or three weeks longer, basically the other side is like, okay, we don’t need to, we can’t play that game, so let’s close it right now. And there you go. You have like saved two, three weeks of your sales cycle, right?” (16:55)
To make it even more interesting, Chili Piper wrote about their no discount approach right here.
It’s kinda obvious. If you don’t do the average 15% discount, you’ll have that cash and can reinvest it. It’ll give you some clear advantages:
“That translates both into the ads you can run on Google and Facebook, but also on the quality of sales reps you can hire, the support you can give and all of these, all of these other things around it, which basically gives you a competitive edge.
So really, the more CAC I can afford because the price is higher because of more funding in the bank account, the more competitive and aggressive I can go.” (09:49)
Think of it this way, if you’re in a competitive market, being able to afford a higher CAC means you can hire better reps and buy more customers through marketing than they can.
So.. we just.. Remove discounts?
This will be very difficult. If there’s already an established practice, getting rid of discounts requires the CEO to get involved.
But, there are alternatives – we shared two alternatives in the episode: Pricing tiers & vanishing discounts.
A major factor here is your pricing and packaging. Using different tiers can help you change the conversation when it comes to the price.
“If you want a 20% discount, it’s no issue. You just then buy this other level, this other tier here.
I think that conversation, sometimes it’s really painful for the buyer. Because then they’re like, Ah, no, but I want this other thing. And it’s like, well, if you want the other thing, you need to pay for that. So this is sometimes a good conversation”. (24:39)
Nailing pricing is not easy, and there’s a reason that companies who review pricing yearly has a more solid foundation for growth.
While increasing price 1% is more effective than increasing retention or win rates 1% (see previous link), reviewing price can help you change the conversation into what solution the customer needs rather than how cheap it can be sold for.
Another option is providing non-recurring discounts. And when it’s time for renewal? They’re gone.
There are a couple of reasons this makes sense as an option
“When you buy a new tool, you always have this, oh, damn, I need to roll this out now, I won’t be able to use it for two, three months. And then there will be some bug and some things won’t work.” (25:29)
Buying a tool requires not only a monetary investment for the customer. They need to spend time implementing, training and refining. That brings with it a lot of risk.
A one-off discount can help alleviate some of that pain. Companies like HubSpot have historically charged for training, onboarding and implementation – separate from the subscription.
Doing so makes it by default a one-off discount if they waive those fees.
“Arguably your value for the first year probably is less than the following years, and you can almost think like you add that amount of rollout work on top of the price” (25:44)
Interested in more? Check out the full episode on Spotify, iTunes or Youtube (video).