For those who sell software, discounting is a fact of life, as certain as… well, you know.
That’s particularly true for SaaS companies selling to businesses, where sophisticated buyers recognize that 1) much of the cost to produce the product has already been paid, and 2) customer count is a key driver of growth. These buyers naturally assume that SaaS sellers will generously discount to generate revenue and add another customer.
But while discounting is a certainty, outcomes are not. Depending on the approach you take, discounting can spur growth or slow it. In a future post, I’ll show you how to use this lever to your advantage. Before we go there, let’s take a look at three common approaches to avoid, since they’re almost always counterproductive to achieving growth goals.
1. “We never discount!”
Some software companies believe their value proposition is stout enough, or marketplace advantage great enough, that there’s no need to discount. They may fear discounting would devalue their brand or lower MRR. And forget about pre-designing discounting into pricing strategy―that raises the terrifying specter of never being able to sell at full price again!
Such fears are unfounded if discounting is done right. Moreover, a blanket anti-discounting policy hurts SaaS growth by:
- Turning away potential customers who like your product but don’t think its value is aligned with its price. By refusing to discount, you deprive your company of the opportunity to prove the value of your product and earn customer loyalty.
- Encouraging new customers to make smaller initial commitments. Your initial revenue takes a hit, but that’s not all. Because these customers may settle for a software tier that doesn’t fully meet their needs, they may have a less-than-optimal experience, dampening their receptiveness to subsequent offers.
- Weakening upselling and cross-selling momentum. A no-discounts policy leaves you with very little flexibility to guide customers along a relationship path leading to increasing mutual value.
2. “We discount (without discounting)”
Knowing they’ll be faced with discounting during negotiations, some software companies build anticipated discounts into pricing strategies. They might, for example, bump up starting prices for enterprise deals. They might double markups, with one discount set aside for a champion and another for procurement. They might provide one pricelist for domestic sales and another for price-sensitive regions like APAC.
However you do it, nontransparent and manipulative discounting is a dangerous practice. It can slow SaaS growth by corroding customer trust in the relationship and even tarnish your overall company reputation. No matter how tricky and careful you think you’re being, in today’s software markets, word always gets out.
“An effective discount strategy encourages desired customer behavior, accounts for a wide range of usage scenarios and leaves little room for individual interpretation.”
– Chris Mele, Software Pricing Partners, LLC
3. We discount on a case-by-case basis”
The most common counterproductive approach is to discount on a case-by-case basis. Intent on making a sale, many companies follow the mantra: “Never lose the deal because of price.”
While flexibility is important in pricing (and discounting an excellent lever for achieving it), do you really want two similar customers to discover that they’ve purchased the same product with the same configuration at vastly different prices?
Such indefensible price differences can easily arise if you allow case-by-case discounting without well-established parameters and guidelines. You’re not only risking relationship trust erosion, you’re also putting your sales team at a negotiating disadvantage. They may discount too much, depressing revenue, or too little, slowing customer acquisition and creating attrition risks.
Now that you know which approaches to avoid, you’re ready to learn how to apply discounting productively to encourage desirable customer behavior and drive better results.
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