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Skillful discounting can have a huge impact on a software company’s revenue, customer relationships and even enterprise value. In fact, provided you avoid counterproductive approaches, discounting is one of the most powerful levers you have for driving growth in hotly contested SaaS markets.
Here are the essentials for using this lever successfully:
Successful discounting is systematic and strategic
The most important requirement in successful discounting is adopting a systematic approach.
All discounts your organization offers should fit within a cohesive strategy. That strategy can comprise a number of incentive types. If you use multiple discounts, make sure you have clear definitions, parameters and guidance for when and how to use them.
A cohesive discounting strategy:
- Aligns incentives and offers with company objectives
- Ensures market fairness, so customers buying the same set of products and services pay the same price or rate
- Enables fine tuning over time without reinventing the strategy
This approach benefits your sales teams and sales management by:
- Shifting sales conversations from negotiating price to identifying the best product/service configurations for each customer
- Accelerating deals, as customers learn they can no longer negotiate every aspect of a purchase
- Giving salespeople a consistent way to defend pricing and value
- Treating salespeople more equitably (individual reps are steered away from cutting their own deals)
- Introducing insightful KPIs, such as a metric showing to what extent sales teams are achieving scheduled net prices over time
Adopting a systematic approach to discounting should in no way limit your ability to maneuver in the marketplace. In fact, a discounting strategy can even increase your flexibility. Here’s how:
Great strategies let many incentives bloom
Because a well-crafted discounting strategy includes clear definitions, parameters and guidance, it becomes much simpler to apply various types of incentives to different sales situations.
While potential incentives are limited only by your marketing savvy and sales execution skills, they generally fall into two categories:
Category 1: Structured incentives are predetermined by your company and earned by customers based on what they buy. For example:
- Bundle discounts for customers buying more than one product; often used to encourage products historically purchased together
- Volume discounts for larger transactions, such as offering a better price for a purchase of hundreds of units than for a few units
- Payment incentives for upfront payments, such as a discount for paying two years of license fees at contract signature
- Contract length incentives for signing multi-year commitments
If you were to offer these types of incentives without an overall strategy, you could end up entangling your sales effort and creating friction points with customers. For example, it may be counterproductive to combine discounts for paying multiple years up front with signing a multi-year contract. The advantage of a cohesive strategy is that every sales person knows the rules of engagement determining how you’re going to handle such situations.
Category 2: Unstructured incentives are also predetermined by your company, but are applied to customers on a discretionary basis. Often they’re used to accelerate decision-making. For example:
- Discretionary discounts are reductions in one-time or recurring fees, including services
- Discretionary promotions are offers salespeople sales people can use at their discretion in an effort to close a sale
Again, it is crucial your overall discounting strategy ensures that such incentives serve your enterprise objectives, fit within organizational policies and are not in conflict with other incentives. For instance, you might want to give sales reps the discretion to offer a free rapid implementation service (a one-time revenue hit) but not to reduce the per unit rate (an ongoing revenue hit).
By adopting a systematic, strategic approach to discounting, you create a framework that can enable you to be very innovative in pricing and marketing—while keeping everything orderly, manageable and efficient. That’s the way to more fully capture the revenue and value of your customer base.
As we said at the outset, in the software business, discounting is a fact of life. Depending on your approach to it, that life can be better…or not.
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