The importance of discounting to a software company can hardly be overstated, as the difference between the right and wrong approach to it can have a monumental impact on revenue, sales growth and enterprise value. In fact, provided you avoid counterproductive approaches, discounting your software 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 software discounting is systematic and strategic.
The most important requirement in successful discounting is adopting a systematic approach in which all discounts your organization offers fit within a cohesive strategy. This strategy sets the boundaries that enable you to capture more revenue and value from your customer base.
A cohesive discounting strategy:
- Aligns incentives and offers with company objectives.
- Provides clear guidance and parameters to sales reps and managers.
- 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 software discounting should in no way limit your ability to maneuver in the marketplace. In fact, a discounting strategy can even increase your flexibility.
Pre-determine your incentives to best match customer situations and company objectives.
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:
1. Structured incentives
Structured incentives are predetermined by your company and earned by customers based on what they buy. You may choose to include one or multiple incentive types. 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 using multiple discounts, make sure you have clear rules for when and how to use them, otherwise you could entangle your sales effort and create friction points with customers. For example, it may be counterproductive to combine discounts for paying multiple years upfront with signing a multi-year contract. With a cohesive strategy, every salesperson knows the rules that determine how such situations are handled.
2. Unstructured incentives
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 can use at their discretion in an effort to close a sale.
Again, it is crucial for your overall discounting strategy to ensure 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).
Your discounting strategy can become a true advantage.
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.
In the software business, discounting is a fact of life. How you approach it will have much to do with your ultimate success.