9 Things You should know about SaaS Discounting

Yesterday was a typical Sunday morning, and I was sipping my hot cup of chai when an old friend called me to chat about work, life, and everything in between. Reminiscing about some old deals led us to talk about discounting as a sales tactic for SaaS.?

And, it was after this discussion that some deep thought and a spiral of research led me to this alarming statistic, “In SaaS, customers acquired through aggressive discounting (20%+) are - 3X more likely to churn, and deliver 30%+ lower LTV.”

In my opinion, discounting in sales is a bit like taxes. Some of it is inevitable, but with proper planning and execution, it can be (and must be) minimized.

Most buyers say that they would have bought even at half the discount they got. It's just too easy for them - all they needed to do was ask.?

Some of it is indeed inevitable since there are advantages to SaaS discounts: increase your win rate, shorten sales cycles, beat the competition, and so on.?

However, if the practice is not monitored and controlled, the disadvantages can come to exceed the benefits:

A discount-happy business might develop a reputation in the market that it is easy to negotiate down, and in some situations, buyers' perception of the product's value can suffer as a result. Furthermore, SaaS discounts can give sales teams an "easy out" when it comes to closing a deal, which not only covers flaws in the sales process or product-market fit, but also deprives your team of the potential to perfect a critical skill: knowing when to let an opportunity die.

Bottom line, with proper planning and execution, discounting can be (and must be) minimized.?

Here are my go-to tips for doing that.

1) Remember That Everyone Wants A Discount

If your sales process involves a customer-rep dialogue, price push-back will be continual. When the target learns you're a young business, they want to see how far you'll go to win a customer. Expect “we're so little & resource-constrained” and “we're large, we'll be one of your biggest clients & this complete contract as it will be too big of a number for me to push through” from targets of all sizes. SaaS discounting's "primary directive" is that everyone wants it, yet delivering it to everyone causes a loss of money and poisons your market.

2) Define A Good vs. Bad Discount Request

Know what makes a good SaaS discounted request and what doesn't. Depending on your business and ACV, here are some examples:

Bad reasons to discount:?

Competitor pricing is higher, the customer has the need & budget but won't pay, the customer wants new modules/features for free, and the customer is unwilling to commit to anything in return for a discount (e.g. testimonials, a discount timeline, periodic product feedback), true need or product fit is unclear, your offering contains heavy services-based elements that are not cost-scalable.

Advantages of discounting:?

A potential customer is facing a legitimate (hopefully near-term) price point issue (e.g. seasonality of their internal budget process, customer can only handle a smaller number of seats than normally required but is growing or expects to expand), the customer is extremely large and is requesting a reasonable per-seat discount due to total deal size.

3) Coach your sellers to "Trade, not Cave"

Sellers should be trained to respond to each request of the buyer ("give") with a request of their own ("get"). They should build the value of the "gives" from the beginning of the sales cycle.

SaaS discounting should be reciprocal. If a potential consumer requests for a cheaper price since they are on a budget but need your product, they should give something in return. Even beta clients should submit testimonials, case studies, and product feedback to maintain the notion that your offering is valuable. You can also request time from key stakeholders. The quid pro quo creates a fair customer-vendor relationship and ensures that the issue is budget rather than product-market fit. Customers who are willing to work with you and meet even little requests tend to be better long-term clients.

4) Give every salesperson a list of tradables

Tradables is a list of "Gives" and a list of "Gets" with associated costs and value.?

Gives are items that have a high-value perception for the buyer but don't cost your company much. Agreement terms, delivery dates, additional training, change requests, additional implementation hours and premium customer success are all tradable items that can replace expensive cash discounts.

RevOps can prepare a one-pager list of your tradables and encourage AEs to stick a printout in front of them to refer to while they negotiate.

5) Know When To Walk Away & Be Willing To Do So

Expect price-related losses. Negotiating is being willing to walk away, as the saying goes,? bargain consumers are often your worst accounts. They may need additional customer success resources and be harder to renew. Before committing to a loose SaaS discounting policy that could lead to churn or client termination, consider this.

6) Pressure-Test Your Pricing Model To Understand Where Discounts Are Occurring

If you have enough historical sales data, you may conduct a few basic studies to find out where discounts are most popular. This may show you where your product "feels pricey" to potential buyers and reveal deadweight loss (i.e. money that you left on the table due to unnecessary discounting). You might want to consider this quantitative exercise:

Make a scatterplot of deals won with price-per-seat and number of seats on the axes (include a second line series with your list or internal rate card pricing). The curve presumably resembles y=x^(-1), representing your volume discount (with spikes at your tier breakpoints if you have them). To see how tiering or "bucket" pricing affects discounts, replace price-per-seat with ACV-per-account.?

For instance: You assess your 2nd and 3rd pricing buckets: $1k/month from 20-50 seats and $2.5k/month from 50-100 seats. If you find more discounts at the 50-60 seat range (Zone A) shortly below the breakpoint, you may be over-discounting / under-pricing.

If offers around 100 seats close at very variable price points (Zone B), you may wish to cap transparent pricing at 75 seats and group higher-seat packages into your "Call For Pricing" corporate tier.?

7) Build SaaS Discounting Into Your Internal Rate Card

Account-specific discounts may be necessary. Even if your pricing is non-disclosed, most SaaS pricing models require an internal rate card with volume-based discounting. Salespeople should know your "list price" for different seat counts. Pressure testing your pricing model is a solid start. This will help you keep your discounts close to your price-per-seat regardless of whether you share it with potential consumers.?

It ensures volume discounting uniformity and fairness as you hopefully tackle higher-ACV deals. Remember that heads of sales chat to each other, thus a lax approach early on can arm later potential clients with facts that could undermine your negotiation position.

8) Considering Structuring Contracts To Protect Upside (Or At Least Message Accordingly)

Discounts should only be granted when necessary. If an account realizes your product's market value, they should pay full price. Discuss discount timelines upfront. The contract may need a time or seat limit. Even if you don't lock in a reversion to full pricing, don't surprise customers at renewal. Big deal prospects may demand a discounted trial with no limits. But agree on a time to restart the talk. Focus on customer value. If, by that future conversation, the value you both anticipated for has not been realized but the account meets your Ideal Customer Profile, consider extending it and investing more customer success resources. If the consumer refuses to pay full price and their budget or need is uncertain, you should have a framework that requires you to consider "firing" them.

9) Disincentivise excessive discounting by building it into the commission structure

Most companies follow the tier-based revenue commission structure model for compensating their sales teams. This straightforward model ties commissions directly to the total sales amount. Sales reps earn a percentage of the revenue generated, making it a simple and transparent structure.

The flip side here though, is that a sales rep who sells 45K worth of your premium product at a 50% discount will earn more commission than a sales rep who sells 40K of your base plan at a 20% discount (that has much more future upsell potential).

To deter excessive discounting, companies often use a Gross Margin-based commission structure. More about commission structures here:

Top 10 Most Effective SaaS Sales Commission Structures

10) Remember That SaaS Discounting Is Part Of The Negotiation: Be Open & Creative

As I mentioned, you must try to determine your SaaS discounting approach. You should also make sure your sales team understands and follows the logic. However, especially when considering higher-ACV arrangements, every deal has its own quirks, and many SaaS discounting circumstances may require judgment. Work with customers and get creative to close sales. No matter how scalable your business model is, SaaS requires a company culture that promotes customer value development.

All in all, discounts hold great power in helping your SaaS business close deals but only when they’re used the right way.?