The Dangerous Enterprise SaaS Discounting Trap: How to Avoid It & Recover If You’re Stuck
Imagine this:
It’s 11:59 PM on the last day of the quarter, and your sales team just closed its first 7-figure deal—a potential game-changer for your SaaS startup. The Slack channel is going wild with celebration emojis. But as you look over the contract, your excitement fades. To close the deal, your VP of Sales approved a whopping 68% discount amounting to $45K per year.
The customer was practically a sure thing—they were ready to buy, no doubt about it. So why did we let $45K slip through our fingers? That's money we could've had upfront, and it would have kept coming in year after year. The rep who closed the deal is getting all the high fives, but in your mind, they left $180K on the table over the next four years.
Sounds familiar? Welcome to the high-stakes world of enterprise SaaS pricing, where today’s big win can become tomorrow’s growth roadblock.
Understanding the Real Impact of Discounting
Discounting is a reality in the enterprise SaaS world, and it can be a useful tool when applied strategically. However, excessive discounting, especially in the early stages, can erode your product’s perceived value and harm your long-term profitability.
In a recent Profitwell study of 8,000 software sales practitioners, 70% believed that discounts are necessary to close deals. What’s more concerning is that nearly 77% felt that discounts of 25% or more are key to securing contracts. This mindset can be dangerous if it leads to rampant discounting without considering the long-term consequences.
Your sales team naturally wants to close deals and will often push for discounts to get the customer over the line. The challenge for you, as a founder, is to maintain pricing integrity while still meeting sales targets. So, how do you hold the line on discounts without losing customers who expect them?
6 Steps to Follow Setting Your Pricing Strategy for Long-Term Success
1. Model Your List Price to Account for Discounts Set your list price with the expectation that discounts will be applied. For example, if your product’s value is perceived at ~$1,000, but you typically offer a 30% discount, consider setting your list price at $1,400. This way, after discounts, your revenue aligns with the intended value.
Example:
Additionally, consider tiered pricing or volume discounts to incentivize larger purchases or longer commitments, aligning discounts with higher usage or extended contracts.
2. Implement a Rigorous Discount Approval Process Establish a structured approval process to manage discounts and prevent margin erosion. For instance, auto-approve discounts up to 10%, require manager approval for 10%-20%, and escalate anything beyond that to senior leadership.
Example:
This ensures discounts are strategically justified and not given out too freely.
3. Pre-Allocate a Budget for Strategic Investments Set aside a budget for customer acquisition incentives, such as free trials, additional services, or one-time discounts. By pre-allocating these funds, you can manage out-of bound discounting/expenditure more effectively and ensure you’re not undermining the long-term value of your product.
Example:
4. Monitor Customer Churn and Competitor Pricing Keep a close eye on customer loss rates due to pricing. If you notice an uptick in churn after a competitor’s price drop, it might be time to reevaluate your strategy. However, resist the urge to engage in a race to the bottom. Focus on differentiating your product and communicating its unique value.
Example:
5. Regularly Reevaluate Your Pricing Strategy No pricing strategy is perfect. Continually test, evaluate, and adjust your pricing parameters to find the optimal balance. This might involve experimenting with different discount levels, contract lengths, or approval thresholds.
Example:
6. Empower and Align Your Sales Team Train your VP of Sales and ensure their goals are aligned with your company’s long-term revenue objectives, not just short-term bookings. Trust your sales leaders to manage the process, but make sure they understand the importance of maintaining pricing integrity. Remember: Aligning sales quotas with ARR (Annual Recurring Revenue) goals, rather than just bookings, will ensure everyone is focused on long-term success.
These steps are just a few steps you can take to strengthen your pricing strategy to retain as much value as possible. There are other considerations to keep in mind while setting your list prices - I’ve written a comprehensive article on what other factors such as Willingness to Pay and external competitive forces to consider while setting your pricing strategy - read more here.
Strategies on “Holding the Line” with the Sales Teams
After setting up your pricing strategy, you’ll likely face pushback from your sales team. Here are common arguments and how to counter them while preserving long-term value:
“It’s a foot in the door; we need to provide a 77% discount."
“It’s a marquee customer; they’ll be a reference for us.”
“It’ll help us hit our quarterly target; it’s an end-of-quarter deal.”
“The competition is offering a lower price.”
“It’s a multi-year commitment; it’s a large volume deal.”
“We need to break into this new industry/market.”
“The customer is facing budget constraints.”
Common Misconceptions About Discounting in Enterprise Sales?
Myth 1: Deep discounting will drive customers to buy more?
Many sales teams operate under the belief that offering higher discounts will keep customers happy and engaged for a long time. However, a 2018 ProfitWell study shows that customers given lower discounts initially churn at a lesser rate than customers who were given a deeper discount.?
Myth 2: The Higher the Discount, the Faster the Sale
Another common belief is that discounts are a necessary tool to accelerate sales. You’ve likely heard salespeople say, “If you commit by the end of the month, I can give you a special discount.” While this may create urgency, it leads to erosion in customer lifetime value because customers use this trick to get deals.?
Ryan Neu from Vendr shows some tangible data that busts this myth.?
Myth 3: Discounting/Pricing can simply be adjusted at Renewal Time?
The reality is that by giving out deep discounts in the first place, you are training customers to devalue the product or acquiring customers that just weren’t the right customers in the first place.?
In my experience, if we look at annual contracts and we look at the willingness to pay the customer at annual renewal compared to the discount level given at the original purchase, we see a dramatic drop-off after the 30% discount mark in willingness to pay.
Myth 4: Freemium models will lead to high % of paid conversions?
Freemium models don't always lead to more conversions. While many believe freemium models boost conversion, in fact only about 2-4% of freemium users convert to paid plans in enterprise SaaS, much lower than often assumed. Read more about how to make freemium plans work for you here.??
On the contrary, “Free Trials” are an effective way to drive paid conversions.?
Note: Freemiums are different from Free Trials - Nitin Kumar, Co-founder of ?????????? ???????????????? explains it really well here
Myth 5: Discounting is the only way to fuel customer growth?
SaaS Enterprises have many levers available to them to invest in their customers that go beyond discounting and price. Customer growth can be fueled through personalised support, value-added services, product training, customer success focused on helping drive key business outcomes, product customization, loyalty programs, community building, regular updates, improved UX, data-driven insights, partnerships, and sustainability initiatives to enhance value, loyalty, and long-term engagement beyond discounting.?
Training your sales teams to think broadly across these various mechanisms is key.?
Frequently Asked Questions?
Q1: How do you balance the pressure from investors for rapid growth with the need to maintain pricing integrity?
Balancing investor demands for rapid growth with the need to maintain pricing integrity involves a strategic approach. My suggestion would be to start by transparently communicating with investors about your pricing strategy and the long-term benefits of pricing discipline, such as protecting margins and brand value.?
Another way to ground discussions would be by benchmarking against industry leaders and competitors to maintain competitive pricing while pursuing growth. Additionally, emphasising a sustainable, phased growth plan that balances short-term investor expectations with the long-term health of the business.?
These approaches ensure that pricing integrity supports brand strength, customer loyalty, and long-term profitability, satisfying both investor goals and business sustainability.
Q2: What's your advice for founders struggling with imposter syndrome when it comes to defending their product's value against enterprise procurement teams?
First, let’s just say that imposter syndrome is “real.” All of us know what it feels like to be in environments we are not used to, and the answer for me here lies in preparation. It's helpful if you go into discussions with procurement teams with a deep understanding of their needs and some pricing options/scenarios. Anchoring the discussion on how your product can drive the right business outcomes for the customer in a way that is mutually beneficial for both parties has resulted in the best results in my experience. Remember, you’re in the room because your product offers value. Rather than seeing procurement teams as adversaries, view them as potential partners who are assessing the best fit for their needs.
Q3: How do you handle the internal conflict that arises when different team members have opposing views on pricing strategy?
Let’s get this straight - everyone in your company will have a point of view on pricing, it is the founder’s role to define the strategy (writing it down makes it easier to share and refer to), align the different teams (remember to consider differing points of view) on said strategy and then hold the line on it. The more you point folks back to the strategy when they ask for deeper discounts, the more people will coalesce around it.?
Q4: Can you discuss a time when you realised your initial pricing was wrong? How did you course-correct without alienating existing customers?
Honestly, when we are charting new territory, we should plan to make some educated gambles. There have been times when we’ve experimented with pricing and realised we need to change our model. Messaging price drops to customers are easier, however price increases or model changes need to be thought through. Best practice on price increases is to grandfather existing customers on their existing prices till the end of their contract. However, if a price increase needs to be implemented without the ability to grandfather customers - then the leadership team needs to model the impact of the pricing increase and its effect on customer churn. Be prepared to bite the bullet if it's needed to ensure long term success.?
Q5: How do you maintain confidence in your pricing when well-funded competitors are undercutting you in the market?
In my opinion, competing on price and price alone has never worked out for many companies. While this can give your competition a slight advantage in the short term - it's impossible to keep up even for those with deep pockets. Remember to compete on value and differentiate on service. Customers are not looking for the cheapest product out there, they are looking for products/services that will help them succeed by driving their business outcomes. Having said that, there will always be cases where you do not want to cede customers to the competition - in these one-off cases, use predefined investment funds to defend or acquire customers by providing one-time discounts or “free usage.”?
Q6: How do you balance the need for standardised pricing with the demand for customization in enterprise deals?
Customised pricing doesn't always yield better results. While tailored pricing is often seen as ideal, a study by Simon-Kucher & Partners found that companies with standardised pricing models often achieve higher profit margins than those with highly customised pricing. Having said that, when the company in question is just starting out - pricing terms might need customization as the policies on payment terms, overages etc. are not thought through. My recommendation would be to define what threshold of deal values will be eligible for customizations. For example - you could simply say deals need to be $500k+ USD annual contracts or more are eligible for customised pricing terms.?
Q7: Can you share an experience where saying no to a discount actually led to a better outcome for your company?
More mature enterprise SaaS companies have large teams to manage customers expectations on discounts and they frequently reject customers' requests for deeper discounts. These teams are set up to guard the long term profitability for the companies. So in my experience when we say no to deeper discounts it's actually protecting our companies bottom line, which is a net positive.?
However, this might seem like comparing apples to oranges for smaller organisations. Organisations who are just starting out might not have the bargaining power. One specific example that comes to mind is when we were negotiating a deal with a customer in a new segment - they requested an additional discount of $150,000 on the contract, this would’ve diluted our per unit price on the software subscription by 15%. Declining the discount would mean losing the customer because they were getting a better deal from a competitor. We declined the customers request to discount the per unit software price, but we simultaneously worked with them to provide free implementation services (worth $150,000), this was a win-win situation because the customer got the net effect of getting the discount and we positioned the customer up for success without eroding the future renewal value of our softwares unit price.?
Q8: What metrics should SaaS founders focus on when evaluating the success of their pricing strategy?
As a SaaS founder, I would focus on the following five metrics to see the health of my pricing strategy.
To Wrap It Up: Play the Long Game
As an enterprise SaaS founder, it’s crucial to think long-term. Protect the value of your product by resisting the urge to give deep discounts, especially in the early stages. Focus on strategies that preserve pricing integrity while still delivering value to customers. The goal is to maximise lifetime customer value, not just to close the deal. By maintaining a disciplined approach to discounting, you set your company up for sustainable growth and long-term success.
If you enjoyed this article, please consider subscribing. More such content is on its way!
?? ?? Check Out Previous Articles ?? ??
Deal Strategy, GTM & Revenue Operations
3 个月Love this Vidhi Agrawal , thanks for drafting and sharing this. I would add what I have practiced in my roles - Discounting is not your only lever to win a deal. A contract is made up of so many other commercial elements that are often overlooked. Commercial terms are an integral part of what makes up the contract and it pays to listen to customer's concern and move beyond just the discounting dialogue. E.g. Customer's often request aggressive discounts on a product because they are unsure of its value proposition. Peeling the layer further, this can be addressed by providing customer swap rights so that they can protect their investment without having to worry about shelf-ware. Another Deal Construct that is a power tool against aggressive discounting is doing Ramp Deals / Stagger Activation, so that the contract costs are aligned with customers proposed roll out plan while balancing the economies of scale they might seek in exchange of higher commitments. And many more ??