To Discount or Not to Discount, That Is the (Pricing) Question

“We pride ourselves on our strategic pricing model. Unlike many in our industry, we rarely offer discounts. Instead, we guide our customers towards a lower priced tier product that suits their budgets.” — Head of Sales, B2B SaaS company

In the realm of SaaS products, pricing strategy is a critical element in attracting and retaining customers. This quote from the Head of Sales of a successful SaaS provider highlights a distinctive approach: rather than using discounts to attract immediate sales, they focus on delivering incremental value, enticing businesses to start with a lower-tier product and scale as they grow. This strategy has not only fostered a loyal customer base but has also enabled a gradual expansion into the enterprise segment, where their presence is increasingly notable.

But is this approach universally ideal? While effective for them so far, should they consider implementing discounts to accelerate growth, especially among larger prospects? Let’s delve into the potential benefits of discounting and when it might be strategically advantageous, despite an already successful pricing model.

The Complexity and Opacity of B2B SaaS Pricing

The nature of B2B SaaS pricing often tends towards opacity, with many providers choosing to start with a higher list price and then offering discounts as part of the negotiation process. This practice raises a valid question: why not simply set the price directly at the point after discount?

The Role of Value Perception in Pricing Strategies

A critical aspect to consider when discussing discounts is the concept of value perception. In many cases, customers use the sticker price as a proxy to assess the quality and credibility of a product, especially when it is complex and its full benefits are difficult to evaluate prior to purchase. This is particularly true in the SaaS industry, where features and functionality can be extensive, but not immediately tangible.

In many cases, customers use the sticker price as a proxy to assess the quality and credibility of a product

High Price Equals High Quality?

It’s a common consumer psychology trait to equate higher prices with superior quality. When a SaaS product is priced higher, it might be perceived as more effective or feature-rich compared to cheaper alternatives. Therefore, a low starting price can inadvertently signal that a product is less valuable or inferior to its full-priced counterparts.

B2B sales are often not impulse purchases but considered decisions involving multiple stakeholders. The initial higher price sets a benchmark for value, which can be adjusted to fit the client’s perception of value through discounts. This method also taps into the psychological aspect of obtaining a ‘deal’, which can enhance customer satisfaction.

Starting high gives sales teams flexibility in negotiations, allowing them to adjust the final price based on the perceived value and budget of each customer. This can help maximise revenue on a per-customer basis, as it caters to varying budgets and willingness to pay across different markets and customer segments.

Strategic Discounting and Value Perception

When discounts are used judiciously, they do not necessarily undermine the perceived value of a product. Instead, they can be framed as exclusive opportunities, making the offer feel special without degrading the product’s inherent worth. For instance, offering discounts for a limited time or exclusively to specific customer segments can maintain the high-value perception while still making the pricing accessible to a broader audience.

This nuanced approach ensures that discounts are seen not as a desperate bid to boost sales but as a thoughtful strategy to extend the product’s reach without compromising its perceived quality and prestige.

The Strategic Use of Discounts in SaaS Pricing

While our client has effectively utilised a tiered pricing strategy to scale their customer base, there are compelling reasons to consider incorporating discounts under specific circumstances. Here’s why:

1. Capturing Willingness to Pay

Every customer has a different perception of value and a different budget. Offering strategic discounts can help capture the maximum willingness to pay from a diverse customer base, making the product accessible to a broader audience without permanently lowering the price.

2. Navigating Competitive Deals

Our research indicates that in about 25% of cases, customers did not consider any alternative solutions seriously, suggesting a strong brand or product preference. In these non-competitive scenarios, sticking to the list price can reinforce the value proposition. However, when facing competition — especially from multiple vendors — discounting can be a crucial lever to pull. It can tip the scales in favor of our client by aligning price more closely with customer expectations and competitive pressures.

3. Understanding Market Priorities

In our survey, features and integration capabilities ranked higher than pricing on the list of customer priorities. However, when these factors are comparable among competing products, pricing, facilitated through discounts, can become a decisive factor. Thus, a well-timed discount might just be what is needed to clinch those critical deals.

4. Engaging with Procurement Processes

A significant portion of our client’s potential customers, about 40%, engage in a formal Request for Proposal (RFP) process, involving procurement departments that often have ‘discounts negotiated’ as a key performance indicator. Offering discounts can streamline negotiations in these formal buying processes and can be a practical necessity to engage effectively with procurement professionals.

This is particularly true with larger enterprises. Our client has been successful primarily with SME and have had not many experiences with large enterprise customers. To be success in that segment, they must build up their capabilities in discounting with intent and discipline.

5. Responding to Market Expectations

Interestingly, our data reveals that 78% of customers negotiated a discount before finalising a purchase, with discounts typically ranging from 5–20%. This statistic underscores a clear expectation for price negotiation in the industry. By preparing to offer discounts within this range, our client can meet customer expectations while still maintaining control over their pricing strategy.

Comparing Discount Strategies Across Industries

While contemplating the strategic use of discounts, it is instructive to look at how different sectors approach pricing. Notably, some companies rarely or never discount, aligning their strategies with their brand positioning and market expectations.

Luxury Brands: The High-Value Proposition

Luxury brands like Tiffany’s operate on the principle of maintaining a high-value perception among consumers. Discounts in this sector can dilute the brand’s prestige, suggesting that the products are worth less than their full price.

Everyday Low Price (EDLP) Strategy: Consistency is Key

On the other end of the spectrum, companies like Walmart utilise an Everyday Low Price (EDLP) strategy. This approach emphasises consistent low prices over periodic discounts, aiming to build customer trust through pricing transparency and predictability. For SaaS companies, adopting an EDLP strategy could be compelling if they can maintain competitive operational efficiency and want to attract cost-conscious businesses looking for straightforward, predictable pricing.

Conclusion

Deciding whether to discount is not just a tactical move — it’s a strategic decision that reflects a company’s brand positioning, competitive landscape, and customer expectations. For our client, while their current approach has served them well, there are clear scenarios where thoughtful discounts could not only boost sales but also enhance customer satisfaction and retention. As with any strategic decision, the key is balance and timing, ensuring that any discounts offered align with broader business goals and market dynamics.

Stay tuned for our next article, where we’ll dive into the specifics of when and how to implement discounts effectively. If discounts are used too liberally, there is a danger to become a race to the bottom. We’ll explore strategies that not only protect your brand’s value but also ensure that your pricing moves are as impactful as possible, helping you achieve both short-term gains and long-term growth.