Discounting is the root of all evil

Ok, the title is a little dramatic, but if you’re a B2B founder, the summary is: discounts are bad. Don’t overuse them. Don’t let your sales team get addicted to them. Aggressive use of discounts is often a sign that?something else?is wrong with your process, and your discounts are an attempt to mask that problem.

Here’s why I don’t like discounts, and why the list prices at Pilot are?almost always?the prices our customers actually pay:

Discounts are a bandaid for a problem elsewhere in the process

If you’ve found yourself in a world where the only way to win the deal is to layer on an aggressive discount, you’ve messed up your sale. You should have been focusing on demonstrating value, but instead you’re stuck talking about price—and you’re going to feel pressure to match the lowest price on the market.

Nothing you actually want to buy?is sold as “... and it’s so cheap!” Things that add real value are sold as “It’s high-quality and it’s fairly priced given what it does for you.”

If you haven’t made a compelling case as to the value of your product, the conversation will naturally turn to pricing—because your product is undifferentiated versus the alternative.

The worst part is, even aggressive discounting can’t always save deals like this: if you haven’t actually made the case that your product is worthwhile, you will not consistently be able to sell it, no matter how cheaply you price it.

Discounts add friction

Aggressive discounting trains your customer that your list prices aren’t legitimate or fair. This makes managing the customer lifecycle more challenging: when it comes time to renew, guess what you’ve trained them to do? Pushing back on price worked last time, so why wouldn’t it work going forward? In addition to potentially being challenging to your economics, all of this negotiation just?slows down?a process that would otherwise have been comparatively quick and painless.

Discounting doesn’t just cause you a problem for the customer you’d previously discounted, it potentially causes you a problem with all future prospects. Your customers absolutely talk to one another, and what they tell their friends is to push you hard for a discount. Look at this sweetheart rate I got! Only suckers pay full price.

Discounts can engender ill will if they feel unprincipled

You and your team have spent a bunch of time with your prospect, convincing them of the value of your solution, explaining its capabilities, and explaining its pricing. You’ve sent over the proposal and asked for the sale at a price point you think is fair.

The customer rejects it outright, and, desperate to have them not walk away, you trot out an aggressive discount.

In the best case, the customer is delighted and signs, thinking “Wow, I sure am a great negotiator.” In the worst case, you’ve completely delegitimize everything you’ve ever said to them, because you’ve effectively said “You’re right, I?was?trying to rip you off earlier—but you caught me! Busted. Ok, here’s the?real?price.” A relationship you’d spent a ton of effort to build is now a low-trust, transactional one.

When are discounts OK?

I find that they work best in two situations:

In the earliest days of a product

In the very early days of your company,?you’re desperate for customer traction—you’d probably be willing to pay?them?to use the product, doubly so if they’re a recognizable logo that you can put on your website. You also probably don’t?really?know how to price your product or what the true customer willingness to pay is, because you’re just getting started.

In these cases, it’s fine to experiment wildly with discounting in the name of getting people in the door—and over time, you’ll bring more rigor to your pricing, as you learn more about who your best users are, what value you create for them, and what you can reasonably charge for that value.

As part of a structured, systematic program

There are some cases where you?know?you’d like to provide a discount, because there’s something about that particular shape of customer that’s disproportionately valuable to you. Perhaps you know they’ll grow into a huge account with you over time, or that they’re a great reference customer, or that they’ll attract a bunch of other customers.

In those cases, a discount program for those customers is reasonable—if it doesn’t feel arbitrary. For example, Pilot offers a modestly discounted rate to portfolio companies of certain investors, because they end up growing into large accounts, and the math works out on the account’s lifetime value. We also offer discounts to select partners of ours, because the partner’s customers are good fits for us, and when you use that partner’s product, our lives are actually made easier—we’re able to do our work more accurately and more reliably.

These discounts are all very principled: I could stand in front of a room and explain why the discount exists and why it’s applicable to some customers and not others without having people be resentful of it.

I’m not saying you need to announce to the world the full details of all the discounts you’re ever willing to provide, but it’s a good litmus test for whether your discount is a structured program or something that feels arbitrary.