What customer doesn’t want a good deal? Discounting is as much of an art than it is science, especially in multi-year (e.g. ramp) enterprise deals. Used effectively, discounts can provide SaaS businesses with an effective way to respond to competitive situations and other cases where the perceived value of the solution to the customer is lower than the standard prices of the product. Put another way, discounts can alter a customer’s perception of the value of a product or service in order to generate customer interest, increase customer loyalty, or increase the number of units sold. But the dilemma for many is how much is too much?
At a high level, let’s touch on the five reasons to leverage discounts in SaaS.
- Gain market share - If your business is starting to enter a new market or vertical, discounts can be used to grow market share.
- Reach financial goals - Regardless of whether the economy is strong or uncertain, businesses are under constant pressure to hit their quarterly and annual goals, and discounts used strategically can help close deals.
- Beat out competition - Competitors not only validate a market, but they also force companies to constantly improve their products and service to customers. Discounts can be used not only to push deals across the finish line, but also to create differentiation from competitors.
- Fit the customer’s budget - Whether your product and service is priced higher than the customer’s budget or you’re looking to close a bigger, longer-term deal, discounts can be an effective way to bring in customers with growth potential.
- Reduce churn - One way to approach this while building customer loyalty and product stickiness is to offer a discount on a specific part of your package, such as discounting the implementation process or discounting an integration to another product that’s core to their business.
Enough vs. Too Much?
Let’s get to the question at hand. When it comes to discounting, how much is enough vs. too much? Discounting as an acquisition strategy can be approached in many ways, and ramp multi-year deals discounting is common. The reason: the longer the SaaS contract period, the fewer opportunities for the customer to drop your service.
In gauging how you approach discounts in multi-year contracts, the answer depends on the following:
- Do you have a high churn rate?
- Are renewals a lot of work?
- Are you receiving payment up front?
- Can you lock out competitors?
Churn Rate Highs and Lows
If you have a low or net negative churn rate, multi-year deals are worth less. For example, if you offer a 20% discount on long-term contracts, you are giving up a significant amount of downstream revenue in Year 2 and on if your churn rate is low, and locking yourself into a decade of discounts not just for the customers you close today, but also the ones you add later.
Renewals and the Work Involved
Depending on your business model, renewals can be a grind that comes with associated costs. For example, renewals cost money if you pay commissions, in which case, it may be faster and easier to pay the next cost of that renewal commission upfront via a discount. In contrast, this is less of a benefit if renewals are transactional and easier.
Cash Flow Positive or Squeeze
If you’re in the early days of a new business or launch of a new line of business or churn is high, large discounts for multi-year deals may be worth it for the cash. Of course, once you are cash-flow positive, you’ll be less inclined to give up bookings and offer less of a discount in Year 2 and onwards for a little more cash.
Competitors on the Hunt
Leveraging discounts with multi-year contracts has the advantage of locking in customers while discouraging them from looking at other solutions, at least for a while.
Closing Thoughts Not to Be Discounted
SaaS companies need to be thoughtful about their discounting and pricing strategies and the overall health of their business. But just as important is the adaptive quote-to-revenue platform to support those strategies and adapt to changing market conditions and customer requirements. Read more about multi-year ramp deals.
To learn more about multi-year deals, discounting, and adaptive quoting and billing, contact us.