So you go to some Saas pricing websites and see three packages: the good, the better, and the best. They’re available in monthly plans, but when you move the slider, they turn into annual ones, and their price is reduced by 20%.
You know this pattern perfectly well, right?
Since the majority uses such a discount model, it may seem you should also use it so as not to stand out. And maybe you should.
However, before you take advantage of this or any other discount policy, ask yourself one essential question: for what purpose?
What are discounts in SaaS B2B?
The answer to this question is absolutely crucial because discounts are mechanisms that always have a specific effect, and thus you should plan them carefully.
For example: imagine that 90% of your customers are on plan A, and you want to diversify your revenues so that you’re not dependent on one customer segment. So you can transfer some customers to plan B by giving it a periodic discount.
Another situation: let's assume that you want to segment your customers, e.g., into price-sensitive and price-insensitive ones, to adjust the pricing policy to both groups in the long term. Discounts will be an excellent tool for this purpose.
One more example: you want to increase the stickiness of your product, so you run a referral campaign. For 5 users that the user invites to the app, he gets a 30% discount on the annual plan.
What is your business challenge?
Let's go back to the example from the beginning of the text, i.e., a 20% discount when buying any plan in an annual subscription instead of a monthly one.
If you were considering such a discount in your SaaS, what business goal were you guided by? And why are you discounting the plan for 12 months, not for 6, 18, or 24?
Why are all plans included in the discount, not just a specific one?
If you need the answers to these questions, hold off on the discount. First, set a goal, and then consider whether the discount is the right tool to achieve it. If it is, then use it with precision.
Discounts’ hidden costs
Now that we've recognized discounts as a business tool, it's time to clarify that it's not perfect. Each profit resulting from the discount has a cost.
First and foremost, discounts hurt your unit economics: they increase Customer Acquisition Costs (CAC) and decrease users’ Lifetime Value (LTV). These are one of the most important, if not the most important, SaaS metrics. So don’t play with them.
Secondly, when you lower the price, you close the door to increases, which are the most straightforward lever to increase the company’s profitability. Basically, you want to constantly increase the average monthly revenue per user, but how do you explain a $10 increase to someone you gave a $10 discount at the very beginning?
Third, when you lower the price with a discount, you automatically reduce the product’s value. You openly tell the user: Hello there, how about I give you 100% of myself for 80% of my value? It doesn't sound good. How can you expect your user to respect you?
Fourth and last, discounted customers churn at a higher rate. Even if you increase conversion to a given plan with a discount, on average, users will stay on it for less time than the regular-priced ones.
We don’t want to demonize discounts here, but all the above consequences can sink the business. So, therefore, let’s emphasize again: if you don’t have a specific reason and a bigger picture plan, don’t give discounts. And certainly don't do it just because your competitors do.
Do you want to be a craft beer or a Carlsberg?
Discounts also strongly influence the perception of your brand by customers, employees, and yourself. An aggressive discount policy makes you position your product as worth the price. Customers reach for goods in this category only when they consider that the cost of the quality/value is low enough.
However, they will ditch you as soon as they find a similar product, sometimes even worse, but at a better price.
Of course, some B2B SaaS live in such a way and are doing well, but they have the proper scale. In their case, the discount policy is a tool to achieve and maintain this scale. But is this your path? Are you building a global SaaS factory?
If not, non-discounted pricing, clear communication, and selling of your value is a better choice. Hey, we're not the cheapest, but no one can help you/provide as much value as we do!!
This is how you build a SaaS in which the user gets value for money and won’t change you to another tool as soon as the wind blows. Working with such users is easier and more pleasant. And longer. ;)
Discounts are not just price reductions
Another critical issue is that you don’t necessarily have to reduce the price when granting a discount. You can also increase the product’s volume.
For example, suppose you run an email verification tool and want to maintain your user base because several new competitive email checker solutions have emerged on the market. Instead of lowering the price of a plan, you can add 200 records to it.
In this way, you will kill two birds with one stone; you will provide the bonus to the client and encourage him to take the desired action, e.g., upgrade to a higher plan or stay on the current one, and at the same time, you will firmly defend your pricing point.
And the cost of increasing the volume is always less than the cost of reducing the price because you avoid the adverse psychological effects I wrote about earlier.
So what if you could do an upsell instead of a discount?
As a rule of thumb, you want the average profit per user to increase with the age of your SaaS. To do so, you can optimize costs, raise prices, add new value, but also... cut discounts.
Converting discounted customers to full price is the cheapest revenue source because you don’t have to spend money on client acquisition.
This is one of the first challenges we work on with clients at Valueships. What can we do with your customer base to limit the number of discounted users? How do we convert them to regular pricing, or at least the old one, but without a discount?
Asking yourself these questions and consistent work on user migration can bring spectacular results. For example, in Brand24, one of the most prominent internet monitoring tools widely used by over 30,000 brands, we increased ARPU (Average Revenue Per User) by 23%.
Of course, instead of working on economy units, we could make a 20% temporary discount on all plans, launch a social media promo campaign, and temporarily increase the company's revenue.
However, it would cause the company more problems than benefits in the long run, especially in the face of rising development costs, rampant inflation, and a recession slowly reaching Poland and other Western countries.
