SaaS discounting strategies and how to choose the right one?
in Monetization and Pricing
February 21, 2023
SaaS discounting strategies can sometimes do more harm than good and should be implemented carefully. We explain how to do it well.
Despite the fact that most SaaS businesses have less than five subscription plans, discounting them can be significantly more challenging than in retail companies with over 10k products in their portfolio.
If we pick the wrong approach, it can do more harm than good. So, how to choose the right discounting strategy for SaaS? And most importantly, should you even do it?
In this article, we’ll answer both of those questions and a few more, such as:
👉 Why do SaaS businesses decide to discount?
👉 What are the most popular discounting strategies for SaaS?
👉 What are the biggest risks of discounting, and how to avoid them?
Why do SaaS businesses give discounts?
Before we move on to the actual strategies, let’s take a moment to answer perhaps the most crucial question “why?”.
There are several reasons, but the most common is to attract customers and increase the conversion rate. Of course, there are many possible tweaks and variations on how exactly we give those discounts, but the main incentive is usually to get that first sale.
It’s primarily based on the assumption that a significant part of our audience wouldn’t be interested in our services if they weren’t given a discount. Whether or not that’s true is obviously the biggest conundrum that usually decides if the whole discount idea makes business sense. But, more on that later.
Then, there are those who give discounts more arbitrarily. It can be an idea taken from one of the competitors or simply a leverage used from time to time by the sales team. In those kinds of scenarios, there are many possible risks which we’ll discuss in the following segment.
Another, completely different type of scenario is giving discounts for long-term subscriptions. This kind of discount is a completely different beast and in the next few paragraphs we’ll explain why.
And lastly, there are discounts in the case of screw-ups. It can be a nice way to apologize if, for example, our tool was down or malfunctioning for a couple of days.
To sum up, discounts in SaaS are given mostly in three contexts
Is discounting in SaaS even worth it?
No matter what discounting strategy we choose for a SaaS business, there’s always a pretty high risk that we’ll only lose in the long run. That’s why the biggest question is not “which one should we choose” but “should we do it after all?”.
Let’s take a Black Friday promo as an example. Like many other businesses, we often feel tempted to grab an opportunity and acquire some new clients with major discounts. Then, by analyzing revenue and customer behavior, we often learn that despite short-term growth, there’s a significant drop in the LTV (Lifetime Value) and of course ARPU (Average Revenue per User). And if we add to that the marketing costs that come with running such a promotion, we might discover that the entire discounting project was a massive failure.
The same goes for long-term promotions and all types of one-offs that companies often give their customers for many different reasons. Companies get accustomed to giving discounts, it becomes a part of their culture, and then they’re afraid to remove them due to fear of losing revenue. In fact, it usually results in quite the opposite.
What’s more, by giving many different kinds of discounts and individual offers, we might discover at some point that we have twenty different subscription plans instead of the three advertised on the website. And that brings another set of problems with analysis, sales, and even customer relations.
A discount that backfires
Let’s say you have a potential lead interested in your upper-tier subscription plan, but they ask for a 20% discount. They’re not big enough to ask for an enterprise-scale individual package, but it still looks like a great sale, and they’re happy to pay for 12 months upfront. Wanting to seal the deal, you approve the discount and celebrate the sale. Great, huh?
Now, you might not have realized that their main competitor has already been your client for the past two years. They never asked for a discount, and you never offered them any. Why would you? They were satisfied, right?
Somehow, they’ve learned about the new favorable offer you gave their competition. Best case scenario, they politely ask you for a discount too. Worst, you lose a good client and suffer reputational damage.
Good, bad, and disastrous discounting strategies in SaaS
Okay, let’s discuss some examples and how they can impact both the MRR and the LTV.
First and foremost, we should discuss the one that’s the most popular, and for a very good reason. Of course, we’re talking about the discount for long-term subscriptions. For example, -15% if a customer pays for 12 months upfront instead of monthly or quarterly.
Compared to all the other types, this one is the most reasonable and profitable for a vast majority of SaaS businesses. On top of that, it has an entirely different purpose than all other discounts. We implement it to lock in customers and build solid, long-term relationships, while most other discounts are used mainly to attract new customers and increase conversion rate.
In terms of numbers, it’s the one type of discount that usually gets us to lower the churn rate and increase Customer Lifetime Value. According to our benchmarks, even a 10-15% discount for a yearly subscription is enough to do the job. But, more importantly, it doesn’t lower the perceived value. And why is that?
Whenever we give a discount, we agree with a customer that a service we offer isn’t worth the original price. And that goes for almost every type of discount except long-term subscription price cuts, which can be treated simply as a bonus for paying upfront for such a long period. We talk more about the role of perceived value in our piece about value-based selling.
But let’s get back on track.
Those kinds of discounts have a completely different goal. They’re used to increase sales, ideally to those customers that wouldn’t convert without them. Of course, they can still be effective, but they are prone to some risks.
Discounts in SaaS can’t be subscription plans
If there’s no specific period for which we give discounts, we might as well call them custom subscription plans. Let’s say we offered a significant discount for three of our possible packages on Black Friday. Yes, we can get some sales, but what else will happen next?
1. Once we offer someone a lifetime discount, they expect to keep it forever.
2. If we plan to update pricing for all customers at some point, those discounted customers will be even more discouraged than regular ones.
3. Our current clients certainly won’t be happy about that if they can’t switch to the new Black Friday pricing.
4. We created three new subscription plans, making further analysis even more cumbersome.
We can’t stress the importance of the last point enough. The more pricing plans we have (including custom ones), the more difficult it is to manage them and make crucial decisions on how the product should evolve and what it should cost.
50% isn’t a discount; it’s a giveaway
Very high discounts can attract customers that actually aren’t in your target groups. They’ll quickly realize that the product or service isn’t for them and will churn after a week or two.
And those who will keep using your service would most likely be convinced by a 20% or even smaller discount, so by giving such a high discount, you’re simply giving away potential profits.
Here’s a crazy idea: don’t give discounts!
There’s one critical flaw to every possible discounting strategy. Even if we’ve done everything correctly, including a thorough analysis of how it impacted our revenue and growth, we’re forgetting about one crucial thing.
We’re not measuring how we’d end up without the discount.
It’s perfectly possible that without the costly, elaborate marketing ploy, we’d achieve the same results or do even better.
Are you sure that your enterprise clients are really enterprise?
Individual plans for large clients are widespread across the SaaS world, and there’s nothing wrong with that. However, there must be clear guidelines for the sales team on who should receive such favorable treatment.
Without such rules, the system can be easily abused, and you’ll end up with many clients paying you less than they’re supposed to.
For example, during one of our projects, we discovered that our SaaS client has dozens of customers with custom subscription plans with favorable pricing. After digging a bit deeper, we realized that those plans were almost the same as the regular plans on the website. If all those plans were corrected, our client would receive 25% more revenue.
To discount, or not to discount, that is the question
As with most things in modern business, pricing and discounting require structure and thorough analysis. We don’t need to guess.
As pricing experts, we help companies answer all those questions. Arrange a free consultation with us, and we’ll make sure that discounting is the right idea for your SaaS.