Deconstructing SaaS discounting
Steven Forth is CEO of Ibbaka. See his Skill Profile on Ibbaka Talio.
Discounting is part of life in B2B SaaS. There are a few product-led growth companies with no discounting. See Can a ‘no discounting’ policy work for enterprise SaaS? But for companies with a sales-led growth motion, there will always be some discounting. This is so as we need to:
Give salespeople agency
Acknowledge the needs for procurement
Manage competitor moves
Better align price to value
We have explored these issues in
Given that you are going to discount, how should you go about doing so?
The new layers of SaaS discounting
Begin the design of a SaaS discounting program by looking at the pricing factors your price is based on. These will be unique to your solution and pricing design, but they probably have at least one of the following …
Subscription discount
Scaling or usage discount
Support package discount
Professional services discount
If you have a platform + extension packaging model you may want to look at discounting the platform and each module independently.
Platform Discount
Module 1 Discount
Module 2 Discount
Module N Discount
If you have a tiered of GBB style packaging architecture consider analyzing discounting for each tier. We see two different patterns in tier discounting.
Some companies discount the lowest tier as its purpose is to lure buyers in and the real money is made on the upsell. Discounts are avoided at the Best tier as they undermine the perception of value.
Other companies are already near rock bottom for Good but are more willing to account for higher margin tiers.
Unpacking discounts in this way allows you to focus in on buyer concerns and perceptions of value.
Ask …
What discounts will best answer buyer objections?
Are there questions about the value of some part of the offer? The best response to this is generally not to provide that
What discounts are best aligned with your strategy?
This is an analytical process. It helps the business owner and pricing model designer think through how to manage discounts. But it is too complex for daily use. Something simpler is needed (‘As simple as possible but no simpler’ as Albert Einstein is said to have said.)
Once you have broken it down, build it back up
Having so many different types of discounts is not going to be manageable so now that you have broken down your discounts you will need to build back up to something simpler.
Most sales teams will have difficulty managing more than three types of discounts so try to get the number of types of discounts down to two or three.
The two basic types of discounts are those on subscriptions and those on one-time fees. These need to be managed separately and SaaS companies should discount one-time fees first.
Discount one-time fees even when they are lower margin. Some more traditional companies tend to discuss higher margin fees first. This is a mistake. Fight hard to preserve the parts of your business that provide recurring revenue and drive your valuation. Discounting based on margin is a leftover from the old ‘cost plus’ world.
Discounts can change across the years
One best practice that is sometimes overlooked is that discounts can change over the years. One can write this into a contract even if it is a one-year contract to manage expectations.
The basic ideas are
Don’t lock in long-term discounts, have a way to adjust discounts
Use discount to align price paid with value over time, this means that your discount structure will depend on how V2C (Value to Customer) changes over time.
See Price It Right: Value over Time shapes pricing and Pricing and Planning: 3 Approaches to Discounting.
Discounts are part of you pricing design
In SaaS discounting is part of your pricing design and not an afterthought. Use the same principles of fairness, transparency and consistency for discounting that you use for pricing. Make sure that discounts align with value delivered and do not undermine or distort that value.
At the same time be realistic. Give sales agency, be prepared to negotiate with procurement, and make sure you are ready to address competitor pricing actions.