SaaS discounting is the practice of offering a lower price or rate to a particular customer in order to close the deal. It’s a sales strategy that most companies use from time to time. The benefits of SaaS discounting are clear: up your win rate, shorten sales cycles, keep a customer happy, etc. But the downsides can begin to outweigh the benefits if the practice is left unchecked: a discount-happy startup can build a reputation in the market as a “wounded animal” that is easy to haggle down, and in some cases degrade buyers’ perception of the value of the product. Moreover, SaaS discounting can provide sales teams with an “easy out” in closing a deal, which not only masks weak points in the sales process or product-market fit, but also robs your team of the ability to hone a crucial skill: learning when to let an opportunity die.
At Bowery Capital, we work closely with our founders on sales strategy from Day One, and pricing plays a big part. Every single one of our companies has put some flavor of a discounting strategy to work pre-Series A. In writing this post, I drew on that experience as well as insights we’ve gleaned from friends in the SaaS sales world over the years (for example, check out this episode of the Bowery Capital Startup Sales Podcast on discounting with Bob Lempke of Chartio). We hope you’ll enjoy the result: the 9 do’s and don’ts of SaaS discounting.
- Do Keep In Mind That Everyone Wants A Discount
If your sales process is high-touch enough to involve a conversation between a customer and a rep (e.g. not completely self-serve), push-back on price will be a constant. Especially when you are a younger startup and the target knows that, it’s in their interest to see how far you’re willing to go to win a customer. Expect to hear it from targets of all sizes: “we’re so small & resource-constrained” and “we’re huge, we’ll be one of your biggest customers & this total contract as is will be too big of a number for me to push through.” The “prime directive” of SaaS discounting is that everyone wants it, but if you’re giving it to everyone, you’re leaving money on the table and probably poisoning your market.
- Don’t Give In To Discounts Requested For The Wrong Reasons
Develop an understanding of what comprises a bad SaaS discounting request and a valid one you’ll consider. Here are a few examples (though keep in mind they’ll vary based on your business and ACV):
Bad reasons to discount: Competitor pricing is higher, customer has need & budget but won’t pay, customer wants new modules / features for free, customer is unwilling to commit to anything in return for a discount (e.g. testimonials, a discount timeline, periodic product feedback), true need or product fit is unclear, your offering contains heavy services-based elements that are not cost-scalable.
Good reasons to discount: Potential customer is facing a legitimate (hopefully near-term) issue with price point (e.g. seasonality of their internal budget process, customer can only handle a lesser number of seats than normally required but is growing or expects to expand), customer is extremely large and is requesting a reasonable per-seat discount due to total deal size.
- Do Know When To Walk Away & Be Willing To Do So
You should expect to lose some opportunities on price. As the adage goes, you aren’t negotiating if you aren’t willing to walk away. In our podcast last week, Bob highlights an important point: customers on discounts are often your biggest problem accounts. They are probably more likely to require ongoing customer success resources, and will be more difficult when it comes around to renewal time. Take this into consideration before you commit to a loose SaaS discounting policy, which could very well result in churn (or the need to fire customers) down the road.
- Don’t Let Your Salespeople Fly Blind: Pressure-Test Your Pricing Model
If you have sufficient historical sales data, you can run a few basic analyses to determine where discounts are most commonly occurring. This may give you a sense for where your product “feels expensive” to potential customers, and might draw out some areas of deadweight loss (i.e. money that you left on the table due to unnecessary discounting). At Bowery Capital’s first annual CFO Summit, Fred Shilmover, the CEO of InsightSquared, gave an excellent tactical chat on various analyses he undertook to ensure that discounts were approached in a way that maximized value for both customers and the Company. Without going into specific detail on their approach, you might try out a similar quantitative exercise of your own:
Pull together a basic scatterplot of deals won with price-per-seat and number of seats as the axes (you’ll also want to add a second line series with your list or internal rate card pricing). You’ll probably see that the curve fits the general shape of y=x^(-1), reflecting your volume discount (with spikes at your tier break points if you have then). You can do the same but swap out price-per-seat with ACV-per-account to get further perspective on how tiering or “bucket” pricing is affecting discounts. Let’s take an example: you analyze your 2nd and 3rd pricing buckets: $1k / month from 20-50 seats, and $2.5k / month from 50-100 seats. If you find no discounts at the 50-60 seat range just after the break point, you may be under-pricing; alternatively, if you that deals around 100 seats close at highly variable price points, you may want to consider capping transparent pricing at 75 seats and lumping higher-seat deals into your “Call For Pricing” enterprise tier.
- Do Understand Your “Levers” Outside Of Price In Terms Of Cost & Value
Dollars aren’t your only lever when it comes to discounts and winning deals. Many SaaS offerings scale up the number of modules, add-ons, or value-added services with tiers or price points. They can give you some flexibility in being creative with discounts and may allow you to protect revenues by offering premium features a client wouldn’t otherwise have access to. Keep in mind, however, that providing these value-added features have an internal cost as well. It’s therefore important to map each of these features out against internal ongoing cost (another smart analysis that Fred at InsightSquared undertook). You should also develop a sense for which add-on features are valuable to which customer types. This will help you to make proper use of non-dollar deal levers; they can be just as much a part of the SaaS discounting negotiation as price point.
- Do Build SaaS Discounting Into Your Internal Rate Card
Sometimes you’ll need to negotiate specific discounts on an account-by-account basis. But even if your pricing is non-disclosed, you should have an internal rate card that reflects some volume-based discounting, which is a standard expectation in most SaaS pricing models. Your salespeople should know what your “list price” is for various numbers of seats. A good start is the charting exercise outlined in #4 above. Even though you may or may not share this information with your potential customers, this will help you ensure that your discounts don’t deviate too heavily from your price-per-seat based on where that customer is in terms of number of seats. It helps ensure a consistency and fairness in volume discounting as you (hopefully) address increasingly high-ACV deals. Keep in mind that heads of sales do talk to one another, so a loose approach early on can arm later potential clients with info that might hurt your negotiating position.
- Don’t Give Anything Away For Free: Ask For Something In Return
SaaS discounting should be a quid pro quo exercise. If a potential customer asks for a lower price because they are facing a budget issue but they truly have need for your product, they should be willing to give something in return. Even if you’re a young startup, you should protect the perception that your offering is valuable; so even beta customers should be willing to provide a testimonial, case study and/or periodic product feedback. Your ask may also be something as simple as an indication of their commitment, such as time from key stakeholders. The importance of the quid pro quo isn’t necessarily just about what you get in return; it’s equally valuable in creating an equitable customer-vendor relationship and ensuring that the issue is really one of budget and not one of questionable product-market fit. Customers that are willing to work with you and meet even small asks are more likely to be better clients long-term.
- Do Structure Contracts To Protect Upside (Or At Least Message Accordingly)
Remember that discounts should only be given for good reason (see #2 above). You have (hopefully) set pricing that aligns with your product’s value in the market, and if that value is realized in a particular account, they should be paying full price. Therefore, approach the conversation of discount timelines upfront. You may want to build some sort of limit (by time or seat) into the contract itself. Even if you don’t lock in a reversion to full price upfront, you want to avoid catching a customer off-guard when it comes time for renewal. Of course, truly big deal opportunities sometimes may require that you enter into some sort of discounted trial that doesn’t have defined limits. But set a future time that you mutually agree upon to re-initiate the conversation. Most importantly, frame it around value created for that customer. If, by the time of that future conversation, the value you both hoped for has not been realized but you still feel the account fits your Ideal Customer Profile, consider extending it and dedicating more customer success resources. Alternatively, if the customer is not willing to revert to full pricing and their “fit” has become unclear (in terms of either budget or need) you should have a framework in place that forces you to consider “firing” that customer.
- Do Stay Open & Creative: SaaS Discounting Is Part Of The Negotiation
As discussed above, you should put in the work to understand what kind of SaaS discounting strategy works for you. You should also ensure that your sales team understands the rationale and knows how to stick to the party line. But at the end of the day, especially as you consider higher-ACV deals, every deal has its own idiosyncrasies, and many SaaS discounting situations will come down to a judgment call. Be willing to work with your customers and don’t hesitate to get creative to win deals, within reason. No matter how scalable your business model, it’s still Software-as-a-Service; no pricing policy can substitute for a company culture that prioritizes value creation for its customers.