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Unique Sales Commission Structures

This article is co-authored with Ray Thek, Fall Analyst at Bowery Capital. Loren is an Associate at Bowery Capital, an early-stage venture capital firm investing in B2B technology.

Within software, optimal sales commission structures are extremely difficult to create and are a continuously iterative process. As a sales manager you want to be sure to reward your top performers, but also need to encourage teamwork in the way your commissions and bonuses are structured. Good salespeople tend to be voracious by nature. When it comes to “friendly” inter-company competition, a maligned compensation system can cause cannibalized revenue, increased cost of sales, stifled lead generation and disgruntled employees. Eliminating commissions entirely can backfire with some of the same effects when employees believe they have disproportionately contributed and are not being rewarded. Hybrid compensation plans often struggle with complexity as they try to properly align multiple products and business lines. Salespeople tend to ignore a plan whose direct incentive is not apparent. So, how can you incentivize teamwork and individual sales performance? Here are three interesting methods we’ve seen.

  1. We’ve seen several startups experiment with alternative commission structures predicated on the theory that an overly aggressive sales team produces customer success issues further down the line. One solution is a company-wide bonus that is paid out equally to every member of the team (developer and salesperson alike). This bonus is a percentage of excess company revenue above the monthly quota. The view here is that a bonus structure that gives all employees a stake in monthly earnings will optimize workflows beyond sales. However, this system has its shortcomings. The structure takes away from the individual incentives and also may not be viable as the employee count grows. Despite these potential issues, this may be a method to consider.
  2. Instead of removing commission to unify the team’s efforts, other startups have taken an antithetical approach, paying every employee on commission to some extent. This rallies every department behind sales, allowing for a team dynamic on every deal. It also gives flexibility to still reward those who are closest to the deal by varying commission based on role. Engineers, for example, might receive 20% commission and 80% salary, while salespeople’s pay consists of 90% commission and 10% salary. This way, everyone is focused on revenue creation as a collective and the company is still free to attract top sales talent via traditional incentives. A main drawback of this system has been inconsistent payouts. Employees may tighten their belt in one month only to be flooded by cash in the next.
  3. Another alternative is the spot bonus. Many companies have championed the idea of performance based spot bonuses as a replacement for traditional commission. The concept behind this is that employees (from all departments) can be incentivized by the knowledge that outstanding achievement will be monetarily rewarded. This allows a similar team-oriented feel to the all-commission structure, but gives more consistency in payout. The spot bonus plan also allows for more discretion. Accurate commission incentive plans require an organization to be extremely open about their revenues. Paying bonuses rather than publicly proclaiming fixed commission rates may be more conducive to a company whose culture is more reserved. A problem that is often seen with bonuses as a replacement for commissions is that they act as a soft cap to compensation. When an employee is commission based the up-side is theoretically unlimited. If they are able to sell double their sales goal, they will receive a fixed percentage more in commission. With a spot bonus, the employee knows they will be compensated for excellence, but this compensation is fixed. One potential drawback is that it may not make sense for a top salesperson to work 20 extra hours closing a new deal if they are already the top performing salesperson.

While no strategy is perfect, a strategically designed plan can be a significant competitive advantage in utilizing human capital. An organization should to take into account both individual and team dynamics in order to achieve optimal results.

Seed to Growth: Know Your Customer Journey

This post was co-authored with Ryan Janssen of Oxford Valuation Partners.

The single biggest difference between venture-stage founders and growth-stage founders in VC pitches: the venture-stage CEOs often can’t articulate their Customer Journey. We’re surprised how often venture-stage CEOs are unprepared when asked this. They can’t even provide a wrong Customer Journey, which is better than nothing. Many (even most?) venture-stage CEOs haven’t even considered it yet!

Your customer is the most important part of your business. So understanding how a customer becomes a customer is a great way to invest your time. It’s really the first step in building a company that scales, which is why 100% of growth-stage companies understand it.

That’s why you need a Customer Journey. Your entire organization needs to know what potential buyers think as they advance towards becoming customers. What they feel, what their problems are and what pushes them towards the ultimate decision to buy.

If the Customer Journey is a new concept to you, here are some helpful resources:

  • The Sales Acceleration Formula – start here. Roberge has a great section on how to plan a Customer Journey, and mapping it to your CRM process.
  • HBR has a good primer on Customer Journeys.
  • Usertesting – there’s a very good template for mapping Customer Journeys.
  • SurveyMonkey has a good (if slightly self-interested) version for B2C Customer Journeys.

Some general tips on the Customer Journey planning process:

  1. Understand your customer more deeply than you do now. The whole Customer Journey planning process is really an exercise in just that. Interview customers, analyze data, review industry best practices. Question all of your assumptions and be very outward looking in your planning.
  2. Make sure your Customer Journey is action-oriented. This is NOT a thought exercise. Every stage in the journey should have an external trigger, an internal action and a metric for how well you’ve taken the Customer through this stage. This is especially true for BD, where every stage in the journey should sync up to a bucket in your CRM.
  3. Add loss branches. These are even more important than the sale. Track and understand why customers fall off at each stage of the process. Once you understand the most vulnerable stages in the journey, you know where to focus.
  4. Take the Customer Journey beyond sales. The Customer Journey should drive product design, customer support and every other area of your business. This is what it actually means to be a customer-centric organization! I’ve invested in a company because they had the Customer Journey posted on the wall of the lunch room.

It doesn’t even need to be a business. This works for any BD-type process you’re working on. Building your personal network? Trying to get a promotion? These should all have Customer Journeys too. Whatever it is, start with a set of discrete states that map out how the customer will get from cold to purchase.

For more information, contact Sanjay Gandhi at sgandhi@oxfordvp.com. Avoid other pitfalls on your journey by visiting the knowledge section of the Oxford Valuation Partners website.

 

Startup Culture Podcast: Danielle Morrill of Mattermark

Danielle Morrill is the co-founder and CEO of Mattermark. She was the first employee at Twilio and went through yCombinator with a different company, one which wound down but ultimately became Mattermark. Danielle shares insights from these experiences as well as thoughts on shaping culture in a venture as you grow from founders to a team of more than 50.

Square 1 Bank Announces Credit Facility to HealPros

Square 1 Bank, a division of Pacific Western Bank, today announced that it has provided a credit facility to new client HealPros, a HEDIS/STARs gap closure service provider. Proceeds from the facility will provide working capital as the company pursues a strategic expansion plan.

Headquartered in Atlanta, GA, HealPros uses its mobile healthcare capabilities to solve Health Plan HEDIS and STARs compliance gaps. For example, HealPros provides mobile, diabetic eye examinations in physicians’ offices, members’ homes and other non-medical locations on behalf of healthcare payers to assist with one of the most difficult gap closures. By making early detection and examination services more accessible, HealPros is improving patient care and diabetes compliance for patients who are not regularly examined by primary care physicians or eye care professionals.

Jim Sullivan, chief executive officer of HealPros, said, “HealPros expects to rapidly expand through the remainder of 2016 to aid its health plan partners in closing national compliance gaps particularly for the diabetic retinal exam measure. The credit facility provided by Square 1 will aid our team in the expansion of our service offering throughout our current 15-state footprint. We are thrilled to have Square 1 as our financial services partner and look forward to working with their exceptional and experienced team.”

“At HealPros, there is a demand for expansion not only in geographies served, but also in programs and services provided,” added Mark Lange, vice president in Square 1’s Specialty Finance practice. “There are other compliance gaps that telemedicine can address, and HealPros is well equipped to drive that ship forward. We are pleased to support their growth and the outcomes they are poised to achieve.”

About Square 1 Bank

Square 1 Bank is a division of Pacific Western Bank, a Los Angeles-based commercial bank with over $21 billion in assets. A full service financial services partner to entrepreneurs and their investors, Square 1 provides clients flexible resources and attentive service to help their companies grow. Square 1 offers a broad range of venture debt, treasury and cash management solutions through offices in top innovation centers: Atlanta, Austin, the Bay Area, Boston, Chicago, Denver, Durham, Los Angeles, Minneapolis, New York, San Diego, Seattle and Washington, DC. Pacific Western Bank is a wholly-owned subsidiary of PacWest Bancorp (NASDAQ:PACW). For more information, visit www.square1bank.com.

About HealPros

HealPros was created to address the unmet needs of health plans and health systems to bring non-compliant patient populations into compliance for critical diagnostic care tied to specific HEDIS and STARs measures. The Company’s focus is to bring early detection and examination services directly to patients in their home, at their physician’s office, and in non-medical venues such as nursing homes, retirement communities, and corporate offices. State-of-the-art examinations offer easy access for members who are most in need of service while providing health plans the needed improvement in member care.

Media Contact:
Square 1 Bank, a division of Pacific Western Bank
Dee McDougal
919.597.7479
dmcdougal@square1bank.com

Square 1 Bank Announces Credit Facility to BAROnova

Square 1 Bank, a division of Pacific Western Bank, today announced that it has provided a $7.5 million credit facility to new client BAROnova, Inc., a clinical-stage medical device company. Proceeds from the credit facility will supplement the company’s recently raised Series D equity round to support continued growth and strategic initiatives.

Located in San Carlos and Goleta, California, BAROnova® has developed a non-surgical, non-pharmacologic medical device for weight loss in patients with obesity. The BAROnova TransPyloric Shuttle® (TPS®) is designed to slow gastric emptying which enables patients to feel fuller longer. The device is inserted into the patient’s stomach through a brief endoscopic procedure. Currently in clinical trial, the ongoing FDA pivotal study is designed to demonstrate the relative efficacy and safety of the device in combination with modest diet and lifestyle support versus diet and lifestyle support alone.

David Thrower, chief executive officer of BAROnova, commented, “Based upon our pilot data, we believe that we will be able to offer obese patients a non-invasive solution for weight loss. We anticipate completing our pivotal trial enrollment in the near future and believe the TransPyloric Shuttle, with its one-year device residence duration, will offer significant advantages for obese patients with a desire to lose weight and to create a healthier lifestyle. We are grateful to our investors and to Square 1 for supporting BAROnova during this exciting time leading to FDA PMA submission.”

Rilus Graham, senior vice president in Square 1’s life sciences practice, added, “Having recently raised a successful Series D round of financing, BAROnova has taken critical steps toward the launch of a minimally invasive weight-loss product to help treat obesity. We are excited to support the BAROnova team in their mission to move this innovative technology to market.”

About Square 1 Bank

Square 1 Bank is a division of Pacific Western Bank, a Los Angeles-based commercial bank with over $21 billion in assets. A full service financial services partner to entrepreneurs and their investors, Square 1 provides clients flexible resources and attentive service to help their companies grow. Square 1 offers a broad range of venture debt, treasury and cash management solutions through offices in top innovation centers: Atlanta, Austin, the Bay Area, Boston, Chicago, Denver, Durham, Los Angeles, Minneapolis, New York, San Diego, Seattle and Washington, DC. Pacific Western Bank is a wholly-owned subsidiary of PacWest Bancorp (NASDAQ:PACW). For more information, visit www.square1bank.com.

About BAROnova, Inc.

BAROnova is a clinical-stage medical technology company developing devices for the treatment of obesity.

BAROnova’s technology focuses on slowing gastric emptying, a known mechanism of action for weight loss. For more information about the company, please visit www.BAROnova.com.

About the TransPyloric Shuttle

BAROnova’s novel weight-loss device, the TransPyloric Shuttle (TPS), is inserted and removed through the mouth using standard endoscopic techniques. In a previous feasibility study of the TPS, patients with a BMI of 30-40 kg/m2 demonstrated an average excess weight loss of 58% and an average total body weight loss of over 14.5% after six months.

Media Contacts:
Square 1 Bank, a division of Pacific Western Bank
Dee McDougal
919.597.7479
dmcdougal@square1bank.com

BAROnova, Inc.
David Thrower
650.638.9796
dthrower@baronova.com

Expedia VP On Changing Your Company’s Culture Through Diversity & Inclusion | PowerToFly

PowerToFly was launched by Milena Berry and Katharine Zaleski in 2014 to connect Fortune 500 companies and fast growing startups with women who are looking to work for companies that value gender diversity and inclusion. PowerToFly is building the platform to propel diversity recruiting and hiring. The company’s optimized search and sourcing tools, targeted job promotions, and high visibility employer branding services reduce the time to hire hard to reach talent pools of underrepresented female engineers at a centralized and lower cost. Through the platform, companies gain full access to actively and passively build a pipeline of vetted women in tech.

For more information, visit https://www.powertofly.com/.

 

Screen Shot 2016-09-08 at 10.19.49 AM

Britta Wilson is the Vice President of Inclusion Strategies & Cultural Integrity at Expedia and is pursuing a doctorate in organizational leadership. She previously served as the Senior Vice President of Human Resources at Paramount Pictures, responsible for Talent Acquisition, Diversity and Learning. She shared with PowerToFly her strategies for making a cultural impact within a large organization like Expedia and why managers need to “think bigger and broader” when it comes to hiring. +Read more

The Top Five BAD Reasons to Take on Venture Debt

This article was originally published on October 1, 2013.

At Square 1, we’re dedicated to the start-up marketplace. As lenders, we focus on working with institutional venture capital firms and the companies they fund.  Lots of those companies are still developing their product or service. Others have reached the point where they’re figuring out how to attack the market, and still others are working to maximize profitability.

Lending to companies with venture capital backing is different from traditional banking in some ways, but in other ways it’s very similar. Over the years I’ve seen some great uses for what we lovingly refer to as “venture debt,” and some reasons to borrow that didn’t make as much sense.

Below are some of the BAD reasons to take on debt that have come across my desk. Some may seem obvious, but if you’re new to the world of venture lending,  some may seem quite surprising.

1. Debt is cheap equity.

This idea is simply not true. If you don’t believe me, you can contrast this to this .

Banks are not venture capital firms. A few have affiliates that make investments, but regulators make us keep those activities discrete from banking. There’s good reason for that. Direct investing is supposed to be riskier than bank lending and taxpayers shouldn’t be on the hook for investment risk. Investors have greater upside, but greater risk. Banks have lesser upside and lesser risk, and it’s largely because of that lower risk profile that banks get the benefit of the U.S. government’s backing. As we all know, federal and state regulators are intensely interested in the performance of banks—and rightly so. They’re the taxpayers’ watchdogs, because when a bank fails because it’s made bad loans, it might lead to taxpayers having to cover the deposits.

The calculus of bank performance is actually the opposite of venture fund performance. Since a VC fund has unlimited upside and downside, a venture fund can still return capital to its LPs if only a small number of its companies succeed—as long as the successes are big enough—but success at a bank is measured by how small a percentage of its portfolio doesn’t succeed. Banks don’t have the unlimited upside of equity investors to offset write-offs. Interest income from even the most wildly successful borrower doesn’t offset a large bad credit for a bank.

Another reason banks get so excited about getting all their loans repaid is that most of the money banks lend doesn’t belong to them. It belongs to their depositors. Pause and think about that for a second. You put your hard-earned money on deposit with a bank and you have every right to expect it back when you want it. You enter into a trust relationship with the bank to keep your deposits safe. Would you want your banker lending your deposits to someone who considers it a sunk cost? Of course not.

2. I don’t want to involve my investors.

This is a bad reason to pursue debt because any bank worth its salt will involve the borrower’s investors in its decision-making process if it’s lending to a venture-backed company. The bank will have conversations with investors covering things as mundane as a common expectation that the debt will be repaid (see item #1 above), as well as key issues like how the investor measures the company’s progress, the investment’s exit strategy, under what circumstances the investor will provide additional capital to the company, and how much they’ve set aside for that purpose. The answers to these tough questions should inform the bank’s credit decision and may lead to redirection of the dialog with the borrower.

An investor’s willingness to support their company’s decision to take on debt will be partly based on borrowing experiences they’ve had in the past, but also on how they view the value of their investment in the company. The way capital stacks up, senior debt has to get repaid before investors get a penny. That means the investor has to believe that the market value of the company is greater than the sum of the carrying value of their investment in the company, plus the debt. Sometimes that’s the case, and sometimes, unfortunately, it’s not. And if the management team holds common shares, they need to think that through too, since the lender, and then the preferred equity holders, all have to be repaid before the common stockholders begin sharing in the return.

3. The more leverage, the better the return on equity.

The operative word here is more. Leverage in the form of bank debt can serve a valuable purpose under the right circumstances. It can provide a low-cost, low-dilution method for getting a borrower from one point to another, sometimes increasing a company’s value by the time another equity round is needed, and sometimes dramatically increasing it. But too much debt, or debt structured the wrong way, can stop an equity round in its tracks or can make a company unattractive to an acquirer. This concept is lost on some borrowers—and on some banks, for that matter. I’ve seen other banks get so worked up over a chance to lend to a company that they offer more debt than the company requested. There are times when it’s to a company’s benefit to borrow more, but I have seen new investors resist coming into an equity syndicate because the company’s debt burden is too great (see the discussion about the capital stack, above).

Responsible lenders want to enhance the company’s value, not take it over by exceeding the position of equity holders.

4. No personal guarantee? No personal responsibility!

Personal guarantees from the management team are almost never required by banks providing venture debt, but that doesn’t mean there’s no fallout if a management team doesn’t take care of business. One of the basics of lending is character. Even the safest loan can be impossible to collect if the people who borrowed the money don’t intend to repay it. Most troubled situations don’t involve anything as egregious as fraud. More often, people just make poor choices. This can be true of actions as seemingly innocuous as incomplete disclosure, or spin. But the best thing borrowers and lenders can do for one another is to be as candid and forthcoming as possible, as soon as possible, if things aren’t going according to plan.

Ben Franklin said, “It takes many good deeds to build a good reputation, and only one bad one to lose it.” This works both ways, and believe me, at Square 1, we understand that. We’ve been so acutely aware of it that being square is one of our core values, and we hold one another accountable for it. We understand that burned bridges can be impossible to rebuild.

5. If I just had another six months of runway, I might be able to raise equity.

I can’t tell you how often I’ve seen this reasoning over the years, but when raising needed equity is questionable, using bank debt to get to a decision point is a bad idea. The argument I hear most often revolves around what makes bank debt worthwhile, and how repayment risk has to be extreme to make that case. Look, we have and will continue to provide thoughtful bridge exposure to the right companies, with the right investors, in the right situations. But (and you knew there was a but coming along) what we won’t do is bridge to an indefinite event without a fall-back position. See Item #1, above. I tell people that as long as it’s a question of “when” funding will occur and not “if” funding will occur, we will consider going into a bridge situation.

All this gets back to the premise of venture banking as distinct from venture capital. Put another way, if bridge financing is needed to get your company to a point where it can determine whether or not it can survive, please don’t consider bank debt.

What is the Difference between Incubators and Accelerators?

When you get into the startup game, you hear the terms “incubator” and “accelerator” in your conversations with other founders and entrepreneurs. Maybe you have a friend whose company is working with an incubator, or you attended an event hosted by an accelerator. It can be easy to assume they are one and the same, but they each are different in what kinds of companies they bring in, as well as what they are looking to get in return.

So what IS the difference between an incubator and an accelerator, and is either option right for your business?

Startup Incubators

Incubators bring in early-stage companies to develop their idea with assistance in the form of office space, resources and access to experts in the startup ecosystem. In exchange for this assistance, the investor or investing group will receive a percentage of equity in each company. There is usually no time limit for participating; each company is brought along at its own pace, usually until it becomes self-sufficient enough to begin operating independently.

Startup Accelerators

Accelerators imply a more expedited process, and that is what you get. Companies that gain acceptance into an accelerator program are looking for resources and guidance to catapult them to their next milestone. Programs last just a few months (usually three) before companies are set off on their own again, and investors will offer up investment capital and act as mentors in exchange for a percentage of equity in the company. This percentage is generally less than what would be requested from an incubator.

What’s the process for applying?

Even though there has been a big jump in the number of both incubators and accelerators cropping up in major markets across the country, it can still be pretty tough to get in. The most popular programs reject hundreds of applications each year. Y Combinator, a top incubator in the Bay Area, has to turn down so many great companies/ideas that they have a page up on their website that explains why they weren’t selected.

Should I choose an Incubator or Accelerator?

Think carefully about what stage your business is in before deciding which route to go. If you are still working through important details such as market fit, product development or even just the right elevator pitch, then an incubator may be the ideal option. If you’re at the MVP stage, have solid financial planning and need expert input on how to proceed to the next stage of your company’s development, an accelerator is the better choice of the two.

As with other cases, this is a great opportunity to take a look around you. What are other founders and entrepreneurs in a similar stage doing? If you already have a mentor or advisor, do they have any recommendations? Don’t be afraid to tap into your existing network to get additional input on what the best option is for you and your early-stage company.

Square 1 Bank Announces Credit Facility to Zavante Therapeutics

Square 1 Bank, a division of Pacific Western Bank, today announced that it has provided a $10 million credit facility to new client Zavante Therapeutics, a clinical-stage biotechnology company. Proceeds from the facility will provide growth capital to support commercialization efforts and the potential development of additional indications.

Headquartered in San Diego, Zavante develops and commercializes therapeutics to address serious unmet medical needs in hospitalized patients. The Company’s lead product candidate, ZTI-01, is a first-in-class injectable antibiotic which treats a broad range of infections including those caused by multi-drug resistant (MDR) bacteria. Zavante is backed by leading life sciences investors including Aisling Capital, Frazier Healthcare Partners and Longitude Capital.

“We are extremely pleased to have Square 1 as our banking partner and extend the strong financial relationship base that we have formed with our existing venture capital investors. The closing of this credit facility supports our goals of filing a New Drug Application, or NDA, for ZTI-01 with the U.S. Food and Drug Administration in the second half of 2017 and preparing for commercialization,” said Ted Schroeder, founder, president and chief executive officer of Zavante.

Rilus Graham, senior vice president in Square 1’s life sciences practice, added, “Zavante’s success to date is a testament to the vast knowledge and experience of the company’s strong board and management team. Square 1 looks forward to working with this impressive group as Zavante boosts its commercialization efforts and overall growth.”

About Zavante Therapeutics
Zavante is a privately-held, late clinical-stage biopharmaceutical company focused on licensing, developing and commercializing novel products that address serious unmet medical needs in the hospital.

About Square 1 Bank
Square 1 Bank is a division of Pacific Western Bank, a Los Angeles-based commercial bank with over $21 billion in assets. A full service financial services partner to entrepreneurs and their investors, Square 1 provides clients flexible resources and attentive service to help their companies grow. Square 1 offers a broad range of venture debt, treasury and cash management solutions through offices in top innovation centers: Atlanta, Austin, the Bay Area, Boston, Chicago, Denver, Durham, Los Angeles, Minneapolis, New York, San Diego, Seattle and Washington, DC. Pacific Western Bank is a wholly-owned subsidiary of PacWest Bancorp (NASDAQ:PACW). For more information, visit www.square1bank.com.

Media Contact
Square 1 Bank, a division of Pacific Western Bank
Dee McDougal
919.597.7479
dmcdougal@square1bank.com

Discounting In SaaS Sales: 9 Do’s & Don’ts

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.

  1. 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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.

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