If 2020 taught the world nothing else, it was to expect the unexpected. Because in 2019, projections for the year ahead were nothing if not optimistic.
As a small example, the Software as a Service (SaaS) market was predicted to eclipse $157 billion—a substantial jump from its $134.44 billion valuation in 2018. Yet, after the pandemic shook up the entire global economy, reality may be radically different than initially projected.
Regardless, businesses across the world have had to make big changes to survive the impacts of the pandemic. And those that didn’t, or couldn’t, move quickly enough were forced to close.
Those that have weathered the storm so far have likely done so because they were strategically positioned in the marketplace, or because they took actions to attract new customers and keep them satisfied.
One of the key components for attracting customers—and one that many business are likely testing or at least considering at this time—is pricing. This often takes the form of discounting: price alterations that impact the perceived value of products.
Discounting as an acquisition strategy can be approached in many ways. Some businesses use discounts pretty effectively as a way to really enhance their product offerings. Other businesses, quite frankly, just throw their money away with ineffective discounting schemes.
Before we dive too deeply into the dos, don’ts, challenges, and solutions of discounting though, let’s explore some good reasons why businesses may choose to discount.
Five main reasons to discount in SaaS
Just as every SaaS business is different depending on industry, offering, customer demographics, and more, there are many different reasons one may want to offer a discount to its customers.
Discounting is a very powerful business tool, but you need to be clear on what you’re trying to achieve.
- Gaining market share. Sometimes a SaaS business decides to offer a discount simply as a ‘land grab’, to grow its market share, or to simply find a foothold in a market that’s evolving quickly. Maybe you've already got a good number of customers but you’re trying to push it over the edge and get to some strategic number; say thirty percent of the market.
Businesses working to gain market share might be thinking, “We're going to get less money right now, but we're achieving a goal that’s not one hundred percent revenue. We're achieving a goal that’s changing the direction of the market.”
- Making your numbers. In today’s economic upheaval, this is probably one of the most common reasons businesses may choose to discount. With the COVID-19 pandemic, there’s a lot of downward pressure for SaaS teams to make their numbers work. The reality is, budgets are not being realized.
Businesses that are simply trying to hit their goals will find discounting is a good tool for this.
However, if you’re using a discounting strategy just to make your numbers, unfortunately, you’ll find there are a lot of repercussions downstream.
- Beating out the competition. Having strong competitors in the marketplace does have its benefits. It keeps a business on its toes and pushes it to offer a superior product to its customers. However, businesses often find they need to offer different discounts than their competitors.
For example, if your product is going up against Competitor A, you might need to discount your product by 20% to gain an advantage and secure a customer’s business. However, if your customer is comparing you with Competitor B, you might need to offer a different discount.
How do you keep track of which customer was offered what discount? It can prove to be a huge headache down the line.
- Fitting the customer’s budget. Sometimes when you’re working through the sales process effectively, in trying to extract as much information as possible from the prospect you may find that your product is simply priced higher than their budget. What do you do?
In the SaaS space, the cost of providing service is generally quite low, so many businesses will discount to fit the budget. This can be an effective way to bring in customers with growth potential, so long as the lower budget is in fact real and not simply a bargaining strategy.
- Churn reduction. At times, a SaaS business will discount its product with the idea of reducing churn over the long term. The more a business can make its product sticky—offering a solution that the customer uses frequently and at a cost they can’t say no to—it knows the customer will likely stay faithful to their product.
One way of doing this is to offer a discount on a specific part of your package, such as discounting the implementation process or discounting an integration to another product that’s core to their business.
The more you can make your solution something a business comes to rely on, the stickier your product will be. But you need to get them in the door first.
The challenges of effective SaaS discounting
For discounting to be impactful, you need maintain control. This includes control of the sales team, the specific use of discounts, and the overall impact discounting will have on your business.
Discounting and your direct sales team
Sales teams may resort to using discounts as a crutch rather than focusing on selling the value of the product. But discounting should never be used as a leading tactic—instead, it should be used as a closing mechanism toward the end of the sale.
As the old saying goes, “if you sell on price, you lose on price.”
So if your main selling point is cost, you can easily lose to a competitor that actually costs more but has done a better job of making the customer see the value.
Controlling the use of SaaS discounting
Next, keep in mind discounting impacts your business margin. You're still providing the same service, so when you discount, what you’re giving up is 100 percent margin.
You also need to be careful if your platform has any fixed costs or necessary hardware.
In the SaaS world, there’s a theoretical cost of sales because it’s running on a platform. There is a fixed cost, but it’s relatively minor.
However, if you're selling a product with a hardware component attached to it—such as an IoT business with connected devices—you need to be very cautious if you’re discounting to win business. You must ensure you factor in variables such as stocking and restocking fees, items that are damaged in transit, and long-term warranty costs.
If you don’t? Sure, you might make the sale, but your net margin will be less than what you think it is.
Be mindful of how discounting affects the overall health of your business
Also, keep in mind discounting reduces your revenue.
While you’ll get more sales if you hire more salespeople in an enterprise model, in a SaaS model, you’ll get more sales if you get more marketing qualified leads (MQLs).
This is why SaaS businesses typically staff their sales teams based on projected MQLs. But there's only X amount of revenue you can extract from every qualified lead. And when you discount it, you don't get that money back, so your overall revenue goes down.
If you use discounting as a tool correctly, you'll win deals you otherwise would have lost, so your overall revenue will be higher.
But if you're not careful in managing your sales process and structuring your discounts correctly, you're just going to be charging everybody less.
Effective SaaS discounting requires flexible, adaptive billing technology
Discounts often have a shelf life that create an urgency for the prospect to convert to a customer.
Once customers are brought on board with a discount, how do you back out of it down the road? And more importantly, how do you get customers’ renewal pricing closer to being in line with that of your mainstream customers?
Your SaaS business needs to have the technology to manage and support all of this.
When a business’s technology doesn't support the schemes and strategies marketing and sales put together to win new business, there can be trouble. In fact, this is where a good portion of revenue leakage occurs for SaaS businesses.
Discounts can have a time limitation attached to them, or they can be usage-limited. And regardless, at the end of a contract, there’s usually some sort of uplift to a more standard price.
Imagine having to go through your customer base manually to adjust contracts on a continual basis—all the while keeping tabs on the various discounting strategies applied across the board?
- If you forget or are late to make an adjustment, you’ll either be leaking revenue or you’ll be over charging, which could lead to churn.
- We often see SaaS businesses creating entirely new plans to support the discounting they want to apply to a customer, rather than having a preferred selling price and then discounting from that. Why? Because their billing systems simply don’t have the sophistication to discount plans on a customer level.
- This leads to situation where businesses will have many plans at different price points, and they have no seamless way of migrating the customers on these discounted plans to more standard pricing.
An adaptive recurring billing service manages all of this for you—automatically. The technology gives you the flexibility to create standard pricing plans and then discount and customize from those to win business.
The inclusion of such modern billing capabilities creates a clear competitive advantage for SaaS businesses that have implemented this fintech digital transformation above those that haven’t.
If you don’t have an effective way to manage discounting, manage your subscriptions, and above that, manage your recurring revenue, then your business is at risk.
Renewal pricing: the downstream challenge of SaaS discounting
Renewal pricing can be a challenge when you’ve discounted your SaaS product. And this can have a huge impact on your customer experience, and of course, your churn rate.
Do you take away the whole discount all at once, or you do it in a staged environment?
The answer is 100% customer-specific. Ask yourself the following.
- How well is the company doing?
- How much have they grown?
- How much do they like the software?
- How good was your sales or customer success team at keeping in touch throughout the year?
Regardless of how you choose to transition customers’ pricing post-discount or at the end of their contract, adaptive recurring billing enables your business to manage renewals and uplifts automatically and in the exact way you’ve laid it out in your contracts.
Customers are still unlikely to love when their pricing goes up, but at least you’ll know you’ve managed the process professionally.
Unique renewal requirements
What about customers with unique discounting situations that require a bit more customization when the time comes? These one-offs can be handled by your sales or customer success team who have the specialized skillsets to handle these cases, rather than your billing and accounting team.
For example, what if a client had heavy discounting applied to their subscription plan in order to bring them in the door?
You may not be able to just automatically remove that discount entirely when renewal comes around. Instead, your sales team might present that full price without discounting and then have a discussion with the customer around what can be done to make it better.
‘You’re currently paying X, the list price is X, why don’t we do X for you…’. This creates a much more positive customer experience.
Automated price uplifts
And what about non-discount related uplifts in customers’ pricing?
In the SaaS world—and especially for B2B SaaS—annual price uplifts are quite common and accepted. However, there's often no way to implement uplifts unless you have an automated system to manage it.
Just getting accurate billing out on time and getting paid can be challenging in itself for businesses operating with manual processes. Consequently, applying uplifts across an entire customer base is often too much to consider.
With a comprehensive billing automation solution, uplifts can be applied automatically and tailored at the customer level. This means you can set it in your contracts, and then just let it happen.
That’s all margin.
Discounts play into future SaaS forecasting
Why do you offer discounts? To get customers in the door. But its important to consider the future at the same time. You should structure your contracts to get your customer thinking in long-term contexts.
Point out the total cost of ownership to customers, not just in the first year. Take the customer from, “What’s it going to cost me today?” to “What’s it going to cost me over the next three years?”
For example, instead of discounting 50% at year one, consider offering 30% off in year one, 20% off in year two, and 15% off in year three. That way customers know exactly what their costs are going to be each year.
And as the customer grows with your business and increases their usage of your product, chances are you’ll end up making more even with the extended discounting.
Imagine the complexities of manually managing these discounts, though. What a headache. And if you forget to change that discount from 30% to 20% between years one and two, you’ll be leaking revenue.
If your billing and accounting team can’t handle these discounting related billing complexities, then it can’t be presented to the customer as an option.
Comprehensive recurring billing software can handle discounts every step of the way, automatically, so these price breaks are managed correctly each time the price adjusts. This is essential for reporting and forecasting, because you can’t plan for the future if you don’t have a solid handle on present finances.
Use discounting effectively to acquire customers and scale your SaaS business
Businesses need to be more thoughtful about their strategies and the reasons behind their discounting. But equally as important, they need to make sure they have the adaptive billing technology in place to support their strategies and ongoing subscription management.
Treat customer discounts carefully. If you lose customers with mismanaged discounts, you’ll struggle to win them back.
If they decide to buy from your competitor, they’re likely gone for good.