Discounting doesn’t have to be the villain in your pricing story. In fact, when done right, it can be a powerful tool to boost Customer Lifetime Value and drive growth. Here, we’ll explore the important aspects of crafting a strategic discount policy for your quota-carrying Customer Success teams.
Is Discounting Bad in SaaS B2B? Not Necessarily.
Many believe discounting devalues a product, but when used strategically, it enhances customer acquisition and retention. Think of discounting as a scalpel, not a sledgehammer. When used precisely, it can make your sales efforts more effective without harming your bottom line.
Discounting can be a smart tactic if it targets the right customer segments and is aligned with your overall pricing strategy. For example, offering discounts to high-value customers or new segments can accelerate growth and market penetration.
The Problem with a Bad Discount Strategy
A poor discount strategy can lead to short-term gains but long-term pain. It risks devaluing your product, eroding profit margins, and creating a customer expectation of perpetual discounts. Imagine your discount strategy as a leaky bucket. Each poorly planned discount is a new hole, causing you to lose revenue and devalue your offering.
A bad discount strategy often results in a “race to the bottom,” where competitors also start offering similar discounts, eroding industry margins. Moreover, it can negatively impact your brand perception, making customers question the value of your product.
How an Effective Discount Strategy Empowers Your CSMs in Negotiations
Having a well-defined discount strategy empowers your Customer Success Managers during negotiations. Here’s why:
- Consistency and Confidence: With a clear strategy in place, CSMs can approach negotiations confidently, knowing the parameters within which they can operate. This consistency helps in maintaining the perceived value of the product.
- Strategic Offers: CSMs can make informed decisions about when and how to offer discounts. For instance, they can use discounts as leverage to secure long-term commitments or to upsell additional features, aligning with overall business goals.
- Value-Based Negotiations: By understanding the strategic purpose behind each discount type, CSMs can focus on the value they are providing rather than just the price. This approach helps in building stronger, value-driven relationships with customers.
- Enhanced Customer Relationships: Strategic discounting can be used to reward loyal customers or to regain at-risk customers, thereby enhancing long-term relationships and customer satisfaction.
Having a strategy in place ensures that discounts are used effectively to drive business goals, rather than being offered reactively or arbitrarily.
Introducing the 5 Key Components of a Discount Strategy
Crafting an effective discount strategy involves considering several critical components. These components help ensure that your discounts are strategic, effective, and beneficial for both your business and your customers. Here are the five key components:
- Goals: Defining clear objectives for your discount strategy.
- Types of Discounts: Utilizing various discount types to achieve your goals.
- Non-Dollar Levers: Offering non-monetary incentives to add value.
- Guardrails: Implementing guidelines to maintain the effectiveness of your strategy.
- Reciprocal Benefits: Ensuring mutually beneficial outcomes from discounts.
1. Goals
Setting clear goals is the cornerstone of any effective discount strategy. Your discount policy should align with your broader business objectives, focusing on goals such as:
- Reducing Churn: Offering discounts to retain customers who might otherwise leave.
- Incentivizing Expansion: Using discounts to encourage customers to upgrade to higher-tier plans or purchase additional features.
- Boosting Long-Term Commitments: Encouraging annual or multi-year contracts through attractive discount offers.
By clearly defining these goals, you ensure that your discount strategy drives sustainable growth and customer satisfaction.
2. Types of Discounts
Different types of discounts can be strategically applied to meet your business objectives:
- Fixed Discounts: Offer a fixed percentage discount.
- Volume Discounts: Encourage larger purchases by offering discounts for higher order value. For instance, a 10% discount for purchasing 100+ licenses.
- Multi-Year Renewal Discount: Provide a discount for customers who commit to multi-year contracts, such as a 15% discount for a three-year renewal.
- Early Renewal Discount: Incentivize early renewals by offering a discount to customers who renew their contract before a specific date.
- Prepayment Discounts: Provide a discount to customers who pay for the entire term upfront. For example, offer a 10% discount for multi-year prepayments.
These discount types help tailor your strategy to different customer needs and lifecycle stages, ensuring maximum effectiveness.
3. Non-Dollar Levers
In addition to monetary discounts, consider using non-dollar deal levers to add value and incentivize customer behavior:
- Promo Units: Provide additional product units for free, such as an extra month of service.
- Modules, Add-Ons, or Value-Added Services: Offer additional modules or services at no extra cost to enhance the overall value proposition.
- Delayed Payments: Allow customers to delay their first payment, easing the initial financial burden.
- Staggered Payments: Implement a payment plan that spreads the cost over time, making it more manageable for the customer.
These non-monetary incentives can be highly effective in negotiations, providing value without directly impacting your revenue.
4. Guardrails
To ensure your discount strategy remains effective and sustainable, it’s crucial to implement guardrails:
- Discount Scarcity: Limit the availability of discounts to maintain their perceived value and create a sense of urgency.
- Discount Timelines: Set clear expiration dates for discounts to drive timely decision-making and prevent perpetual discounting.
- Discount Limits in Contracts: Build limits into contracts to prevent excessive discounting. For example, specify that discounts won’t apply to any additional seats purchased beyond a certain threshold.
- Approval Processes: Implement an approval process for discounts that exceed a certain percentage to ensure they are used strategically.
- Regular Review and Adjustment: Periodically review discount policies to ensure they align with business goals and market conditions.
These guardrails help maintain the integrity of your pricing strategy and prevent discount abuse.
5. Reciprocal Benefits
When offering discounts, it’s important to establish what you expect from customers in return. This ensures that the discounts lead to mutually beneficial outcomes:
- Case Studies: Offer discounts in exchange for customers participating in case studies.
- Testimonials: Provide discounts for customers who give testimonials that you can use in marketing materials.
- Webinar Guesting: Offer discounts to customers who agree to speak in webinars and share their success stories.
- Referral Programs: Provide discounts for customers who refer new clients.
- Product Feedback: Give discounts to customers who participate in feedback sessions to improve your product.
These reciprocal benefits help ensure that the discounts lead to increased customer commitment and long-term value.
Combining Types of Discounts and Non-Dollar Levers
Effectively combining different types of discounts and non-dollar levers can maximize the value provided to customers while preserving your revenue. Here’s how:
- Volume Discounts with Promo Units: Offer a discount for bulk purchases and include additional free units as an incentive. For example, provide a 10% discount for purchasing 100+ licenses and include an extra month of service for free.
- Multi-Year Renewal Discounts with Modules/Add-Ons: Encourage long-term commitments by combining a discount for multi-year renewals with free access to additional modules or add-ons. This approach enhances the perceived value and encourages customers to commit for a longer term.
- Early Renewal Discounts with Delayed Payments: Offer a discount for early renewals and allow customers to delay their first payment. This combination reduces the financial burden and incentivizes customers to renew sooner.
- Fixed Discounts with Staggered Payments: Provide a fixed discount and offer a payment plan that spreads the cost over time. This makes the purchase more affordable and manageable for the customer.
By strategically combining these elements, you can create a compelling discount strategy that drives customer retention, expansion, and satisfaction.
Conclusion
A well-crafted discount strategy isn’t about slashing prices indiscriminately; it’s about enhancing value for both your customers and your business.
By understanding and implementing these key elements, Customer Success Leaders can develop a discount strategy that not only meets immediate sales targets but also fosters long-term growth and customer loyalty.