SaaS Discounting: When and How to Offer Reduced Pricing

According to Transparency Market Research (TMP), the SaaS market will reach $164.29 billion by 2022. The IDC says that SaaS delivery is growing five times faster than the traditional software market, with cloud software accounting for $1 of every $4.59 spent on software.

Software as a Service (SaaS) is the present and the future of the tech industry.

For businesses offering subscription-based software solutions, the market growth makes for very pleasant reading. It also throws up the challenge of increased competition — more and more as the market grows, the more likely it is for organisations to be competing against other companies for the same audience and ultimately, clients.

In retail — whether it’s a new kid on the block looking to gain a foothold, or an old dog fending off a younger rival — one of the simplest ways to get ahead is through discounting. Slash the price of a product to give consumers something they can’t refuse.

Discounting has been around forever because it works. Psychologically, it works. Discounts make people happy. So popular are vouchers, coupons and deals, that they’ve spawned an entire market of their own. People spend multiple hours a week just looking for ways to save money.

If you want to sell more of something, anything, you should be able just to add a discount to it and sit back while the money rolls in, right? In retail, definitely. But maybe not as a SaaS provider.

SaaS isn’t retail

Discount wars are what keeps retail companies afloat a lot of the time. Once one sale ends, another begins. So much so, that rarely does anybody have to pay full price for anything these days.

Trying this approach as a SaaS company, however, is destined to fail. In retail, stores worry more about weekly and quarterly targets then consistent repeat purchases (loyalty always takes a dive when consumers are price sensitive). Discounts are used to get people through the doors to buy the thing that’s discounted and then the job is done. When they want you back, they’ll repeat the process.

In SaaS, customer acquisition is a one-time thing. You get a customer on-board and attempt to retain them.

The aim of a sales rep in a SaaS company isn’t solely to give the customer the best deal to get them on board; it’s to make them a customer for the right reasons — a customer that appreciates value over price. If a customer signs up for no reason other than price, then maybe they’re not there for the right reasons. Because if price is the primary motivator, a customer will be happy to move to your competitor as soon their deal beats yours.

Another negative aspect of discounting for SaaS companies is that it can devalue a product. Why discount software that you truly believe offers value at full price? Lower pricing leaves customers questioning what they’re paying and reluctant to ever pay anything above discounted rates.

A study by Price Intelligently found that SaaS discounting lowers long-term value (LTV) by 30 percent, as well as producing a higher churn rate and lower willingness to pay higher prices. All stats that add weight to the argument that discounting as SaaS isn’t a great idea.

So should you just avoid discounts altogether? Maybe just lower pricing permanently instead and leave it at that?

Not yet. Discounts can work. They just need to be used correctly.

How to use discounts effectively

#1: Package level discounting

Package level discounting is discounting without actually discounting. In fact, this method encourages customers to pay more than they intended to in the first place.

An example…

A customer signing up has the option of taking the $10 per month standard package plan, which will fulfil their needs. However, by signing up today, they can get the premium package with all of its extra features for $20 per month instead of the regular price of $30 per month. And they can have it at this price until they cancel or downgrade, after which they’d have to pay full price.

Or maybe they could enjoy the reduced price for the premium plan for the first 12 months — giving them a lengthy period to reap (and hopefully become attached to) the benefits and extra features.

It’s a clever way to use discounts and a great method for sales reps to deploy with new customers.

#2: Time-sensitive discounts

Discounts should always be time-sensitive; otherwise, they should just be permanent in the form of lower pricing. If an “offer ends at midnight, tonight!” then that’s when it truly should end.

A lot of companies falsely use time-sensitive discounting as a way to instil a fear factor in potential customers; however, this can devalue products in the long-term.

#3: Demographic-specific discounting

Enterprise and student discounting are the most commonly used demographic-specific discounting methods in SaaS and can be used without damaging the perceived value of a product.

Given the factors involved, such as volume and package requirements, enterprise discounts should be issued on a case-by-case basis without prices being plastered across a website. Non-disclosure agreements (NDAs) can also be put in place to ensure deals remain confidential.

Don’t broadcast discounts to the world

A lot of people are willing, and happy, to pay full price. A large banner across a website advertising discounts risks lost income from those people. The idea of a discount should be to make it easier to close a sale, but only as a last resort. Sales reps need to identify customers that require a discount to sign-up and offer them sparingly. Instant demos and online sales meetings are a great way to get to know prospects and understand their pain points and motivations in order to know when (and when not) to offer a discounted rate.

Ultimately, products should be priced to reflect true value and command sales without any deviation in price. However, when the moment is right and when prospects need a little nudge in the right direction, discounts used at the right time can be used effectively.