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We've been looking at a considerable amount of SaaS financial data across companies and discovered a big difference between SaaS companies that discount heavily and those that don't.

Essentially, those that discount heavily may meet their revenue targets, but the LTV, churn, and price sensitivity of these customers acquired through discounts are all dramatically different. We found that amongst our group, discounts lowered LTV by over 30%, which is insane if you think about the time to recover CAC's impact on cash flow.

  • LS

    Laurent Sabbah

    over 3 years ago #

    Discounts are temporary, like a patch, but it all falls apart eventually.

    Build a good product, people are gladly going to pay the price, if it's worth it.

    • AD

      April Dunford

      over 3 years ago #

      I think a lot of time SaaS startups discount because they simply lack sales skills and are too quick to assume that price is what is causing friction in the sales process. In my opinion it very, very rarely is. In every company I've worked with we have done a price increase almost immediately because the company was under-charging. In every case sales told me we would lose deals if the price went up - and we just didn't.

      • PC

        Patrick Campbell

        over 3 years ago #

        Definitely agree, @aprildunford. A good course in value selling would go a long way to a lot of these earlier stage folks. I'll admit sometimes you want to reduce that friction as much as possible, but a lot of times it's not worth the cost.

        Interesting that you just raised prices carte blanche with each company, especially since we see this all the time, too. Typically is you do a sales discount analysis and it's an average drop of greater than 15% you should be pulling back those discounts and locking the VP of Sales away for a bit. :)

      • PC

        Patrick Campbell

        over 3 years ago #

        Definitely agree, @aprildunford. A good course in value selling would go a long way to a lot of these earlier stage folks. I'll admit sometimes you want to reduce that friction as much as possible, but a lot of times it's not worth the cost.

        Interesting that you just raised prices carte blanche with each company, especially since we see this all the time, too. Typically is you do a sales discount analysis and it's an average drop of greater than 15% you should be pulling back those discounts and locking the VP of Sales away for a bit. :)

        • LS

          Laurent Sabbah

          over 3 years ago #

          @patticus @aprildunford @platformula1 @lincolnmurphy @cbates lots of amazing insight here, especially for me since I'm part of an SaaS startup right now (website localization)!

          In short, price drops/discounts are the lazy man's A/B testing, marketing strategy, optimizing and so on.

          It's just the easiest way to increase sales in most industries, but realistically those aren't the kind of sales an SaaS startup should be looking for. They usually just add up to losses and huge churn...

          Nice convo!

      • PC

        Patrick Campbell

        over 3 years ago #

        Definitely agree, @aprildunford. A good course in value selling would go a long way to a lot of these earlier stage folks. I'll admit sometimes you want to reduce that friction as much as possible, but a lot of times it's not worth the cost.

        Interesting that you just raised prices carte blanche with each company, especially since we see this all the time, too. Typically is you do a sales discount analysis and it's an average drop of greater than 15% you should be pulling back those discounts and locking the VP of Sales away for a bit. :)

    • PC

      Patrick Campbell

      over 3 years ago #

      Hey @laurentsabbah. Absolutely - can't tell you how frustrating it is to talk with companies that just keep dumping cash into sales and marketing, thinking it's going to somehow solve the problem at some point.

      That being said, definitely certain types of customer personas, as well as additional reasons to use discounts.

      • JB

        Joseph Bentzel

        over 3 years ago #

        Patrick: I like what you're doing with Price Intelligently and share your point of view relative to 'throwing money at growth'. But I'd encourage you to expand your research beyond the 'direct-to-customer SaaS' model to what I call partner-advantaged 'XaaS' models.

        The excessive CAC is often baked in to DIRECT SaaS models imposed on startups and growth players by VCs for their own reasons---and the price discounting is often there to quickly reach some 'growth milestone' needed to justify the next investment round.

        FYI on SaaS vs XaaS below:
        https://medium.com/@Platformula1/xaasify-your-startup-7b01e2885102

        Keep up the great work.

        Joe

        • PC

          Patrick Campbell

          over 3 years ago #

          Hey @platformula1 - I'm not entirely sure I understand what you're getting at, but I would argue that a partner value added reseller and a direct to customer model still have similar rules to the discounting equation.

          The cut given to a value added reseller or partner isn't a discount, it's more of payment for distribution, so most of the rules on discounting don't really apply. If the unit economics work out, partners are almost always a net positive.

          CAC can still be huge in distribution models. We often see this when a founder/CEO hasn't negotiated proper terms and they get drowned under needing to serve an upside down deal. This still isn't discounting though.

          Definitely agree with you though on the fact that a lot of this is driven to reach that next milestone, but I'd still argue that you shouldn't do it - you should probably pick better investors, especially now since money is relatively cheap*.

          *Full disclosure that I've never raised money as a Founder. I've been involved with companies raising cash, but I'm not the best person to give advice on VC.

          • JB

            Joseph Bentzel

            over 3 years ago #

            PC: Not talking about 'partner @ the edge' of a product or VAR/affiliate model.

            Talking about 'partner @ the core' or embedded partnering model now popular in cloud stacks. FYI.

            https://medium.com/@Platformula1/xaas-distribution-101-2f09f8b17991

            JB

            • PC

              Patrick Campbell

              over 3 years ago #

              So I guess I may just not get if this is truly something different or a semantic, because I know HubSpot (an example you use in your post) looks at their agency partner program as a "VAR program". Co-marketing is also what I'd consider a "partner" program.

              I guess I'm not understanding what the difference between a partner "at the edge" versus "at the core."

              • JB

                Joseph Bentzel

                over 3 years ago #

                Baked in vs added on.

                For example, when another SaaS company consumes Tableau functionality inside their environment, or SAP white labels the Apigee API Mgt platform, or Schneider Electric consumes the Kinvey MBaaS inside their IOT or field service apps, or a startup bakes a security as a service product inside their offering....... not semantic thing but different go-to-market model inside partner's environment.

                I understand where you're coming from. You focus on direct SaaS sales models, not embedded XaaS which is different and often has an elastic or usage based pricing approach.

  • CB

    chris bates

    over 3 years ago #

    I work in an industry that heavily relies on discounts (gaming) and I don't understand why SaaS companies with predictable monthly revenue would offer discounts to current customers, unless their price offerings are variable and they want to incentivize engagement.

    What I've learned about discounts in gaming is that:
    1) When you discount, it borrows future earnings. That is, if you run a 20%-40% sale, there will often be a hangover as customers stock up because they know winter is coming and the next sale might not be for a while. But then their current spending habits will change.

    2) Discounts work best in a first-time purchase scenario. Getting a customer to spend that first $1 is more difficult than getting them to spend more from $1-$25...that is the thinking atleast.

    3) Discounts to encourage loyalty, especially when the product is new, can be good. If you show that your customers are special, and you tell them the pricing is temporary on a limited basis, then the next time you charge them the real price they'll remember you were kind enough to give them a good deal before and they'll want to support you.

    • PC

      Patrick Campbell

      over 3 years ago #

      I really dig the "borrow from your future earnings" concept, @cbates . I know Makerbot suffered from this recently when they announced they were working on a better model. Everyone waited for the new one and didn't buy the existing. This is why Apple has such an intense release cycle I think. This isn't directly related, but just made me think of Apple/Makerbot.

      2 - absolutely agree

      3 - I think so too, especially if you want to curb grandfathering, which feels really good, but may kill your margins down the road, unfortunately.

    • AD

      April Dunford

      over 3 years ago #

      #3 is a really good point - even when you do it, it's pretty important that everyone understands that this is a very limited offer - that way you aren't setting an expectation that this happens all the time so anyone who pays full price is a sucker.

  • LM

    Lincoln Murphy

    over 3 years ago #

    This is great... but it's also one of those weirdly obvious things, right? Get less money from your customer on a recurring basis, their lifetime value will be lower. It's only obvious after it's been said though... so it had to be said.

    Of course, some companies probably feel like they'll make it up in volume. Or at some point - though they've completely mismanaged expectations around this - they'll get the customer to pay full price. Good luck with that.

    Pricing is Marketing.

    It has numbers, it might include math, and it may seem like economics... but pricing is marketing. In fact, it's the part of marketing where the rubber hits the road... where your value prop meets their value perception with a dollar value attached. If you missed the mark, you've got problems.

    Maybe discounts will solve those problems temporarily... maybe.

    I go into more detail on that in this post (I tried to find the GH thread on it but couldn't): http://sixteenventures.com/saas-pricing-discounts

    Overally, my rule is to never discount what someone would be willing to pay full price for; instead, discounts are used to increase LTV by incentivizing an upgrade, an impulse buy, access to something they otherwise wouldn't want/need/get, etc.

    Many startups use discounts to get cash flow by "borrowing from future earnings" (as mentioned by @cbates and @patticus ) but it's hard to ever pay back that debt.

    I say if you need cash that bad and think you must discount your core product, then know how much cash you need and only offer discounts until you reach that goal. At the very least, that scarcity can legitimately be used to increase the velocity of those discount sales.

    Discounts are usually a tiny band aid on a festering wound infected by the lack of (desire to obtain or use) sales and marketing skills. Sorry... gross.

    • PC

      Patrick Campbell

      over 3 years ago #

      I don't think it is obvious though, because there is a potential medium where discounts could balance out a potential increase in LTV if used properly as discussed in the tail end of the article. The issue is people don't use them properly and the wrong customer persona targets the wrong tier or value. This is why studying the data is necessary instead of just following the logic.

      In terms of pricing being marketing, I agree, but to say it's not economics is almost getting into strictly semantics and risks diminishing the power of quantified marketing (economics). Figuring out how that value proposition "meets the road" is hard math and shouldn't be taken lightly, because it is something that is easily measured and quantified, as well as absolutely necessary in terms of growth and sustainability.

      • LM

        Lincoln Murphy

        over 3 years ago #

        I too get irritated when people say what I wrote about was obvious, so I should have been sensitive to that. Sorry about that @patticus ... poor wording on my part.

        What I meant was that in hindsight and with data to back it up, it's very clear now that giving discounts will probably hurt LTV.... which is the point of your post, right?

        So I think we agree there.

        But I must stand by my Pricing is Marketing statement... and I think I'm giving Pricing more credit as a major part of the business than you might think I am.

        The way I see it is that you can have good economics... but if you don't consider pricing as a function of marketing and instead focus only on the numbers and math, you may miss out GREAT economics.

        Maybe you've found in your pricing business that selling Pricing as Science rather than Marketing allows you to charge more... and if that's true, it proves my point.

        And if it's not true, I still stand by my assertion. :-)

        • PC

          Patrick Campbell

          over 3 years ago #

          I think at this point we'd/we're just debating semantics, which are important, but better over and adult beverage than a forum. :)

  • PC

    Patrick Campbell

    over 3 years ago #

    For those interested, I also just linked to the data in the blog post if you want to play around/model anything. Couldn't share customer/user level data, of course, though.

  • RV

    Rachel Vanier

    over 3 years ago #

    great article, I added it to SaaSClub.com (weekly newsletter about SaaS)

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