In recurring revenue businesses, sloppy discounting doesn’t just take a bite out of this year’s top line, it impacts future years of ACV as well. Worse yet, the customer may have needed a deep discount because they didn’t value the product enough; there’s a chance they churn out before you even recoup the cost of acquiring them. To make sure you’re not giving away money or making the wrong deals, make a point of discounting only when you’re getting something from the customer in return.
1. Discount for paying up front
One of the easiest and most common discounting tactics is to charge customers less when they pay up front. Payment up front is great from a cash perspective, and it can give your customer success team time to make sure customers thrive.
How much to discount?
Because getting up-front payment is effectively a way of staving off churn, you can calculate a good benchmark using churn and your weighted average cost of capital (WACC). Just divide your churn by 1+WACC; for instance if churn is 15% and WACC is 10%, you can afford to discount 15%/110%, or about 14% for customers who pay up front.
2. Discount for meeting usage goals
Incentivize customers to use the parts of your product you know will get them hooked by offering first-year discounts for using sticky features or meeting usage goals. Hopefully you already have analytics on which behaviors your most successful, most loyal customers exhibit. Maybe you’ve found that your best customers tend to finish onboarding within a month, build at least 3 dashboards, or add a certain number of users. Great! Offer one-time discounts to customers who do that valuable thing, and keep tracking your analytics to make sure t
hat the behaviors you’re incentivizing continue to be auspicious ones.
How much to discount?
This one’s easy—use the amount that doing the valuable thing decreases churn. So, if customers who log in at least once a week churn 15% less than other customers, you can discount up to 15% off the first year’s price for customers who meet the login goal. It may be more impactful to offer that discount in a lump sum within the first few months of the contract, vs. spreading it out over the course of an entire year.
3. Pre-determine volume discounts
Large customers get volume discounts in most industries, and that’s fine. But many companies don’t have a standard schedule that ensures there isn’t rampant discounting or over-discounting. Keep your pricing consistent and avoid aggressive discounting by setting up a discount table, and sticking to
it. In general, volume discounts exist because there tend to be advantages to serving large customers. In recurring revenue companies, this usually manifests in two ways: larger accounts cost less to sell and onboard per dollar of ARR (i.e. it costs less to sell and onboard one account that’s twice as big as your average account than it does to sell and onboard two average accounts), and/or larger accounts churn less than smaller accounts. Either or both of these two favorable conditions would drive up your LTV:CAC for large customers.
How much to discount?
The amount of lift in LTV:CAC for large customers is a good guide for the maximum you can afford to discount. If the LTV:CAC of an average account is only 60% of the LTV:CAC of a large account, you can price a large account at 60% of what you price an average account and the two will still be equally attractive. Of course, you likely can (and should) charge large customers more than this mi
nimum, but you should never charge less.
Create a low-discount culture
One of the most impactful initiatives for c
ontrolling discounting is creating a sales culture where discounting isn’t the default. Train both your sales reps and your customers that discounts are fixed and finite by only offering a menu of pre-determined discounts, and by not letting discounts get deeper at the end of a sales period. Most importantly, call attention to the sales behavior you want to reinforce. Track discounting across sales reps, and publicly acknowledge and award those with the lowest discount rates.
It’s easy for any sales team to gravitate towar
ds discounting, but in a recurring revenue business, it’s a crucial habit to break. Well-executing discounting can set up great customer relationships, but too often a discount is just the laziest way to close a deal. Take stock of when discounts truly work in your company’s favor, and deploy them only when it’s to your long-term advantage.