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.