Never just lower the price: 3 smarter ways to discount

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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.

What do Warren Buffett and Medieval Kings have in common?

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They both like moats (so do I).

A good economic moat can help drive market share and profitablility, here are some of my favorites for software companies:

1) Network data – the obvious example, a natural monopoly emerges when a company is able to create a dominant network.  The more participants, the more attractive it is for new users and the harder it is for competitors to gain share (Facebook, LinkedIn).

2) Marketplace – similar, but two-sided, with buyers wanting to use the provider with the most sellers, and sellers wanting to user the provider with the most buyers (Etsy, Amazon).

3) Ecosystem – a well connected company with APIs to other relevant solutions in the market has an advantage, a platform that other products are built on develops a real moat (Salesforce, Shopify).

4) Machine learning dataset – the better the training dataset, the better the AI product.  With a better product, even more data comes in, making it that much harder to catch up (Google, IBM).

5) High switching costs – alright, this one is more a ditch than a true moat.  High switching costs might not help drive market share and profitablity, but they can often help a company maintain them.

Do you want to grow by winning more, serving more, or charging more?

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Is your biggest growth goal to win and retain more customers, serve more segments, or charge more per contract? Does your product roadmap match that strategy?

You probably have a laundry list of customer feature requests, enhancements promised by sales, and team pet projects in the development backlog—which ones should define your roadmap, and which should stay in the queue? The best way to answer that question is to make sure that you’re using your high-level strategy objectives to guide your prioritization. There are at least 3 overarching growth objectives you could choose to be the guiding star for your product development efforts. The catch? Each will lead you to build different things.

1.      Win or keep more core customers

This might be a priority if…

Churn has spiked, or you’re increasingly losing deals to competitors.

Product development to prioritize: feature parity

If customers are churning to competitors, or if you’re losing them to competitors in the sales process, you could have a feature parity problem. That’s not the worst news, you can use your competitor’s feature set as a roadmap cheat sheet. But be careful not to just replicate everything your competitor offers—you may not need to. Use insights from your sales team and user feedback to understand which features really matter to customers.

One important caveat: if customers are churning back to using nothing or a manual process, or if you’re losing deals to “no decision”, you may be facing more of a pivot than a tweak. It could be a product-market fit problem, and/or you could be targeting the wrong segment. Continue reading “Do you want to grow by winning more, serving more, or charging more?”

“Would you rather” for SaaS nerds

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In an ideal recurring revenue company, you’d have enormous LTV:CAC because sales and marketing costs would be small relative to ACV and there would be no churn. But if you had to prioritize one, would you rather have a long customer lifetime, or a quick payback of acquisition costs?

LTV:CAC is effectively a measure of how much a customer is worth (lifetime value) relative to how much they cost to get (acquisition cost). With a little rearranging, it can be restated in terms of lifetime and payback period.

This tradeoff can be visualized as a matrix of different lifetime/payback combinations that achieve given LTV:CAC values. Because it’s more familiar, I’ve restated lifetime in terms of its inverse, churn.

Continue reading ““Would you rather” for SaaS nerds”

4 ways to size B2B markets

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Between consulting and growth equity, I’ve ended up sizing a lot of markets (30+ so far!). Recently, they’ve been niche B2B markets that are poorly covered by reports, but surprisingly easy to estimate. Here’s the cheat sheet I wish I had when I started.

1. Start with customers

The simplest market size calculation is to multiply the total number of customers by annual spend per customer. A bottom-up method works well in industries where there are relatively few customers, or where there’s good data on the number of customers. For instance, if the product is sold to large hospitals, all you need is the number of hospitals in your market. Sometimes that number is easy to find in public data; if not, you might still be able to use private reports. Try reports covering your target’s customer’s industry–they tend to include the number of businesses in the field.

Continue reading “4 ways to size B2B markets”