Disadvantages of SaaS Discounting

💻 SaaS

Rishabh Rathi

Feb 24, 2020 — 5 min read

Discounts are one of the most powerful tools in a sales team’s arsenal. But way too many companies are using them wrong. To get people into their product, many SaaS companies turn to discounts to increase acquisition. They think that they can raise prices later, once these customers see the value in the product. But by discounting, you have already hurt that value.

Pricing is a dedicated and patient process. After spending so much time perfecting your pricing, you shouldn't use discounting as a “quick fix” to bring in more customers by underselling the value of your product. Excessive discounting causes a ton of damage to growing SaaS businesses. The most obvious impact is losing potential revenue. While that does hurt, there are much more destructive consequences that come later. So, let’s jump right in.

Discounts Increase Your Churn

One simple rule is key to sales: customers buy when the perceived value exceeds the price. The gap between price and value is the benefit a buyer receives. This is what makes discounting so effective at winning deals. You can get away with low value by offering an even lower price. That allows you to preserve this value gap. In this way, discounting hurts your business and increases customer churn.

Discounted Customers Are Less Willing to Pay

In SaaS, customers are constantly presented with so many promotions and discounts that if you offer a discount “for two days only,” they know there will be more coming down the pipeline. When just looking at the goal, it seems that the aggressive strategy may be the better choice. However, limiting our view to only this small window of time means we miss the significant repercussions of such an aggressive discount strategy further down the line.

We see that by using aggressive discounts, customers had:

Lower willingness to pay. Their price threshold is already set so low so when the price is brought back up, they have a higher price sensitivity and are less likely to renew.
High churn rate. Following the rise in price, rather than renewing, customers are more likely to churn out and look for a cheaper alternative.
Lower lifetime value (LTV). With so many customers that don't renew, you're losing out on that investment you've made to acquire them without even experiencing any revenue.

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Discounted Customers Don’t Appreciate Your Value

That simple price and value model doesn’t reflect how people actually behave. That’s because there is a difference between actual value and perceived value. While actual value provided doesn’t change when you lower price, the perceived value does.
Why is that? Through experience, people have learned to associate high prices with high quality. A nice dinner is more expensive than a burger from a fast food restaurant. A Ferrari is much more expensive than a Ford. Price is a proxy for quality.

And this is why the perceived value is so important. When you lower the price of your software, perceived value will also decrease. A low price may help you land the deal today. But a low perceived value reduces the likelihood a customer be successful. At low price points, customers may not invest time & resources in your solution. It is easy to forget about a solution you paid little for. Without customer investment of time and resources, they won’t see results. And if they don’t see results, they will leave at the soonest available opportunity.

Discounting Undervalue Your Product

Companies often offer discounts thinking that it will help with cash flow by increasing acquisition of customers. However, in the long term, it ends up hurting you instead as you have to spend longer recovering CAC which is even higher with the increase in customers. Even if the discount brings in more business initially, you may never end up recovering CAC for these discount customers and ending up losing even more money in the end.

While discounting directly affects your actual revenue, it also kills your momentum as a company by training both your customers and your team to devalue your product. By offering the same product at a discount, your potential customers may not think your product is worth your original price. Your sales teams just want to close. They may be using discounts as the path of least resistance to close a sale, diminishing the culture of profit you want to centre your company on.

Relevant read:

Customer Discounts Confuse Your Business Strategy

Another dangerous consequence of discounted customers with high churn is confusing your company strategy. Companies optimize growth by identifying an ideal customer profile. Once understood, they then focus marketing & sales on these target customers. But if your churn is too high, you don’t know who your best customers are. In SaaS, a good customer isn’t one who is easy to sell. It is a customer who sticks around for a long time. Retention is much more important than the first sales conversion.

So, excessive discounts used to land deals hide the most important insight: who will stick around. And if you don’t know whom to target, you will waste money on sales and marketing. This lack of focus also hurts your product team. They need to design features to make current customers stickier and attract new ones too. But if product managers don’t understand your users, they can’t improve the product to better meet user needs. So, the product gets bloated with unnecessary features that don’t tie to a clear use case. And guess what? Bloated products confuse and frustrate customers trying to use them. That reduces adoption and increases the likelihood of churn.

Conclusion

Businesses are evolving every day, and so are the tricks that can help you acquire customers. Discounts are one of the oldest, most effective selling tools; that being said, a discount isn’t just an easy-win tactic, but something you need to employ strategically based on the needs of today’s decision-makers. Bad discounting can do serious damage to your customer retention efforts.

It attracts low-value customers who don’t appreciate your service and are likely to churn. It creates a ton of work for your Customer Success team trying to rescue accounts that won’t stay. And it confuses the ideal customer profile your teams need for focus. If you know about any other disadvantages/advantages of discounting, please let us know in the comments section.

Also read: SaaS Discounting Strategy that Works