Okay, let’s just call a spade a spade okay? When it comes to SaaS products, discounts are part of the deal. The company knows it. The reps know it. Hell, the customers know it.
In software, production is a one-time cost, post which a majority of the spends go towards sales and marketing. Big deals are highly profitable and thus attract more requests for discounts.
So, when reps are talking to customers, they know what’s coming ahead, negotiation. And here’s what most reps do: instead of dreading the discounts demands, they use it to push their customers through to the finish line. They use discounts to their advantage and why not? If you’re anyway going to be slashing the prices, some strategic moves can turn discounts into a deal-closing bazooka.
But here’s the thing about bazookas. If you don’t use it properly, they most likely blow up your territory.
Many-a-times, reps offer heavy discounts to close their deals and it ends up damaging revenue growth and devaluing your product. We don’t want that, do we?
Additionally, higher discounts would need approvals and this task has the rep running around in circles figuring out who gives the go-ahead. To remedy this, fix up a discounting policy covering a wide range of clauses to put a rein on the discounting freedom of reps as well as avert any approval delays.
In this blog post, we’ll cover 7 things you need to keep in mind while whipping up a good discounting policy framework.
1. How far can you go?
Every company has its unique set of metrics, instances, end-users, agent licenses etc. One of the mistakes made while framing a discounting policy is the use of pricing instead of deal size.
Don’t say X dollars of discount. Instead of ACV, talk about core metrics like the number of instances, users or agent licenses and product usage metrics like server space and cloud storage. This varies from company to company based on the offering, past data and customer base.
For instance, let’s put a table on discounting limits based on agent licenses:
2. What plans?
As SaaS companies, we always have a variety of plans to offer to our customers based on their needs and the company size or number of end-users. Now, we can’t offer the same discount to a company on a basic plan and one on the enterprise plan.
As you climb higher in the plan rate, the markups go higher too. Therefore, you have to discount less to avoid any losses. While pitching, sales reps need to talk in discount percentage rather than dollar value to ensure that the deal comes across as superbly negotiated and a good product was bought at a competitive price.
3. Where are you?
Is your firm’s priority getting a foothold on the market? Then you have got to consider how discounting can help you beat your competitor’s pricing.
And, that’s not all. A lot of how you discount and sell for that matter depends on what territory you are in. Is it a new market or an established market? Where are you located?
How aggressive is the competitor’s pricing? How do the customers there make their purchase decisions? All of these questions need to be answered before the reps start selling.
If your product sells in the US, you have not much to worry about as it is pretty cushy when it comes to paying for a good product that solves the problem. However, if you’re selling in Asia, the scene might be quite different as they’re price sensitive. Here, it is acceptable to discount more. If you don’t, your competitors might vulture all your prospective customers.
Without proper information about your territory, you’re sending out your sales reps with butter knives to a battle fought with Valyrian swords.
Sales reps will not be able to meet their quotas and hence struggle with cash flow and motivation.
4. How was it done before?
If this is your first time making a discounting policy, go through historical sales data to spot where discounts are most commonly occurring. This exposes exactly where your customers think your product is pricey. It will also draw out some areas where money has been left on the table due to unnecessary discounting.
A good look back into the past data gives enough information on how discounts have had an impact on revenue and steer you towards the next steps in building a solid policy to weaponize discounts for closing.
5. What about addons?
When customers choose a plan, they would ask for some customization based on their requirements. They might want to pick a basic one and ask for some features of the higher plans as addons. These features, naturally, are added to your licensing and plan tariffs.
On a mission to close the deal, some reps have the tendency to give away these addons for free. While in some cases it is completely okay. In others, reps give away the higher priced features for free and that is unacceptable.
Your policy must clearly highlight the guidelines on which addons can be free and how much discounting is allowed, based on the value of every feature.
6. How much for onboarding?
When talking about the price of the product, we’re not just covering licensing costs but also other service-based costs and onboarding charges. Bear in mind that onboarding also costs us money and we have to be wise about how much of those costs we are incurring instead of the customer.
Can the reps offer it for free? Can they give them a reduced price? If yes, how much? These questions need to be answered clearly in your discounting framework.
7. Who gives the go-ahead?
No two companies are the same. While closing bigger deals, you might want to make some exceptions and offer discounts outside of the predetermined brackets to acquire a certain logo or brand. Create a minimum deal size cap or logo indexes like Fortune 500 as criteria for reps to make exceptions. Moreover, these exceptions should be approved.
Get the finance team and the CRO in the same room and make sure they align on approvals. If you’re working in multiple territories, new and established, set brackets for each territory and discount percentages for each of them.
Mark the IC level for each bracket above standard discounting levels. Reps can discount a maximum of upto 20% without approvals post which they’d need approvals. Your policy must clearly state who reps have to get approvals from.
Here’s an example:
Use these 7 pointers to clearly articulate when a discount can be given and when it can’t (sorry reps). You can also set a number on higher discount levels that a rep can give. Example: Reps can only give X percentage of discount per Y number of deals closed. This way, reps can ration their discounts.
Finally, I am going to leave you with some unsolicited, annoying (but true) selling advice. It is important to remind reps that the product must be sold based on the value it brings rather than how much it costs. Make the customer think they’re missing out on the world by not buying your product and you won’t have to worry too much about discounts.