Discounts are one of the most powerful tools in a sales team’s arsenal. But way too many companies are using them wrong.
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.
Customer discounts drive up churn by attracting the wrong customers to your business. These customers don’t align with your value proposition, so they churn out fast. And managing low-value customers becomes a distraction for your team.
Let’s take a look at how discounting hurts your business and increases customer churn. Then we’ll share the best way to use discounts to win sales deal AND increase customer retention.
How 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.
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. Because past experience colors your customers’ perceptions. We agree with Customer Success expert Lincoln Murphy, who asserts “Price objections are value objections.”
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.
This is especially true if you price to match the budget authority of someone junior. Expensive solutions will trigger procurement processes. They may need executive team signoff. This process takes longer but provides you better visibility. More people in your prospect’s company are thinking about your solution. Your champion is selling it internally. The net effect? The perceived value of your solution increases. And more individuals have a stake in its success.
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.
Customer Discounts Distract Your Customer Success Team
Another big issue with discounts is they create a real burden for the Customer Success team. Each CSM can only handle so many customer accounts. The more accounts they are managing, the easier it is for some customers to slip through the cracks.
Some high-value customers may show signs that they are at risk of churn. These signals from product usage and other customer data need proactive outreach. But a Customer Success Manager distracted by a ton of low-value customers gets stuck in a reactive mode. Low-value customers are often the most demanding ones. Putting out their fires is time-consuming work. Work that doesn’t leave much time for big-picture thinking.
And in reality, all this effort spent on low-value customers is likely wasted. They are paying you less money, and are more likely to churn no matter how hard you try.
Want to save the Customer Success team lots of headaches and sleepless nights? Send them fewer customers likely to succeed. Don’t drown them in low-value customers destined to fail.
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 those excessive discounts used to land deals? They 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. Money spent reaching out to lousy customers who are going to churn in the future.
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.
Now let’s change gears and explore the right way to use discounts and keep churn low.
The Right Kind of Discounts
Here are some tactics your sales team can use to make sure that discounts don’t increase churn.
Principle of Reciprocity
If you give the customer a discount, the customer should you give you some other commitment in return. That commitment should be something other than closing the deal.
One commitment to consider is increasing the length of the contract. This is a win for both parties. The customer gets an attractive price on your offering. Your company locks in a few years of revenue, eliminating any chance for near-term churn.
Another commitment to consider is changing the payment terms. Pair a discount with paying the entire annual contract right now. Or tie discounts to quarterly payments. Once again, this enables you to lock in more revenue early. Even better, you get money in hand right away.
Preserve High Perceived Value
The main risk of discounting is lowering the perceived value of your offering. But if you are aware of this behavioral bias, you can fight against this perception.
One way to do so is reframing how you describe discounts. Offering the first 2 months free is about the same dollar value as a 15% price reduction on a one-year contract. But your service price remains intact, so it is the mental anchor for your customer.
This approach also allows your promotion to expire naturally upon renewal. In contrast, customers receiving a flat % discount in the first year will expect it to continue.
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.
Good discounting uses reciprocity to tie the customer down to more commitments. Those commitments reduce churn and increase upfront payments received. And good discounting maintains perceived value while decreasing lost revenue.
There’s no excuse for crappy discounting. With a more thoughtful strategy, better customers and lower churn await you.