Everything You Need To Consider Before Creating A SaaS Discount Strategy
In the world of SaaS, it’s still a matter of debate whether or not having a SaaS discount strategy is a good move for SaaS providers.
According to ProfitWell, more than 50,000 SaaS businesses offer discounts of more than 30% to their customers. However, it ends up hurting their revenue levels and brand reputation instead of helping them.
Still, that doesn’t mean that offering a discount is always a bad pricing strategy. It just means that there are certain precautions that SaaS businesses should take when creating and offering SaaS discounts.
In this article, we will take a deep look into how a SaaS discount strategy works. We will talk about its benefits and possible pitfalls. We will also discuss the three rules of SaaS discount offerings and the best practices when it comes to offering SaaS discounts.
And if you decide that offering a discount isn’t the right move for your SaaS company, we will also give you a few alternatives that you may want to try.
So let’s dive right in.
Benefits Of Offering A SaaS Discount
The first precaution in offering SaaS discounts is to understand its pros and cons. So here are some benefits that you can get from a successful SaaS discount strategy:
It Helps You Attract New Customers
If you’re looking to grab a large market share, offering SaaS discounts can be one of the most effective ways to do that.
It gives prospective customers an incentive to try out your product or service instead of going with another provider.
What’s more, it may also be a good strategy for ensuring customer growth even during an economic downturn (say, a pandemic).
During such times, people usually cut their budgets for various things, including their spending on SaaS solutions. But a discount may cause your SaaS product to fit their budget and ultimately entice them to buy it.
It May Give You A Boost In Revenue
As we mentioned in our introductions, discounts usually affect SaaS companies’ revenue in a bad way. It can significantly hurt your long-term revenue.
But if you do it right, it can rather pave the way for a higher long-term recurring revenue.
If you manage to acquire a lot of customers thanks to your SaaS discount strategy, it will also give you a significant boost in revenue in the form of cash.
And cash can be a valuable asset, whether you receive the full amount or not.
You can use that cash to invest in growth strategies that will have a positive long-term effect on your revenue and overall business health.
It Can Help You Retain Customers
Finally, SaaS discounts can also give you a way to keep customers engaged with your product or service.
This is especially true if the customer has gone inactive for some time. A discount may be just what they need to come back and use your product again.
And since loyal customers are more likely to stay with SaaS companies longer, offering discounts every now and then can help you build long-term relationships too. This can boost both customer loyalty and revenue in the long run.
Possible Drawbacks Of Offering A SaaS Discount
Now let’s talk about the not-so-good things about offering a SaaS discount. Keep in mind that these are things that you risk whenever you offer a discount on your SaaS product.
It Lowers Your Customer Lifetime Value
Discounts usually lower your SaaS product’s customer lifetime value (CLV). That is because SaaS businesses are essentially giving away some of their revenue to acquire customers.
And if you fail to leverage that boost in customer acquisition and revenue, SaaS discounts may end up being a net negative for SaaS companies.
If that happens, the reduced recurring revenues will always outweigh the initial gains you’ve had.
It May Attract The Wrong Customers
Of course, SaaS discounts aren’t always a bad thing. Sometimes, it can be an effective way of attracting the right kind of customers.
But if you’re not careful in setting up your SaaS discount strategy, you may end up attracting the wrong type of customers — those who will only use your SaaS solution once and never come back again.
Such customers will bring a lot more problems than gains for your SaaS company, because they’ll cost more to acquire and won’t generate any long-term recurring revenue either.
It May Hurt Your Brand Reputation
Sometimes, discounts may also hurt your SaaS company’s brand reputation.
In fact, if you do it wrong, SaaS discounts can make customers think that you are desperate for sales and earnings — thus causing a further drop in your customers’ trust.
And trust is something that SaaS businesses need to thrive and survive in the long run. So be very careful when setting up your SaaS discount strategy.
It Can Upset Your Customers Who Are Paying Full Price
Finally, SaaS discounts may upset some of your existing customers who are paying full price for the same plans or subscriptions.
Such customers will either feel like they’re taken advantage of or that you don’t appreciate their loyalty. And this can cause them to become unhappy and even leave if you don’t fix the issue quickly.
Therefore, SaaS companies should be very careful when setting up SaaS discounts and make sure that everyone benefits from it — new and old customers alike.
The Three Rules Of Creating Discount Offerings For SaaS Businesses
Now, it’s obvious that offering a SaaS discount is like a double-edged sword. It can either make or break your SaaS business.
That’s why SaaS pricing expert Lincoln Murphy created three rules of creating SaaS discount offerings to help SaaS companies make sure that they’re doing it right.
Let’s talk about these three rules one by one.
Rule #1: Price objections are value objections
This rule is more applicable to enterprise SaaS sales or other customized SaaS transactions where your potential customer can negotiate the product pricing.
The idea is that if someone is not willing to pay a certain amount for your SaaS product, then they don’t believe that your product is worth that money.
In other words, they don’t think that your SaaS solution doesn’t provide enough value to justify that price.
So if you have negotiations like this, be extra mindful when a potential customer asks for a discount. Instead of immediately caving to their demands, try to understand what value they are looking for and find out how you can improve your SaaS product’s perceived value.
Rule #2: Discounts should get people to pay you more, not less
Ironic as it sounds, discounts should be used to make people pay you more and not less.
As we discussed earlier, the boost in revenue you get from SaaS discounts is only temporary. And SaaS companies need to find a way to turn that temporary boost into permanent recurring revenue.
But that’s not the only way to get discounts to positively impact your bottom line. In fact, you could get your new customers to pay more through SaaS discounts.
The key is in upselling to your customers even before they get a paid plan.
For example, let’s say you have a tiered pricing model and you offer a discount on your lowest-tier subscription for $30 per month. Then it attracts a potential customer who signs up for a free trial.
During their free trial, you see that their usage and value metric indicates that they may actually need your $60/month plan. So you offer the higher plan.
If you want to leverage your SaaS discount strategy even further, you can even offer that plan for $50 per month instead.
It’s reduced revenue, sure. But you were able to increase your revenue from that customer, from $30 per month to $50 per month.
Rule #3: To be really effective, discounts require scarcity
A scarcity marketing strategy is all about making people think that something is rare or hard to find — thus increasing their desire for it and giving them a sense of urgency.
When SaaS discounts are set up in such a way as to create scarcity, they can be extremely effective at driving signups and your overall conversion rate.
For example, you could offer SaaS discounts with expiration dates or limit the number of users who can take advantage of the discounts.
That will make your customers realize that they need to act fast — otherwise they’ll miss out on the opportunity.
These tactics can increase signups significantly — which not only helps SaaS companies get more customers, but also helps SaaS companies increase their revenue.
Best Practices In Offering SaaS Discounts
If you decide to try out a discount strategy for your SaaS business, it’s best to be mindful of the three rules we just discussed above.
What’s more, you may also want to adopt some of these SaaS discount strategies and best practices:
1) Offer Standard Discounts For Educational Institutions & Nonprofits
A lot of SaaS companies today are offering discounts for educational institutions and nonprofit organizations.
Although they are usually in niches relevant for these sectors. Most learning management systems (LMS) providers usually offer standard discounts to schools while a lot of project management software vendors are offering discounts to nonprofits.
If your SaaS product is relevant to a certain sector of society, you may want to consider offering discounts to that sector as well.
This will greatly improve your brand reputation, and it will also help you reach customers who may not have been able to afford your SaaS solution otherwise.
2) Be Ready With An Upsell Strategy
As we discussed earlier, SaaS discounts should be used as an opportunity to upsell customers. Or at least, you can use the discount as a hook to get them onboard and increase your revenue from them later on.
So if you’re not ready with an upsell strategy, then SaaS discounts won’t do much for your bottom line.
So how can you use an upsell strategy in tandem with your discount strategy?
Here are some practical tips:
Track Your Discount Customers’ Usage: If you find that some of your customers are using more than their basic tier plan offers, then there might be an opportunity to upgrade them to a higher-tier plan.
Target Your Customers With Personalized Upsell Offers: The best upsell offers are the ones tailored to the individual customer’s needs. So once you understand their usage patterns, you can offer them targeted SaaS upsell and discounts that are too good to pass up.
Offer A Discount On The Higher Tier (if necessary): If you find that it’s absolutely necessary to get them onboard, then consider offering a SaaS discount on the higher tier. That way, they will realize that they will actually save more money in the long run if they upgrade their pricing plan.
3) Offer A Free Trial Before The Discount
Having a potential customer go through a free trial is a great way to let them experience the value of your SaaS product for themselves.
Remember Rule #1 — price objections are value objections.
A free trial can be a great way to improve your SaaS product’s perceived value and provide potential customers with the evidence they need to make an informed decision.
In other words, a free trial can remove any value objection that a potential customer may have.
Moreover, SaaS companies can use a free trial as an opportunity to upsell customers on higher plans even before they purchase a paid plan.
As we mentioned earlier, you can track their usage during the free trial. And you can use the information on their usage to create a personalized upsell offer that is highly relevant to their activity and their needs.
4) Leverage Scarcity On Your Discount
Remember Rule #3, which says that only through scarcity can your discount be really effective.
Implementing a scarcity marketing strategy is easier for tangible products, where you can only have a limited number of units available for sale.
But how can you do this for a digital product like SaaS?
Here are a few tips:
Offer Your Discount Only For A Limited Time: You may choose to offer your SaaS discount only for a week or two. This would create a sense of urgency and make customers act quickly before the offer is over.
What’s more, you can use various design elements to emphasize the scarcity.
For example, if you’re making your discount offer through your pricing page, you can add a countdown timer to show that the offer will expire in a certain number of days.
Limit The Number of Discounted Licenses: You can also limit the number of SaaS licenses you are offering at the discounted rate.
That way, customers will know that there are only a certain number of users who will get to enjoy the discount and they would have to act quickly before all slots are taken.
Like in the previous pointer, you can also add urgency-inducing elements on your pricing page, such as real-time counters that show how many discounted licenses are remaining.
Make Your SaaS Discounts Rare: You can also create scarcity by making SaaS discounts rarer. In other words, you don’t need to make SaaS discounts a regular thing.
You can offer SaaS discounts only during special occasions such as launch days, holidays, and other key events.
By making SaaS discounts more rare, you can ensure that customers act quickly and don’t take them for granted.
5) Offer A Discount On Your Lowest-Priced Tier
Primarily, the target audience for discounts are budget-conscious users.
So, it’s best to offer discounts on your lowest-priced tier and make them an irresistible offering for the budget-conscious users.
This strategy may also help you acquire more users quickly — as long as you don’t reduce the price too low and affect your bottom line negatively.
By lowering the barrier to entry for your potential customers through SaaS discounts, you can acquire more new customers who could later be upsold on a higher tier or premium pricing plan.
6) Use Discounts To Encourage Longer-Term Plans
When SaaS companies offer discounts, they usually focus on short-term plans. But SaaS companies can use these discounts to encourage longer-term plans as well.
For example, let’s say your basic subscription plan has a monthly fee of $30 per month. You could offer an annual plan for $300 per year or only $25 per month.
By offering SaaS discounts on longer-term plans, SaaS companies can help customers save more money per month and encourage them to sign up for a longer commitment.
In turn, longer-term commitments will help you reduce customer churn rate and increase your recurring revenue.
7) Offer Discounts As Bundle Pricing
Bundles are an effective SaaS pricing strategy to increase customer value and a discount can be an effective tool to make bundles more attractive.
For example, if you have three products in your SaaS suite, you could offer a discount when customers purchase all three together as a bundle.
This will encourage customers to make bigger purchases at once and get maximum value for their money.
Additionally, offering discounts on bundles can help SaaS companies cross-sell different features of their SaaS suite and get more users to adopt them.
8) Time Your Discount Offers With A New Feature Or Update
SaaS companies can also use discounts to drive more users to try out their new feature or update.
For example, if your SaaS product has a major update coming up, you could offer SaaS discounts on the current version of your SaaS product.
This will help you increase the adoption rate for your SaaS product’s new features and make sure that customers get maximum value from them.
9) Offer Discounts As Joint Efforts With Partners
You may also want to offer discounts as a joint strategy with your partners.
For example, SaaS companies can collaborate with other SaaS products to create a bundle or integration that offers discounts for each product when purchased together.
This will help SaaS companies reach out to customers who are already using the partner SaaS product and increase customer loyalty in both SaaS businesses.
Possible Alternatives To Offering A Discount
If you decide that offering a discount is not the best strategy for your SaaS business, that’s okay.
There are other alternatives that provide the same benefits that discounts do, namely boosts in revenue and customer acquisition.
Lifetime Deals (LTDs)
Lifetime deals are one-time purchases that give customers access to SaaS products at a significant discount.
LTDs are a great way to attract SaaS customers who want to invest in SaaS products without recurring costs. They are also great for SaaS companies looking to acquire more users quickly and make a one-time profit from them.
And if you do make a significant one-time revenue out of LTDs, you can reinvest it in SaaS marketing, sales, and other customer acquisition efforts to drive more revenue in the long run.
The freemium model is another SaaS pricing strategy that SaaS companies can use to acquire more SaaS customers without offering discounts.
With a freemium pricing model, SaaS customers get certain features of a SaaS product for free while they have to pay for more advanced features.
This allows SaaS businesses to acquire as many users as possible and gradually upsell them on additional features over time.
Having customized plans and pricing is commonplace when you’re offering enterprise SaaS solutions.
However, some SaaS solutions targeted towards SMBs and the middle market still offer customized solutions. An example of this would be Monday.com.
Although this would be a major change in your pricing model and strategy, the flexibility that comes with customized pricing can give you a price point that leaves both you and your customers happy with their plans.
What’s more, customized pricing enables the users to tailor your SaaS product to suit their needs and budget. This can allow you to acquire more users without having to risk the potential pitfalls of offering a discount.
Final Thoughts About Creating A SaaS Discount Strategy
Creating a SaaS discount strategy can be a great way to temporarily boost your revenue and customer growth.
However, there are a lot of risks that come with it. And the repercussions could be fatal to your business.
That’s why SaaS businesses should exercise caution when offering SaaS discounts and be sure to follow the three rules in creating SaaS discount offers.
And should you decide not to offer discounts, there are other alternatives that will still achieve the same benefits that a discount strategy can bring to your SaaS business.
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