Discounting is an essential part of SaaS sales. Discounts help win deals, shorten sales cycles, and make customers happy — which are all good things. 

But discounting has a dark side. Discounts obviously decrease revenue — which isn’t great for the bottom line. And the rabbit hole goes a bit deeper. Research has shown that discounts can devalue your product in the eyes of your customers — leading to lower lifetime value, higher churn, and less willingness to pay. For SaaS businesses with recurring revenue, decreased perceived product value can truly be the horrible gift that keeps giving. 

In this series, we’ll take a bird’s eye view of discounts, and look at three essential factors that every SaaS business should address when creating a discounting strategy – 1. Establishing Value (this article!), 2. Discount Design and 3. Quoting & Discounting Enablement.

In order for a discount strategy to be effective, you first have to figure out how to increased the perceived value of your product to your prospect. And while this might seem like table stakes to a seasoned sales professional, an effective discount strategy hinges on getting this right.

During the initial stages of the sales cycle, your sales team introduces your product, talks about the pains it will solve, describes the hours of time it will save, and hints at the magical world where the prospect will live once they have your product. A comprehensive (and beautifully crafted) value prop deck and cool ROI calculator both clearly illustrate how “the product pays for itself!” With such information, the prospect should easily be able to see the value your product brings, right? 

WRONG. 

Most value prop decks include a laundry list of a dozen or so benefits. Very smart Product and Marketing teams work hard to think through every use case and problem. (They don’t want anything to fall through the cracks during these important initial conversations to the detriment of perceived product value.) 

Having bought a lot of software over the years, I glaze over when I see this kind of list of benefits. I usually can identify with maybe two or three things listed — and the rest are just noise. The reality is that I am only talking to the SaaS provider because they said they could solve a very specific problem. And most of the time, they don’t know how much value a solution to that problem will bring to my organization. They never asked me. So when they show me an impressive ROI figure based on benefits I never asked for, I’ve already dismissed it. 

The only person that can tell you the actual value of your product is the prospect. Many salespeople dig into the prospect’s “why” behind a purchase, but only the best know how to dig a layer deeper into the true cost and value. Do you know how much time, money, and effort they are spending on the problem they are trying to solve? You have to ask the right questions:

If you show me a list of all the time, effort, and cost your product will eliminate, aligned to the info I provided to you, then I will start to listen and I will perceive the product value to be greater. When you put pricing in front of me that says it will cost me $20K per year, but I know that I am getting 50% of a full-time $100K/year analyst back and every sales person is going to shave 5 minutes off of their processes, I can see the value of your product. I can take that business case to my CFO to get funding approval. I can use that business case to hold back the procurement contract killers. I can talk to my boss about an exciting new project I can take on because of this newfound capacity. 

As the buyer and executive sponsor, I can believe in the value of your product — because the salesperson asked the right questions and gave me the information I needed. And THAT is the kind of stuff that closes deals — not arbitrary deep discounts. Discounts don’t sell products; value sells products. 

So as a first step toward building a discount strategy, start with the foundation. Ensure the perceived value of your product is high. Once you’ve clearly shown how much value your product can bring to the problems they are trying to solve, discounts become more effective bargaining chips. And you won’t have to rely on them as much to win deals.

(If you're interested in reading more from this series, the next installment focuses on aligning your discounting strategy with business objectives. Alternately, you can download the full series as an eBook.