When recurring revenue and lifetime value are king, good discounting discipline becomes critical.
Sure, software buyers never expect to pay list price, but SaaS companies are exposing themselves to eight times lower customer lifetime value when they follow the usual on-premise discounting practices (see Exhibit 1).
Not to put too fine a point on it: they’re taking a hit on annual recurring revenue per customer and suffering from uncomfortably high churn. Ouch.
The upshot? SaaS companies have to figure out how to control discounting if they expect to maximize customer lifetime value (CLTV). If they don’t factor in discounting’s impact on future monthly revenue streams, there’s a real risk that they won’t be able to recover their customer acquisition costs (CAC). One hint on how to do this: Be willing to pay for good reps.
Traditionally, buyers of on-prem software have been used to getting discounts of 60-90 percent on the license price. In subscription models such as SaaS, the offerings are usually aligned to value metrics, which should limit the risk of “shelf-ware” and reduce the need for discounting. But the truth is that customers aren’t about to let go of those big discounts, and that makes negotiations tough.
To understand these issues better, we looked at 30 companies in our SaaSRadar benchmark database and found that discounting has a big impact in SaaS.
Our research found a “sweet spot” in which SaaS players can discount just enough to attract bigger customers. Those in the ‘mid-discount’ cluster—10-30 percent off list—are seeing revenue per customer grow by 4 percent per quarter (see Exhibit 2).
By contrast, the deep discounters (offering 30 percent and more off-list) do get faster annual customer growth—50 percent versus 25 percent for the mid-discounters—but their growth in ARR customer is half that of the mid-discounters. And those that discount little or not at all get almost no growth in this metric.
Read the full article on the SaaS Radar site