Bob Lempke, Chartio’s VP of Sales joined Nic Poulos on the Bowery Capital Startup Sales Podcast. This post is based on their conversation.
Discounting is a form of negotiation
Customers are trained to expect a discount in enterprise software sales, and most of them come into a purchase process with some expectation that there will be discounting. The better job you do of setting the customer’s expectations, the better the outcome will be for both of you.
Discounts can be a necessary evil. You will probably have to give something to compel a customer to act. So, you should have a consistent process for addressing discounts before you begin selling your product.
The SaaS business model in particular is different from perpetual license software. Customers familiar with perpetual licenses will expect the same discounting principles when dealing with SaaS vendors. So, it’s important to educate the customer and manage their expectations.
Don’t design discounting into your pricing
It’s bad business and unfair to the customer to build a markup into your pricing which is designed to be used as a bargaining chip. The list price of your service should be based on the market and the value that you provide.
However, every deal is different, every customer is different, and every solution is different. So, while the discounting process should be consistent, it needs to be adaptable.
Startups, in particular, need to maintain flexibility in pricing, so they can work with their customers. You don’t want to lose a good potential customer that can help you build your business because you can’t adapt to their needs.
You need to start with a conversation with the customer, understand their needs, and help them understand your process. That’s the foundation of any conversation about discounting.
Maintain sales discipline during the negotiation
Plan ahead and set up guidelines to maintain pricing discipline. Make it clear to the customer at the beginning of the process that they should expect to pay your asking price, and that you don’t really discount. Some customers expect that you’ll discount 80-90% off the bat, so it’s important to set expectations early.
You should have finished the technical evaluation, won the customer’s business, and created expectations about the price before you even talk about discounts.
You should know which levers you have to modify the price without giving a discount per se. For example, you can adjust the price in exchange for other concessions, such as length of commitment.
Listen for customer signals around price
No one says that your price is perfect at the beginning of a negotiation. Customers are looking for your reaction to their opening line, such as “I don’t have the money”, or authority, or whatever. That signals that negotiation has started.
This is a critical point in the sales process, and you need to handle this conversation properly. The sales organization needs to put a stake in the ground early about what the customer is expected to pay, and not move the stake. Sometimes this can be difficult, depending on how critical a particular sale is at a given moment.
As you get closer to the end of the evaluation, and you’ve built the relationship, you can have a more candid dialogue about price and commitment. The expectation should be that for every discount given, the customer must accept a higher level of commitment. This creates value for both parties and sets up a quid pro quo. Commitments can include the length of term, number of seats, or public references (such as a webinar or talking to suppliers/customers).
Discounts must be tied to your business model. For example, it’s easier for a SaaS vendor to give a larger discount for a contract of two or three years because their costs are heavily front-loaded. Every situation is different, and every company is different, and you have to evaluate them individually.
Early on, you may need to give a special deal to a premier customer
Early stage companies will often give a special deal in order to add a great logo on their customer page. It’s understandable that you should be worried about sending an early signal to the rest of the market about your value, and there’s no rule of thumb about the value of such a deal, so you’re going to have to wing it.
In this sort of deal, it’s critical to set the customer’s expectations upfront. As they grow and as you provide more value, they should expect to pay more. The big questions is, “At what point do we earn the ability to send you a bill that’s realistic relative to the actual value that we provide?”
At some point, you’ll need to have a difficult conversation with your early adopters. You don’t want to shut off the customers that put you on the map, but you want them to pay for the value of your service. It’s less difficult if you have those conversations up front. But if you’re in a competitive deal, you may not be able to put that understanding in writing.
There is no “usual” range for discounts – they depend on the economics of your business
I have seen 80-90% discounts – and offered them – in previous roles. These usually involve large volume discounts on multi-million dollar deals, where the price is high enough that it doesn’t exactly feel like a discount.
How you craft a discount depends your situation and what you’re selling. There’s a huge difference between a $3M-$4M perpetual license deals and a $10,000/month SaaS deal.
Perpetual license agreements have more fat built into them. The software has already been built – in many cases a long time ago. The list price is set high to begin with. The main cost in the future is support. Also, perpetual license software can support a high initial discount because it can lock in customers, creating future opportunities for new revenue. This is less true for SaaS.
Professional services are hard to discount, because they involve hard cost for each additional hour of service.
Discounting strategies evolve with the organization. As you get bigger, you attract larger companies, your deals are bigger, and your discounts will likely get bigger.
Be vigilant about your reasons for giving a discount. Discounting to follow a competitor’s lead is a mistake. You’re undercutting your value. If you get a reputation as the guy who discounts just to win, then you’re not in a sustainable situation
Don’t authorize sales reps to give a particular discount
Don’t tell your reps, “You’re approved to give this percentage discount". One of the important things that sales leaders need to teach is creativity. You need to understand the customer’s situation and their needs before you can even consider giving a discount.
You don’t want your sales reps to have hard and fast answers. You want to create the need for conversation starters and the ability to ask the right questions. Then you can arrive at a place where you can make the optimum pricing decision.
For example, imagine that at the end of the quarter a customer comes to you and says, “I don’t have the budget to pay what you need me to pay". That’s a conversation starter. Tell the customer to help you understand when he will have new budget and when he will put the funds into next year’s budget. This allows you to work out payment terms. For example, putting off payment until the next budgeting cycle. You can contractually agree to the solution and the price, but payment doesn’t have to start until later.
This kind of objection is a cue to spend more time talking to the customer. Ask qualification questions. Often, they’re just fishing for a discount. That’s fine, but then you have to decide whether it’s worth giving them a discount, or to go back to them with counter-proposals.
Discounting is sometimes the only way to compel a customer to action. Do this only if you believe they’re sincere about doing business with you.
Discount questions also typically come up at renewal time
When renewal time rolls around, customers start thinking about lowering their costs, and that brings them to discounts. You can try to mitigate renewal issues when you do the original deal, but it’s difficult.
You need to maintain the value that you provided them. But if you didn’t deliver during the term of the contract, you’re in a weak negotiating position. As a good partner, sometimes you have to bite the bullet if you didn’t fully deliver their success.
You need to continue your dialogue with the customer to understand their situation. Look at their usage and the regular cadence of communication. You should know in advance if there’s a red flag on a customer and do what is needed to get them where they need to be by renewal time. Customer support throughout the term of the contract minimizes these situations, but sometimes a situation isn’t salvageable.
If you’re doing your post-sale homework, you should be well-armed to have a proper conversation with the client.
Use discounts to win the best customers, not the long shots
The goal of discounts should not be to extend yourself to new types of customers who are less likely to succeed with your service. The more committed a customer is, the better a customer they will be.
In my experience, customers that come in just looking for the biggest discount will be the hardest customers to support.
Those customers that are the most collaborative tend to be the best customers – and the most vocal on your behalf.
Never lose a deal on price
Find a collaborative middle ground in your negotiations with customers. Your goal is for both of you to walk away feeling good and that you understand each other’s position.
What’s important to to the client? What is he or she struggling with? Is it cash flow, budget, timing, or something else? If you can understand their position, nine times out of ten, you can figure out a way around it
You should always be able to figure out a way to get to the right price if the client is sincere about wanting to work with you.