I caught up with someone whose SaaS platform has an entry price of $20k. Their products were starting to really sell in the mid-market and enterprise space. As they moved upmarket, they felt the need to re-evaluate their discount strategy for these deals, and they asked for some advice.
Assuming the question of “are we going to discount to win deals?” has been answered “yes”, the first thing I’d do is pull in your finance team. You as a company need to determine the maximum discount the company can withstand on any one deal. Your finance team can help with this. In fact, their input is vital, because your ability to discount is tied to financial factors. Metrics like customer acquisition cost (CAC), cost of goods sold (COGS), customer lifetime value (LTV), net present value (NPV), and your cash flow needs are all critical to building a discount strategy.
Work with your finance team to build the case and get CFO sign-off. Get it in writing.
The reason I recommend determining this max discount as your first step is that all the numbers below will be different whether you can bear a max discount of 88% or 18%.
Once you have a handle on the max discount you can withstand, you can move on to the following:
- Create a table (e.g. list/chart, not furniture) of your max discounts relative to contract duration. The max discount you can bear on a 1-year contract will be different than on a 5-year due to NPV, your own returns on cash, etc.
- Determine breakpoints for approvals and who (the role, not the individual) needs to be involved at each approval tier. This comes down to crunching data and then working with a cross-functional group of sales, finance, and executive leadership to codify e.g. devise and implement a standard of discount tiers and an approvals matrix.
- Create one or more reports, and/or a dashboard, to monitor:
- Discount requests and requests outstanding
- Approval durations / “close time” (how long approvals take, so you can factor into your sales cycle time)
- Deal size and discounts relative to those deal sizes
- Contract duration and discounts relative to those contract durations
- Establish a regular review process to make sure you’re staying on sound financial footing.
As your data on discounts and discounting matures you need to refine your model and your enablement practices relative to onboarding and ongoing development of individual sellers and sales leaders.
One benefit we got from this was being able to provide better guidance on deals. We’ve got a decent understanding of the combination of deal size, contract duration, and discount rate as those relate to customer type (by size and industry). This means we know (i) what a win-win-win deal looks like, meaning us-partner-customer and (ii) what a bad sales rep looks like, meaning a salesperson who doesn’t know better than to compete on pricing (as opposed to selling on reducing/eliminating customer pain).
A detailed example with commentary is below:
- We can withstand a maximum discount of A%
- We’re sold exclusively through partners and the partner who registers a deal is guaranteed a percentage so they can markup; assume a guarantee of [A / 4]%
- Let’s assume A is 100. It’s not, or we’d be out of business, but we’ll use 100% for simplicity’s sake
- The above means the partner with deal reg gets 25% (again, I’m shooting for simplicity here)
- We aren’t going to require approvals at 25% or our sales cycle time would skyrocket
- We ran the numbers on a couple of years of deals and found the standard deviation was +/- 10, meaning the vast majority of our discounts fall into a range of 15-35%
- To constrain discounts to fit within that standard, we’d set our first breakpoint at 35%, meaning approval is required by the seller’s direct manager to do a deal at a discount of 35% or greater
- From there, consider setting additional breakpoints by the discount tiers you determined. Continuing with our example:
- We set additional breakpoints at each 5% increment up to 50%
- 35% and above requires approval from the seller’s direct manager
- 40% and above requires approval from that manager’s Area VP
- 45% and above requires approval from that AVP’s “Geo VP” (in our case that’s AMER, EMEA, APAC)
- All deals at or above a 50% discount require sign-off from our CRO and our VP Finance
- All deals at or above a 70% discount require sign-off from our CFO
- We use an all-in and first-rejected approval model, meaning all approvers must approve and the first rejection is a global rejection of the offer (the seller needs to try, try again)