Pricing: Discounting Effectively in a Downturn

COVID-19 has, almost overnight, changed the realities of software sales. Customer budgets are squeezed, a lack of personal interaction can impact deal progression, and some companies will see their core value proposition become less important. 

Discounting can be a valuable tactic to help accelerate and close deals, but there is danger in moving too quickly. While giving your sales team tools to get deals over the line is important, avoid providing your account executives liberty to discount at will. Heavy discretionary discounting could lead to a loss of revenue on those deals in future years and may also trigger a price war with competitors. This guide will walk you through some tactics and guidelines for using discounts most effectively to spur revenue, while mitigating unwanted effects. 

Framing discounts for maximum effect 

When pitching a discount to close a deal, how you pitch it is usually more important than how much the discount is. Even in a crisis, heavy discounting without clear reasoning or structure will paint a picture of a company who doesn’t have confidence in their existing pricing model or product value and will be a pushover in negotiations. It might lead customers to try for an even higher discount, or be aggressive in pushing for a discount in subsequent years. To avoid this, there are a few factors to get right when framing your discount:

• Logical reasoning – There must be a clear and reasonable explanation for why the customer (or customer segment) requires a discount, to avoid it appearing as a negotiation against yourself. The current COVID-19 situation provides ample opportunity for this, such as ‘we understand that this is a difficult period to buy and implement software, and therefore we will offer an incentive for you to sign before the end of the month’
• Incentivized behavior – When providing discounts in pursuit of a behavior, such as closing a deal before the end of the quarter, ensure that the discount is dependent on that behavior. If the customer makes little effort to earn their discount, revoke it or rebase it around a new behavior (for instance closing the deal in the first month of the new quarter) at a lower rate.  
• Reciprocal concession – When providing a customer with a concession in good faith, bear in mind that it is a natural human reaction for them to provide something in return. Target your asks here on things that will provide tangible benefits to your organization (e.g. a marketing case study, usage of logo, or payment up front).
• Expiry dates – The biggest danger with large discounts is that these prices will damage the customer’s willingness-to-pay throughout their lifetime. This is particularly important when the discount is in response to a temporary economic event. In order to avoid that, try and structure discounts so that they naturally vanish in year 2 or 3 of a contract, for instance:
  • ‘Free months’ – Providing discounts as ‘free months’ in the first year of a deal will allow you to offer significant discounts (e.g. 25%=3 months or 50%=6 months) on the first year of the contract. In year 2 onwards, the absence of these free months means that the price level will return naturally to the undiscounted rate.
  • Ramped usage – Allowing customers to start on a lower pricing tier as they implement the product and naturally escalate over time, means that you can offer them the usage limits they need over this period at a price that is more affordable in the first year. Once they have fully implemented, they will be paying for their usage at the higher pricing tier, which means that from year 2 onwards the customer will receive a lower (or no) discount.

Controlling the internal discounting mindset

On an organizational level, discounting can become a habit that can be hard to get rid of. When we see companies who routinely discount deals by 25% or more, a lot of that discounting is learned behavior rather than strategically important in the negotiation. If you are suggesting discounting that is outside your normal bands, put the appropriate approvals and training in place to ensure discounting behavior remains responsible and strategic. 

To hold your sales teams accountable for the discounts that they extend above a certain level (e.g. non-discretionary discounts above 20%). require approvals from CRO, CFO and/or senior sales management to action the discount. These approvals should involve a clear explanation for why a discount is the best option (as opposed to selling the customer on a lower plan and/or holding price) and what the vision is for the customer’s lifetime value. It is vital that the approver plays an active role in testing the team member who is in control of the deal and holds them accountable for the discounts they are providing.

For discretionary discounting, we’d recommend implementing a discount approval table such as the one below. This will allow the sales team flexibility to operate, while limiting the frequency of abnormally high discounts. We would recommend making discretionary discount approvals stricter than for centrally sanctioned discounts of equivalent value. 

Example discount approval table. Levels displayed here are indicative – optimal ranges will vary depending on pricing model, customer base and organization.

In Closing 

While discounting is a natural and necessary response to market changes in a time of crisis, how you discount will determine how effective your discounting is at driving customer behavior. It is also important to ensure that a short-term fix doesn’t create longer term problems in customer contracts. When increasing discounts at this time we would recommend that you frame the discount effectively in order to target the right customer behavior, while mitigating follow-on effects and importantly ensure that the sales team is held accountable for the revenue they are leaving on the table while discounting – so that heavy discounting doesn’t become the new norm.