In today’s episode of The Startup Chat, Steli and Hiten talk about discount pricing strategy. They discuss the pros and cons of offering discounts as a start-up and they also discuss how to refuse discounts requests from customers.
A discount pricing strategy is a key part of your product marketing because it has the ability to greatly impact the amount of sales and profit that you make. Choosing the right pricing strategy for your business will not only help to sell your products but also improve your brands appearance in the marketplace.
While a discount pricing strategy may be useful for driving sales in the short term, this approach when used long-term could have some unexpected effects on your brand image and the perceived value of your products.
Tune into this week’s episode of The Startup Chat to hear the exclusive discussion on discount pricing and why, how and if a startup should offer discounts to their customers, as well as Steli and Hiten’s advice on how you should leverage discounts to get the maximum return.
Time Stamped Show Notes:
00:40 Talking specifically about discounts; the why, when, how and If
01:10 Comparing the B2B and enterprise world pricing strategies
03:23 Discounting and branding overview
04:48 eCommerce discounting pricing strategies
05:20 Word of mouth and blanket discounting
06:05 Standardizing discounts on all offers and discount matching
10:06 Selling the value of the product and the brand
12:39 How to give discounts the right way
15:56 How to refuse discount requests from customers
16:02 Refusing discounts case study
3 Key Points:
- You must really understand the impression you are putting out into the market
- If you give a discount to 1 person the next person that comes along will expect the same discount.
- When you give a discount always get something in return
Steli Efti: Hey, everybody. This is Steli Efti.
Hiten Shah: And this is Hiten Shah.
Steli Efti: Today on the startup chat. We’re going to talk about giving discounts to customers, why you shouldn’t do it, when you should do it, and how you should do it. So this is something … It’s crazy. We’ve now recorded way more than 250 episodes, but we’ve never talked about discounts. We talked about it a little bit here and there, mainly on the episode on negotiations. But we never talked about specifically why, how, and if startups should discount their retail pricing to customers. So I’ll start making a claim, and then I’m dying to hear your thoughts on this. So especially in B to B. I’m not that familiar in B to C to be honest, like that’s just not my world. But in B to B I am not the greatest of fans when it comes to discounts. I know that it’s, in B to B, kind of best practice to do that. A lot of companies are heavily discounting through their sales teams when they talk to prospects and they’re trying to close a deal. Sometimes they do it because they want to be competitive with another offer that a prospect has. Sometimes they do it just because the sales team thinks that if they can lower the price, it’s going to make it an easier purchasing decision. And all in all, I think it’s a really bad practice that leads to a lot of issues down the line. So I’m really against aggressively discounting in B to B, if you’re selling to small and medium sized customers. In the enterprise world, it’s a totally different ballgame. In the enterprise world, I think you have to add a massive margin, so down the line, once you talk to procurement, you can give the big discount because it’s just the way that larger organizations purchase things. There’s a whole department, the entire job they have is to save the company money when they purchase from vendors. So if you price your product without that in mind, you’re basically making it impossible for somebody in the large organization to make a living. So they will not be happy about that, and they will not purchase your product. So in the enterprise world, although it’s kind of a dumb game to price your product way higher than you think you’re going to sell it for so then you can give some kind of a fake discount down the line, it’s just the way things work, so you have to live with that reality usually. But in the SMB world, most sales companies are very aggressive on the discounts, and I think it’s a terrible idea, in most cases. I’ll riff on why I think it’s a terrible idea later, but I just want to hear your reaction. What’s your thought in general on giving discounts to prospects to convince them to become customers? Or maybe even down the line, when somebody’s a customer, giving discounts for them to renew. Or if they cancel, offering them a discount to stay. What’s your general take on discounts, and when they work well, and when they don’t. I’m dying to hear that.
Hiten Shah: Yeah, a couple things. I’m just not a fan of discounts in general. And this is a general rule, but when I think of discount, I think of certain brands. So, in a simple way, when you think about discounts, just think about what brands come to your mind when you think about that. And do you want your brand to have that same association? So Walmart, Costco, Sam’s Club those kind of brands are known for discounting more than others. And there’s obviously the Groupons and all that of the world as well. And then there’s the idea of like Gucci, or Coach, and brands like that, that themselves tend to have very little discounting, and if they do, it’s because of a specific reason. And the reason could be like, this is out of season, or there’s only a few things on discount because it’s the last of our inventory, or things like that. I’m not saying those are good or bad reasons, I’m just saying that the volume that you give discounts at, the number of discounts you give, how often you do it can really lead to a certain brand impression that you might not understand that you’re putting out on the market. And another thing I want to say. Most companies do discounts in the E-commerce world as well as retail world, because this is where discounts came from actually, because of what’s called yield management. So they want to manage their inventory. They want to manage their revenue. They want to increase it. Also, with E-commerce the typical practice is if you get on their email list, they will give you a one time coupon to purchase the first time. And they know that when they give you that coupon, you’re more likely to purchase. And by what percentage? They know, so they know it’s worth it for them, compared to how much they’re losing by giving you that discount in terms of revenue and money. So my biggest piece of advice on discounting, regardless of what kind of business you are, is really understand what impression you’re putting out there in the market. Here’s the thing too. You could say, “Oh, I have an inside sales team. I’m SAS, If I give customer a discount, no one else is going to know.” Well, guess what? Word of mouth is one of your biggest drivers of business, period. And so if you give a discount to one person, that next person that they tell is probably going to expect the same discount. At least, you have to assume that, because you gave the discount to that one person. So that’s my general thought on blanket discounting. I think there are strategic ways that you can do it, and you should do it, but they’re very rare, and they’re very nuanced. I’m actually going to tee it off to you, because every time you rant about how to do discounting right, I learn something. So I’m literally going to tee it off to you, to rant about how to do discounting the right now.
Steli Efti: All right, let’s talk about it. One thing I wanted to double click on, that’s an expression I learned from you, is the … Hey, when you do SAS, SMB and you give some kind of a discount to one customer, you’re like, “Nobody’s going to know.” You know? “We told that customer … It’s not a public interaction so nobody will know.” Well, the issue is not just, Hiten, when that customer refers other customers to you, they will have the same pricing and discounting expectation. The problem is also that often times, when SAS companies discount, their sales teams will give different discounts to different customers for very different reasons, right? A lot of times, companies don’t have a standardized rule set on how to do this. It’s kind of a, deal by deal basis, sales rep by sales rep basis. And then, one thing that I’ve seen many time happen, is that some large customer purchases, there’s really hard negotiations on what kind of a discount they can get. The company thinks they can close them at like a 15% discount, because they’re really, really eager to purchase, and there’s a lot of back and forth. And your statement to them, or your sales rep’s statement to them is like, “I went to everybody, the highest level, and this is really the best we can do, and I can’t give you one little piece more.” And the customer buys that, believes you, and says, “All right, I’m going to purchase.” And then three, four, five months down the line, they become friends, or meet, or talk to another customer of yours that’s gotten a 20% discount or a 22%. And that’s going to create such a fury, and anger, and bad reputation, and brand for you because then that customer is going to come back and be like, “Fuck you asshole. You guys lied to me. I have a friend who’s getting your product for cheaper, and you told me this is the best deal you can give me.” And rightfully so, they’re going to be really, really pissed. And this happens all the time when companies that have a very rampant discount culture, and lots of SAS companies do have that, unfortunately. So first, let me go through a few of the problems that you have to anticipate when you give a lot of discounts. And then I’ll tell you when to do it and how to do it right, in my mind at least or in my experience. So to me, besides the brand thing, which is big, which is what you mentioned, Hiten. Do you really want to be known as the cheapest option out there, or do you want to be known as the biggest value option, as the best option, as the best in class, as a product that’s really serious and a company and a brand that’s really serious. I really don’t like to be the cheapest option around. And we often tell prospects that come to Close, “If all you’re trying to do is get the cheapest price possible, then we’ll refer you to our competitors.” Right? We’d rather have you go to a competitor than deal with this. Because what we want to do, is we want to partner up with customers that want to have the most sales success. They want to have the biggest growth, the most value out of our solution, out of our partnership, and not just the lowest cost possible. So brand is a big thing. The other thing to me, is sales culture. It really creates a toxic sales culture. I’ve never seen a sales team in a SAS company that’s allowed to give discounts aggressively that has great sales people and sales people that create really great relationships. Because discount is such a cheap tool, that if you give it to sales people, they will abuse it, and they will just default to it as quickly as possible because it’s the easiest way to get to the sale. It’s the most transactional way to get to the sale. They don’t have to convince the prospect that they are offering real value. All they have to convince the customer is that the customer is getting the “best deal” quote unquote, or a cheaper option than the competitors offer. So it makes the sales team cultivate very poor sales skills, cultivate really poor relationships. But the relationship starts with, “I’m demanding the cheapest of the cheap for everything I want.” And us being like, “Yes, we’re going to give you everything you want.” That’s to me, an abusive relationship with the customer. And you’re basically building up the foundation of a sales team that’s never going to learn how to sell well and how to sell the value of your product, and your brand, and the service you can offer versus just trying to get to a price point that beats some other offering. So bad sales culture is something that, obviously, I hate. And that’s why I think discounts are the most toxic tool you can give to sales people, because they’re going to take that and drink that discount Kool-Aid until they become really, really bad at sales. And the other thing is predictability. It kills your business and your billing system at the operational side of understanding the amount of customers you have and how much revenue you’re making from that. It’s going to be such a mess once you grow your business, when your sales reps are able to create all kinds of individualized discount deals. It’s going to be impossible to track your metrics. It’s going to be impossible to track what type of customer is generating what kind of revenue. Or when customers churn or upgrade or downgrade, you’re going to be like, “Well, they upgraded three seats, but one of these seats was discounted by 60%. The other one seat we gave them for free. And the third one was full price because it was some kind of a special deal we offered them. And this other customer downgrade three seats, but they had no discount.” And It’s going to be a mess. It’s going to be so hard to predictably be able to forecast what your revenue’s going to look like, and what impact churn has, and what kind of customer is generating what kind of value to your business because your deals are all over the place. You can afford to have all over the place customize deals when those deals are worth millions of dollars and there are, a few, right? That you’re not having tens of thousands of enterprise customers and millions and millions of dollars of deals. But when you’re in the SMB sector or when you sell to professionals and end-consumers, if thousands of customers, hopefully, and if every single one of them can have a little bit of a different deal, it’s going to make predictability of your business and scalability of your business really, really bad. So having said all that and having that theme made out plain and clear that we don’t we don’t love discounts and we think it’s a really bad idea for most businesses, here’s the one … Well, I mentioned one reason why you might … One use case where discounts might be a good idea, or thinking about how to offering a discount is when you do enterprise sales, when you do massive organization sales, but even then. My number one rule for enterprise sales or in the SMB sector if you have a really large customer that for many, many reasons you want to give a discount, you need to get something in return. That’s the basic rule. When you give a discount, get something in return. Don’t just offer the discount for the discount’s sake. What can you get in return? Very simple, a pre-payment. If you’re a subscription business, the simplest reason to give a discount is to say, “Hey, if you pay us a year or two years in advance, all the cash right now, this is so valuable to us from a planning perspective and also from a cashflow perspective that we’re willing to offer you a better deal for that. So offering a 10% discount for one year pre-payment, or a 20%, or a 15% discount for a two year pre-payment, that’s usually a fair exchange. In some cases and especially in SMP, sometimes your customers don’t have the cash reserves to pre-pay for one, two, or three years in advance. So maybe you’re going to give them a discount if they sign a contract, if they do a long term commitment to be paying you every single month and not being able to get out of that contract or churn on a month to month deal. Maybe that’s a reason to give them a discount, and you give them a little bit less of a discount than if they pre-paid, if they have a one year month to month contract, or two year month to month contract. The other thing I like to do and I like to combine these, is ask them for a case study, or a referral, or some kind of a marketing benefit if they get a discount from you. So what we like to do is if you pre-pay for a year or you pre-pay for two years, you’re going to get a discount. If you do that plus if you are willing to work with our marketing team on being a case study and being published on our website, or being a reference on our website, or if you’re willing to do some kind of a co-promotion with us. So you can ask … If a customer wants to get a lower price point, they should always give you something in return. If they are telling you, “The only reason I want a discount is because I don’t see any differentiating value between you and a competitor of yours. All I’m trying to do is get the lowest price for one of the two of you, and I’m not willing to give anything back because I don’t see any value in that.” To me, that’s the worst kind of relationship and I would never do that. The things you can always ask for, back for a discount, is either a pre-payment long term commitment, signing a contract, being a case study, doing a co-promotion marketing, or/and with larger enterprise clients, asking for a specific number of referrals. “Hey, we could offer you this deal, but in return what we would want, because we would invest so heavily in this relationship. We’re going to assume that this relationship is going to be so strong that you’re going to be a reference and a referral customer, and you’re going to connect us with at least three companies in your space that you think could benefit from knowing about us. Who are the three CMOs, CEOs, CTOs you know in this industry that you could connect with us if we were to offer you this special deal. Always, always ask for something in return. You offer something of value. Ask for something of value in return. That’s the basic and very simple rule when you give discounts.
Hiten Shah: What if the customer is asking for a discount and you don’t want to give it for any reason, how do you deal with that?
Steli Efti: You say “No.” I’m actually, right now, in the middle of a negotiation, where basically we’re going back and forth. We jump on a call, this CEO is a very good negotiator and I’ve been knowing him for many years. So he’s calling me, and he’s basically talking to me. I listen very intently. I tell him that I understand where he’s coming from. And then I basically tell him “No. I just can’t do that.” And if that’s absolutely what he needs, then we might not be a good fit, and we can’t serve him. I think that we can be great partners. I think we provide a ton of value, and here’s what I can do, but I can’t give you a discount. And then he, he basically pushes me to go and talk to the team and see if I really can’t do anything, because they might have to leave if I don’t do it. And I said, “all right, I’ll see what I can do. But I don’t think I’m going to come back with a positive answer.” And then I hang up. And then, a few hours later, I’ll send him an email and say, “Hey, I talked to the team. I really looked into this, but no. I can’t do this.” You just say, “No.” You don’t have to offer somebody a special price for your product, you don’t. There’s nobody’s birth rights to get your product at whatever price they want. That’s not how business works. But you have to be okay with losing that customer when you draw a line in the sand. And that’s the question I always ask myself. If I say no and they don’t buy, am I okay with it? And when I answer that question, after I analyze, and think about it, and meditate on it, if I answer that question with, Yeah, I’m okay with them not buying. I really don’t think I can offer this. Then, I can come into the negotiation and feel really comfortable and relaxed, and they can sense that I don’t care. They can sense that I don’t care if they don’t buy. I want them to buy, but I’m not stressed about it. And that’s a very powerful energy to bring into a negotiation. I never go into a negotiation saying no without having thought if I’m okay with them potentially not purchasing. Because then I’m nervous, and that nervousness will translate into a conversation where I’m going zigzagging and going through a rollercoaster ride of emotions when they’re screaming at me, or telling me they’re not going to purchase, or they’re going to cancel. It’s going to make the negotiation really, really tough for me. But when I don’t want to give a discount and they demand it, I just say “No.” Many, many times, not always, but many times I’ve been surprised where customers told me verbatim, “I am not going to buy. I’m going to cancel. This is outrageous. I’m so disappointed. You will never hear from me again.” And then they went and purchased, and then they were a happy customer. It was as if we’d never had that discussion and they never screamed at me or told me they would never purchase. It’s so funny. This happened so many times. Not always, sometimes they truly go through with their word and they don’t buy, or they cancel, or they are really upset, but it’s not like 90% of the time. It’s kind of like 50% of the time. So if you don’t want to give the discount, just say “No.”
Hiten Shah: I’m just processing that for a second. I think we should end on that note. If you don’t want to give a discount, just say “No.” You have nothing to lose. It’s just a customer, there’s many more.
Steli Efti: There you go, we’ll end on that note. And just because they scream, just because they tell you how important they are, just because they say they’re going to write a case study of how terrible you are, just because they tell you that they’re going to drive to your mom’s house and tell her how bad of a boy or a girl you are. Just because they’re making a big fuss out of it; doesn’t mean that you need to feel bad, or you need to buy into that, or have to cave. You really don’t. There’s no birthright on getting a discount. You don’t owe them anything. So don’t discount if you don’t want to and if you don’t think it’s the right thing to do to serve your business, your customers, your employees in the marketplace. That’s it from us. If you are in the middle of a difficult negotiation, and you don’t know what to do, and you need an external negotiation buddy or even better too, Hiten and I have dealt with lots and lots of negotiations. And for you guys, we always want to be there for you. We always love to support you if we can. So if you ever need help on a difficult negotiation, just send an email to Steli@close.io and HNShaw@gmail.com, and we’ll try to be your negotiation coaches and help you through it. And that’s it for us for this episode, until next time.
Hiten Shah: Later.