Today, Nachman Lieser from Connectbooks asks a common question: How does discounting affect the growth of subscription companies? Our answer, however, might cause some controversy.
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Discounts are one of the worst tactics you can use to grow your business, because like a virus they’re a ticking time bomb for your growth. You probably won’t notice the effect at the outset, but the impact will be felt eventually.
You may think I’m being dramatic, but I kind of need to be, because I don’t think you realize just how pervasive discount thinking is within our industry. We asked just over eight thousand sales leaders how important discounts were to their success in selling and found that 7 out of 10 of them saw discounts as important or very important to success.
We’re also not talking about a little sweetheart discount for friends and family. When asked for what they thought the appropriate discount level was for a sale, over half of them said a discount of over 25% was needed to close a sale.
Some of you may be thinking – what’s the problem here? Well, keep in mind that your price is the exchange rate on the value you’re providing. Your sales and marketing team’s job is to justify that value to the prospect in order for them to convert at that value. Yet, most of our sales and marketing teams are saying that in actuality your value is only three fourths or worse than it should be.
Here’s where the problems come into play and they all center around churn. Discounted customers have over double the churn rate as those who weren’t given a discount, and when we break out the churn rate by different discount levels, you’ll notice that as the discount goes up, so does the gross churn rate.
Your prospects who are now customers have been trained to essentially devalue your product. Sure, they converted because the discount was too good to pass up, but keep in mind that they weren’t ready to be a customer and don’t see the value in the product yet.
We see this phenomenon when studying customers on annual contracts. Those customers who come up for renewal that received a heavy discount have noticeably worse willingness to pay than those customers who converted at a lower discount. Essentially, any customers who were given over a 30% discount just aren’t worth having, because you’re fighting a losing battle when it comes to value.
Yet, our teams think this is perfectly appropriate. We’re essentially robbing Peter to pay Paul where Peter is your customer success and product teams who get dumped the problem of retention of these customers that aren’t ready for prime time.
So should you not resort to discount pricing at all? No, that’s not what the data says, but you need to think about a discount, and any other promotional pricing tactic for that matter, as a scalpel as opposed to a sledgehammer – efficiently used as a catalyst to lower the activation energy of a prospect to get them to convert and see the true value of your product with expanded willingness to pay.
Well, that's it for this week. If you have a question, send me an email or video to firstname.lastname@example.org and if you got value here or on any other week of the report, we appreciate any and all shares on Twitter and LinkedIn. That’s how we measure if we should keeping doing this or not. We’ll see you next week with more data (and more answers).