Promotional pricing has long been used in the retail industry to bring in additional sales. But SaaS isn't like retail, so how does this tried-and-true traditional strategy translate to the more modern business model? In this take, we'll take an honest look at the good and bad of promotional pricing in the SaaS world, so you can decide whether it fits your business.
Before we continue, let's define the term. Promotional pricing is a strategy that businesses use to attract prospects and customers by temporarily reducing the price of their goods or services. A lower price for the same product is a greater value for customers, and the limited time offer creates a sense of scarcity. The hope is to do higher volume during the period of reduced price so that total revenue is higher than it otherwise would have been.
4 promotional pricing examples
The definition we just gave may sound like a fancy way of saying that promotional pricing is when companies have a sale. It is that, but there are many strategies that all fall under that umbrella.
Let's look at four common examples of promotional pricing and how they work.
Buy one, get one free
Colloquially called BOGO, this promotion is exactly what it sounds like. Consumers are offered a second item for free when they purchase the first one. Usually there's a stipulation in place that the items must be identical, though sometimes an item of equal or lesser value is offered.
This is what many people think of when they hear about a sale. Discounting is when the price of a product or service is lowered. There are various ways this can be done. We'll discuss two of them next.
This is a discounting strategy that lowers prices for a certain time of the year. This usually means lower prices over a longer period of time when business demand is expected to be especially low. For example, holiday decorations are often greatly discounted after the holiday passes.
While seasonal sales last at least a day, and frequently for more than that, flash sales are over much quicker. Reduced prices for only 2-3 hours are common. Flash sales can create a great sense of urgency, but will often require deeper discounts than seasonal sales would offer to work.
3 questions to determine if a promotional pricing strategy is right for your business
Now we can begin to answer the question about whether promotional pricing will work as good for the value-based pricing of SaaS, as it does for the cost-plus pricing of physical goods. To help, let's look at three questions you should ask yourself before deciding to try a promotional pricing strategy.
1. What is the correlation between the price and value of your product?
With retail, almost every product is priced based on the production costs of the product. Margins may be higher for brand name products versus generic products, but market forces limit what people are willing to pay. This is different from SaaS, where the pricing is based solely on what value potential customers place on the product. How much you're relying on cost versus perceived value as the driver of your price is an important factor in the next question.
2. What is the impact of promotional pricing on your brand?
Value-based pricing relies purely on the value customers see in your product to justify the cost. A product with cost-plus pricing can be discounted every once in a while because its price isn't based on perceived value. If your pricing relies on that value perception though, what effect will it have on how customers view the value if the product is frequently discounted?
3. What is the impact of promotional pricing and your long-term relationship with your customers?
For most physical products, the answer to this one is easy. People will come in, buy your products, help you get the volume fueled revenue increase you were looking for, and then do one of two things: keep coming back, or not come back again until you have another sale. While the first scenario is better, it isn't bad if they wait for another sale, or don't come back at all. If they weren't a regular customer to begin with, then as long as they've helped you get the revenue increase you were looking for, the promotion was a success.
SaaS businesses, however, rely on the customer coming back. Do you offer a discount for only the first few months and hope they stick around after that, or do you make the discount permanent and significantly lower the customer lifetime value? The win/win scenario isn't as clear-cut in SaaS as it is in retail.
Promotional pricing & SaaS, 3 reasons to think twice
The three questions above have probably given you some indication of the problems that can arise from promotional pricing in the SaaS world. In this section, we are going to expand on those reasons and, hopefully, give you something more to think about as you ponder the three questions above.
Promotional pricing can compromise your value-based price in the long run
One of the inherent differences between value-based pricing and cost-plus pricing is that the former relies much more heavily on potential customers believing in the value of your product. If you are repeatedly lowering the price of your product, it will signal to those customers that even you don't believe in the value you are offering. Even in the realm of physical products, brands that sell well above the cost of product and rely on their name to sell products, don't have sales all that often, if at all.
Promotional pricing can affect customer retention
Selling a customer on the value of your product means that they have to respect that value. Not only can promotional pricing lower your perceived value with frequent discounts, but you may attract customers who are only looking for a deal. Those customers don't stick around long, and retention is every bit as important to SaaS businesses as acquisition is.
Promotional pricing naturally increases your time to recover CAC
Those two scenarios above, scaring off customers by lowering your perceived value, and attracting customers who will churn at a higher rate, combine to have a disastrous effect on your customer acquisition costs. Bringing in a lot of additional business that doesn't stick around isn't a winning strategy if you are going to have to spend more, than you otherwise would, to replace them when they inevitably churn.
3 rules of running a promotional pricing strategy
All of those warnings sound pretty negative, does that mean that promotional pricing can never work? Not exactly. It just means that promotional pricing for SaaS is a wildly different beast than it is for retail. If you want to attempt promotional pricing, keep in mind these three key points:
Target your high-value accounts
One of the problems mentioned was the increased chance of churn by attracting the wrong type of customer. This can be resolved by limiting your promotions to customers that already value your product. A discount can help get them to upgrade, where they'll hopefully continue to see value. If you target outside your high-value accounts, be sure to do so surgically, hitting only groups that need a deal to get them to make the initial purchase.
Don't promote your promotional pricing
If discounting your price is going to cast doubt upon the perceived value, then plastering that price all over your website is counterproductive. Unlike retail, bringing in as many people as possible isn't the goal here, the goal is to get quality customers to cross the finish line and sign up.
One way to help retain the perception of value that potential customers have for your product is to create a sense of urgency around the promotion. Let them know that this is a rare occasion, something they'll need to act on quick to take advantage of. This will help the success of the promotion, and minimize the damage discounting prices does to your brand.
Promotional Pricing FAQ
What's the difference between a discount and a promotional price?
The discount you provide is the amount of money taken off of the price. The promotional price is the final price after the discount is applied.
How much should I discount my product?
Remember, the greater the discount, they higher you can expect churn to be, and the more you'll be damaging the perceived value of your product. For this reason, you never want your discounts to get too high. A discount of 10% is good, while 20% should be the maximum.
What are other pricing strategies?
We've already discussed promotional pricing, and how it relates to cost-plus and value-based pricing. Other common pricing strategies include competitor-based pricing, price skimming, penetration pricing, and dynamic pricing.
Which pricing strategy is best?
As you may have determined from the fact that we've used it as the default pricing strategy for SaaS throughout this post, value-based pricing is generally the most successful method for SaaS companies.
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