Reconsidering SaaS Annual Discounts: A Strategic Approach to Boosting Value and ACV

Przemek Gotfryd
Przemek Gotfryd
Co-founder & COO
Posted on
December 5, 2023
min read
Reconsidering SaaS Annual Discounts: A Strategic Approach to Boosting Value and ACV

Today’s economic environment comes with challenges for B2B SaaS companies. Buyers are more tentative, closing requires sign-off by multiple stakeholders, and companies rarely have the cash on hand to pay for an annual contract upfront. How can SaaS companies close faster, keep contract value high, and get cash in hand as soon as possible? 

Most companies rely on discounts to push deals through at an affordable price for customers. It allows buyers to pay a lower, more affordable price while also getting you the win. But it’s not that simple. The average SaaS annual discount is 17% of ACV, which makes a major impact on the bottom line. 

But there are SaaS discount alternatives that can help you win deals at higher ACV while also making it possible for your customers to pay on their own terms. The key is finding the right SaaS payment solution and meeting your customers where they’re at with a unified, well-researched sales approach, a competitive pricing strategy, and flexible payment options that allow you to capture more ACV and win more deals annually for an overall boost in ARR. 

Today, we’ll explore the reasons why so many companies offer SaaS discounts, and what they could do differently to increase ACV, ARR, and power sustainable, scalable growth. 

Let’s break down the details.

The upside of SaaS annual discounts

Sales cycles are taking 27 days longer than they once did. There are a lot of reasons for that. First, market conditions are causing customers to be more cautious with the deals they sign. Most SaaS companies focus their funds on product development and marketing, not buying more platforms for their tech stack. For a customer to sign a deal, your product needs to offer undeniable value, easy integration, and a quick, thorough onboarding experience. Buyers want to see that they’ll have a good relationship with your sales and customer success teams once they sign the contract, and that they’ll be supported as they begin to use your product. 

Second, more stakeholders have to sign off on deals before closing. Because budgets are tighter, every deal is a serious investment. Now, C-level execs want to review your product before closing in order to ensure a strong ROI. Sellers are also under a lot of pressure to prove that they’ll be available to the buyer after the sale so they can hit the ground running and begin to see your product’s effectiveness, value, and their ROI as soon as possible. 

Finally, cash in hand is hard to come by. Many companies simply don’t have what they need to pay an annual contract upfront. B2B SaaS companies are in a unique position because most of them exist to meet unique needs across industries. As a result, it’s essential for SaaS companies to have cash to drive product development so they can respond to market needs

Enter: discounts. Most SaaS sales teams leverage annual discounts as a way to entice customers into closing faster. Sometimes it works, but more often, it backfires. When offered a discount as incentive to close after a long, drawn-out sales cycle, customers often stall, hoping they’ll be offered an even steeper discount close to the end of the quarter. And it works out well for them: the average SaaS annual discount is 17% of AVC. It feels like a win-win, but when you look closer, you’re left with higher CAC, longer CAC payback, and lower ACV, which all impacts the bottom line. 

At the same time, a contract with full value paid out on day one means that you and your company have cash in hand as well. Sure, it’s a discounted amount, but it is money that you can take and immediately leverage to power growth. From operating costs and marketing to product development, cash is essential. The strength of the B2B SaaS field is its flexibility and its nimbleness. SaaS companies are known for being able to respond to challenges and market needs faster than other companies across industries, but in order to meet the ever-changing needs of customers, companies need money on hand to power development. 

When discounting works

Discounting ACV can occasionally be a winning strategy. It all depends on your primary goals. If you’re a SaaS company that’s just getting started, winning deals at all costs might be the best way to get your first wave of customers if that aligns with your overall strategy. But for most companies, the goal is long-term, sustainable growth, powered by strategy that scales as you grow. 

The key element of a winning strategy is making sure that every team across your organization is in sync and aware of your goals. Procurement teams need to identify strong prospects, and sales teams need to get to know those prospects in detail before even reaching out for an initial conversation. Customer success teams have to be prepared to support your overall growth strategy as well, making onboarding seamless and simple, and providing your customers with personalized, ongoing support throughout the contract period. 

Building personal connections with your customers will help you maintain long-term relationships with them, and meeting their needs will help those relationships grow. If starting a customer relationship with a discount meets customer needs and aligns with your long-term growth goals, then discounts can work. But in the majority of cases, a SaaS annual discount calls the value of your product into question and makes it difficult to build a strong, lasting customer relationship. 

If you find your sales teams frequently offering discounts, it’s probably time to step back and assess your wider strategy. Is product value being conveyed effectively? Are your sales reps chasing quality leads and meeting actual customer needs? Are your demos strong and value-packed? Remember, today’s market environment has buyers thinking more carefully about how they spend their money, especially when it comes to a longer commitment such as an annual contract with possibility of renewal. In many ways, renewals have changed from simply re-upping a contract to actually having to re-pitch and re-sell the product to your current customers. With that in mind, your lead, sales, and customer success strategy has to be efficient and targeted. 

In addition to the realities of the market and ever-changing customer needs and priorities, your SaaS pricing strategy could be what’s making your sales teams offer so many discounts. There’s no one-size-fits-all answer to SaaS pricing, but knowing what pricing approach is most effective for prospects in your field and niche is a great place to start. 

Pricing strategy can be approached from a number of angles, and we’ve found that the right pricing strategy can often fit the needs of customers better, resulting in needing to give fewer discounts. It’s a strong tool in every organization’s efforts to reduce the amount and value of discounts given annually.

Crafting a winning SaaS pricing strategy

A thoughtful Saas pricing strategy is a key element of avoiding discounts while boosting ARR. It’s a delicate balance between proving your value, maintaining profitability, and meeting your customers where they’re at. Pricing strategy impacts how customers respond to your initial conversation because pricing and value are so closely tied together. Prove value, justify price. 

Even if your value propositions resonate with a prospect, presenting pricing in the right way is key. Pricing strategy often varies based on company stage, immediate and long-term goals, and market environment. Your strategy can also vary depending on the specific industries that your B2B SaaS product serves, and how your product functions within the tech stack. Something like usage-based pricing, for example, won’t work for a SaaS product with fewer internal features, or for a company with only a few employees. On the other hand, usage-based pricing could be perfect for a company with several hundred employees, not all of whom will be using your product on a regular basis, if at all. It’s key to evaluate customer expectations in your industry, and compare your pricing strategy to competitors in the field in order to make sure that you’re able to compete well, draw customers who are ready to buy, and maintain long customer relationships. 

Your pricing strategy can take several forms, but it all starts with evaluating your costs. The initial cost is product development. For most companies, the biggest push is early-stage development, but this continues as companies begin to offer more products or in-product features to meet customer needs, preferences, and feedback. Early-stage SaaS companies tend to undervalue their product development costs, which cuts into profit once they price out their product. Companies should be careful to calculate their product development costs as accurately as possible and include a profit margin that can make room for growth, new opportunities, and future product development. Cost-based pricing can be difficult to scale alongside market changes, or to adapt when you release new product features. Companies that opt for this SaaS pricing strategy should carefully assess their costs as they grow and scale in order to ensure that they’re making the money they need. 

Another SaaS pricing strategy is market-based pricing, which positions your product within the larger market context of other companies offering competitive products. It’s a great way to make sure you’re measuring up to the competition, but it can also be tempting to undercut yourself in order to win the deal – and that means more discounts, which we want to avoid. Market-based pricing can work well if your industry fluctuates based on large-scale market changes outside of your control. It’s a strong strategy to ensure that you’re presenting prices to prospects that align with their expectations and are similar to other companies in the field. This method can be tricky, however, because you never want to be the highest- or lowest-priced option, and it’s hard to tell how you measure up to other companies in the field. 

Value-based pricing is another option, which tends to reflect your confidence in your product the most effectively. Value-based pricing is a strong Saas pricing strategy that puts your product’s perceived value to the customer in alignment with product price. In short: your customers will pay more if you can prove that your product is really and truly worth it to them. In a more conservative market environment, buyers need to feel confident that they’ll see a strong ROI, and the first part of proving that you can provide them with a good return is to back yourself with pricing that reflects product value. 

The tricky thing about value-based pricing is that it tends to bring the annual contract value higher, making the final bill to the customer higher. And as we mentioned earlier in this article, SaaS companies don’t always have a full contract’s worth of cash available, which can lead to your sales team feeling pressured to offer SaaS annual discounts. 

Discounts seem like the obvious solution, but there are SaaS discount alternatives. We generally recommend avoiding or minimizing discounts in order to help ARR grow, but we also know that having many tools available to your sales team is the best overall way to grow. Sales tools can include more discounts, but should also include SaaS discount alternatives from flexible payment options to usage-based pricing. 

SaaS discount alternatives

Sales teams have a powerful tool in the form of SaaS annual discounts, but it’s essential to recognize that discounts are a short-term fix that pushes deals through at the cost of sustainable long-term growth and a positively changing ARR trajectory

Even alternative discounts such as quarterly, volume, or usage-based discounts can boost ACV and ARR only so much. But there are alternatives to SaaS discounts. 

To determine the best alternative to discounts, you first have to identify exactly what each party gets when a discount is on the table. For the buyer, they get to drag out the process until they get to pay less for your product. And no matter how well-developed your product is, if you’re willing to give it away for a fraction of its true value, your buyer won’t value your product. And a buyer that doesn’t value your product is unlikely to renew or upsell in the future. For the seller, discounts increase CAC and lengthen CAC payback, which means that less of the ACV ends up in your bank account.

An average SaaS discount of 17%, plus higher CAC and a longer CAC payback time adds up to make an impact on the bottom line. Most importantly, it builds the customer relationship on a shaky foundation – making it difficult to build a long-term relationship that grows and is mutually beneficial. 

We’ve worked with hundreds of B2B SaaS companies to help them close more deals, faster, and at higher ACV – without discounts. 

The key is to meet customers where they’re at with flexible payment options. Whether quarterly, monthly, or other custom payment options, flexible payments allow your customers to purchase your product at full value (or close to it) while paying in manageable installments. 

Whether you choose a cost-based, market-based, or value-based pricing strategy, flexible payment options make it easier for your customers to acquire your product, and starts the relationship on a strong, amicable foundation. 

Capturing cash upfront with flexible payment options

Did you read that right? Yes, you did. 

Most people read “flexible payment options” and they picture small deposits hitting their account every four weeks. But SaaS financing partners like Capchase are built to be a true win-win solution. Created specifically for B2B SaaS companies, financing partners meet seller and buyer needs, enabling both companies to reinvest their funds in future growth. 

For buyers, flexible payment options through a B2B SaaS financing partner allows them to pay what they can at regular intervals so your product is both affordable and purchased at full value. 

For sellers, a SaaS financing partner allows you to offer your customers the flexibility they need to close a deal while paying you full ACV upfront. 

Our partners trust us to manage invoicing, billing, and collections with their customers, and in return, we deposit full ACV immediately upon closing, so they have the cash they need to power growth, build new products, and grow to the next level. Flexible payment options perform better for closing than discounts do, and as a result, our customers experience shorter sales cycles – which means lower CAC and shorter CAC payback, plus higher ACV because contracts aren’t gutted by discounts over 15%. 

The right financing partner will offer flexibility not only to your customers, but to you as well, aligning to fit your SaaS pricing strategy and providing you with SaaS discount alternatives. 

ARR growth is possible even in today’s difficult market. It starts with reducing the number and value of discounts given, and closing more deals. It’s possible with a strong sales strategy, thoughtful pricing, and flexible payment options through a financing partner such as Capchase. Grow your ARR in a sustainable, scalable way while also making customers happier by meeting them where they’re at. 

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