Hey, Toni from Growblocks here! Welcome to another Revenue Letter!
This weekly email is my way to share knowledge and build a community of people who love to learn more about growing revenue in a data-driven and scientific way.
Anything in particular you want to hear my thoughts on? Drop me an email, and I might use it in my next article.
In one of my old roles, we decided that we were gonna buy Chili Piper.
So… of course, I wanted to ask for at least $1000-2000 off.
I talked to my RevOps guy, and he stopped me.
“Toni, they don’t give any discounts.”
My first reaction? I laughed.
“Sure, they don’t give any discounts…”
But he was dead serious. And he was right.
You can even read about their no discount approach here.
So we signed.
Because what were we going to do?
Waste another few weeks to push something we weren’t going to get?
Or waste more time finding a product that didn’t fit as well?
Chilli Piper got it right. And the more I think about it, the more I realize it’s a powerful pricing strategy.
The way I see it, there are 3 reasons to ditch discounts.
1. Discounts tend to attract the wrong customers
We’ve pulled a cohort of discount customers so many times over my career.
And they always have two things in common.
A lower ACV and a higher churn.
They’re less loyal and more price-sensitive.
And this will hurt your growth.
Speaking of churn…
2. Discounts increase churn
Would you rather give a 20% discount? Or have a 20% churn?
Well by the numbers, they’re the same thing.
It’ll impact your CAC:PB.
But what’s worse, it’ll impact your LTV.
There’s even evidence that it can decrease your LTV by more than 30%.
3. Discounts break a sales incentive structure
Prospects will plan the negotiation.
And just like your great reps– your buyer can play the urgency card.
When I bought Salesforce a couple of years ago, I started the conversation in the first week of January.
In case you don’t know, Salesforce’s year-end is on January 31st.
So I knew the sales rep I was reaching out to was incredibly lucky.
We ended up signing a 3-year deal worth more than $300k.
But the rep didn’t have time to go through all of those negotiation steps.
He needed to get this deal closed in a month from now or less than that.
So his only choice was skipping some discounting steps, going further down, much quicker.
And we basically capitalized on his deadline.
But does it really matter for a business whether the deal closes on the 31st of January or the first of February?
No.
But it matters for the salesperson.
That means they’re incredibly incentivized to give you the discount.
But what about the benefits of ditching discounts?
The way I see it, there are 2 major reasons.
It’ll lead to a faster sales cycle
Underestimating the importance of velocity—the rate at which an account executive can close deals—is a mistake.
If it takes a year to turn over a deal? Then it’s 1.
If it takes only a month? 12.
In a high-growth business, velocity can be what makes or breaks you.
Remember my Chili Piper story from earlier?
Imagine shortening 2-3 weeks off of every sales cycle. What would that mean for you?
You’ll grow faster
Simply put, if you don’t do discounts you’ll have more cash to re-invest.
At this stage in the game, CAC:PB is super vital.
And if you’re in a competitive market, being able to afford a higher CAC means you can hire better reps and buy more customers through marketing than they can.
So let’s get rid of discounts?
Is this viable in most companies?
Short answer: no.
Especially if it’s been part of an accepted practice for years.
But there are a couple of alternatives I would suggest.
Introduce Pricing Tiers
Tiers can help you flip the conversation when it comes to price.
“Do you want a 20% discount? No problem.”
“Just buy this lower tier.”
This conversation can become a painful conversation for the buyer.
Because that next tier might not be in their scope.
So it changes the dialogue into what solution the customer needs rather than how cheap it can be sold for.
Vanishing discounts
I personally love this trick.
Provide the discount at the start of the deal.
But when it’s time for a renewal? It’s gone.
This makes sense for a number of reasons.
When you buy a new tool, there will probably be onboarding for the first 2-3 months and dealing with switching costs, so you aren’t getting full value right away.
The reality is that the customer will have to invest time in implementing, training, and refining.
The one-off discount helps alleviate that.
And by the time renewal comes around, they’re ideally fully onboard.
So all of a sudden, there’s less argument for a discount.