Whenever we start a client project at RevFixr and I see volume discounting, I can’t stop smiling.
Why?
Because I immediately know we’ll be able to increase ARR by >15% with one simple trick by the end of the quarter.
But before I dive into how we do that, let’s unpack the problem with volume discounting.
The Death Spiral
Volume discounting is regarded as the go-to answer when negotiating with clients that have purchasing power. However, most of the time you’re just making things worse. Give someone a hand and they'll take your whole arm.
The problems with volume discounting:
Proactive discounting is generally a worse policy than responsive discounting.
The ROI of upselling goes down dramatically. You’ll see diminishing returns while expanding your clients.
Enterprises become less profitable than medium-sized: combine volume discounting with longer sales cycles and you end up with a lot of work for very little.
Misalignment of value creation and value capturing. You keep creating more value, but are paid less and less.
The pricing math gets complicated. When the client needs to take out a calculator, nobody is winning.
It doesn’t take a genius to come up with the arguments above. So, the real question is: how did we even get here?
Great Concept, Wrong Industry
Volume discounting has its roots in the early 20th century wholesale and retail industry. It was a strategy to incentivise bulk purchases with lower prices. While margins dropped on each item, mass production drove costs down fast enough to make it worthwhile. In that world, lower prices were a real competitive edge.
For software companies, none of these benefits matter. The marginal cost of another license is already incredibly low and with the internet distribution is essentially free. On top of that, software buyers have a relatively fixed need. Lower prices won’t incentivise them to buy more seats…
If volume discounting isn’t the answer, what is?
👋 Hi, it’s Tjitte Joosten and welcome to Money on the Table, your newsletter for making sense of pricing and packaging. Subscribe to get posts like this delivered straight to your inbox.
A Better Alternative: The Two-Part Tariff
Since volume discounting was borrowed from another industry, we may as well borrow the alternative from a different one: the Two-Part Tariff.
The Two-Part Tariff is an even older tactic dating back to the late 19th century and popularised by electricity and telephone companies. The concept is simple: you pay a base fee plus a per-unit fee.
It would be like going the theme park and paying an entry fee and an additional fee per ride.
Why is this a better alternative?
Well, imagine having just paid $50 to get into the theme park and every ride is $5. If you take a single ride, you just spent $55.00 for one ride. If you take 2 rides, that’s an average price of $30.00 per ride; 3 rides is $21.70; and 4 rides is $17.50. You get the point.
By using a base fee plus a per-unit fee, the average cost per unit goes down as the units go up. In other words, you’re incentivising the purchase of more “units”.
Rationally, this shouldn’t work. Practically, it does.
Business-to-business sales is not actually business to business. B2B is people working at a business selling to people who work at another business.
The Two-Part Tariff for SaaS
While there are several ways of implementing the Two-Part Tariff in SaaS, here is the most popular version:
Platform fee + per seat/usage/outcome
If your Average Contract Value (ACV) is more than $5,000, consider implementing a platform fee. The exact price of the platform fee is up to you to figure out, but make it substantial enough to replace the psychological effect of the volume discount. When you’re trying it for the first time, just aim for it to be around 20–30% of the total sum.
For the strongest effect: always include the average unit price in your quotations. It’ll show how the average unit price drops as usage increases.
Important note: the base fee replaces volume discounting with almost any model, but the incentive to buy more units is limited with seat-based.
TL;DR
Stop using volume discounts. Instead, include a fixed “base fee” in your packaging to incentivise the purchase of more units (i.e., seats, usage, outcomes).
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Tjitte Joosten is the Founder of RevFixr, the one-stop shop for better monetisation of your customer base. RevFixr turns pricing into your biggest growth lever. Prior to founding RevFixr, Tjitte was responsible for the commercial strategy and operations at tech companies like Docfield and Experfy.
