In preparation of a talk I'm giving next week at Sales Heads, I wanted to share my personal framework for discounting in SaaS and the software industry as a whole.

The main motivation to give a talk about discounting is simply the lack of alignment. There are no two people in the entire SaaS community that share the exact same viewpoint on discounting.

Founders, investors, and sales leaders can endlessly debate whether you should you discount at all and if so: why, when, how much, and for how long?

Most of these discussions are pointless, as discounting is highly context-specific. Your discounting policy should be determined by your industry, average contract value (ACV), growth ambition, go-to-market (GTM) strategy, customer churn rate (CCR), customer lifetime value (CLV), and many more variables.

So, rather than adding another opinion to the noise, I want to share a practical framework for discounting. More specifically, I want to share how to think objectively about discounting and how you can make rational decisions.

The Framework

There are essentially three motivations for discounting:

1. To buy cash

2. To buy yes

3. To buy access

Allow me to explain...

1. To buy cash:

Whenever you're closing a deal with a customer, you to agree on the payment terms. For example, a 12-month contract paid at the start of every month.

However, you might prefer to have all that cash at the start rather than receive 1/12th every month. Unfortunately, when given the option, few customers will accept the less favourable payment terms unless you can sweeten the deal.

This is where Payment Term Discounting comes in. You can negotiate the contract duration and billing cycle to optimise your cash flow, but it will come at a cost.

It comes down to the question: How much do I value cash today versus tomorrow?

2. To buy yes:

For almost all B2C products and services and many self-serve solutions, the user will also be the buyer. However, as your average contract value starts to increase, you'll start dealing with multiple stakeholders.

Initially, this might just be a division between a strategic decision maker and end-user. As you pass the threshold of €10,000, the sales process will start including stakeholders who are exclusively responsible for negotiating favourable terms. The performance of these stakeholders might even be evaluated solely on the cash they manage to save.

Introducing: Negotiated Discounting. This includes all discounts you offer a particular stakeholder for the sole purpose of getting their approval. Think of lowering prices, offering free seats or add-ons, providing additional service, more favourable payment terms without higher prices, and so on.

Ask yourself: Do I need to "buy" someone off in the sales process? If the answer is yes, Negotiated Discounting might be the right move for you.

3. To buy access:

Payment Term Discounting and Negotiated Discounting are relatively tactical measures. But discounting can also be a strategic move.

Whenever you're entering new markets, introducing new solutions, or just want to win market share as quickly as possible, it can make "cents" to use generous discounts. I call this Growth Discounting.

One of the most aggressive and successful Growth Discounting campaigns of all time comes from PayPal.

In the early years of PayPal, they offered $20 to anyone who opened an account and an additional $20 to the person who referred them. While spending somewhere between $60–70 million on this strategy, the referral program drove 7–10% daily user growth and made PayPal what it is today.

You do not have to go as far as giving away cash. HubSpot's Startup Program is another great example of Growth Discounting done right.

Anyone who is eligible for the Startup Program can get a 90% discount for the first year, 50% for the second, and 25% in the third year. Considering the inherent lock-in effect of CRM solutions and the high switching cost, most clients will stay for more than a decade. When you look at the customer lifetime value, these discounts are a very small price to pay.

So, the final discounting category just comes down to: How aggressively do I want to grow?

To discount, or not to discount, that is NOT the question. Rather, ask yourself these three questions:

1. How much do I value cash today versus tomorrow?

2. Do I need to "buy" someone off?

3. How aggressively do I want to grow?

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