B2B SaaS Pricing Models: Why Is There So Much Discounting In SaaS? 🎰
B2B SaaS pricing models and strategy in 2022 have seen some significant changes: Over the past year for example, we have seen a number of SAAS firms moving to subscription models, consumption based pricing or to SaaS or PaaS models to compete in next generation SAAS markets.
The problem is though, looming in the background of an ever evolving SaaS pricing model is age old discounting. With most B2B deals still won and maintained by SaaS sales reps using deep discounts and promos rather than strategic pricing or value based selling.
In this article we will continue to discuss discounting in B2B SaaS pricing models. Including: Key drivers of discounting in SaaS and areas of opportunity.
We argue that the quarterly deal management review process typically applied in SaaS firms is insufficient to rain in the loose discounting practices that are leading to substantial and largely unnecessary margin loss.
We strongly believe that incentivising sales representatives based on the number of monthly bookings leads to pricing chaos and extreme price variances that directly impact profitability.
B2B SaaS Discount Pricing Models And Strategy Example: Key drivers of discounting?
Discounting Wins Deals – Beliefs & Mindsets
The first and very common driver of discounting in SaaS relates to the deep seated belief that discounts win deals. SaaS sales reps typically argue, for example, that higher discounts are vital to win deals. What’s more, provides them with flexibility to do so.
But is this really the case? Latest research across multiple SaaS companies consistently shows the opposite to be true. Likewise, we find that the most profitable deals (and long lasting partnerships with customers) actually have lower average discounts overall compared to deals that were lost. Why? Because there was a higher chance that the sales person understood what, how and why the customer was buying. It was also likely that the sales rep devised a deal that made economic sense to both the customer and the firm.
Poorly Set Up Approvals Processes
Another driver of discounting relates to a confusing or overly complicated approvals process – i.e., in particular, how approvals are set up and how they are used by management during times of excessive discounting.
A good example of this is when management adds more sign-off procedures or personnel to the authority matrix as a means to prevent sales from excessively discounting to win deals.
But instead of preventing discounting, tightening up approvals often just adds more admin and complexity to an already frustrating process. To the point that everything slows down: Sales complain they can’t make a sale; getting angry there’s a nonsensical barrier keeping them away from securing their commission. Nothing really changes; nothing is learned. There’s just more red tape that everyone hates. Resentment builds in the sales force and the poor Chief Revenue Officer or Commercial Director just has more approvals to sign off at the end of the quarter.
In fact, we find that when more restrictions are added to the approvals process the majority of deals (>90%) end up getting escalated to the chief revenue officer (CRO) for sign off anyway. We also find that the discounting continues rather than decreases as no one but the sales rep knows the ins and outs of the deal.
This is because to managers and the CRO, every deal can look unique. Forcing them to make approvals based more on gut feel rather than on fact and evidence. In the heat of the deal, it is really difficult to be the one that says no to a sales rep asking for a discount when you are not familiar with the deal. No one wants to be the one responsible for losing a big deal. So very often a discount is approved based on pressure. This awkward situation is commonplace. Unfortunately, it is often resolved with less than objective fact based decision making or pricing.
Poorly Conceived Price Architecture
Leading on from the last example; another driver of discounting in SaaS is down to a poorly conceived price architecture. For example, when excessive discounting occurs, it is common for management to react by increasing list prices. The logic being that discounting off list won’t hurt as much if you inflate list price and/or costs – kind of like masking the reality to provide a buffer of safety type of logic.
But this price logic is flawed and short term thinking. Inflating list prices just ends up perpetuating the spiral of higher and higher discounts. This leads to the 60 to 80 percent average discounts for things like perpetual licenses. It also is a great way to ensure that no one ever trusts the list price again. Why?
Because both the sales rep and customers and management know that the list prices are based on guesswork.
After years of manipulating the list price to change discounting behaviour, the price list is less than useless. It’s a major source of margin erosion. For example, price variance off list in software is often off the charts – i.e., extreme and highly variable; and all because the fundamental architecture has not been pieced together well; or worse still, used to manipulate sales teams rather than to give them real price guidance.
Key price architecture elements such as: price and customer segmentation, product mix, size, and geography, price levels, price tiers, price bundles, promotional strategy are not just ill-conceived, they are done in a rush and almost left or discarded. To the point, there are just a bunch of pricing assets running on autopilot with no one behind the wheel. Lots of fancy price models and aspirational mission statements that produce few business outcomes and often zero margin gain. But worse still, lead to margin erosion as well as plenty of lost value and lost opportunities.
Lack of Market Intelligence
The final driver of discounting in SaaS is the absence of objective market price intelligence in B2B SaaS pricing models. For example, sales reps often have a good feel for the market, but they don’t have many tools or dashboards that provide them with objective price comparisons or key measures of value differentiation (business vs. key competitors) in their respective markets and industries. There is also very limited investigation into why deals are won and lost and metrics to track against baseline performance. In fact, the majority of the information sales relies on in SaaS is based on how colleagues price similar deals. A very limited and subjective view of the market indeed.
Discussion On The Best Pricing Models And Strategy For SaaS Business
Overall, the drivers of discounting in SaaS appear to stem from a legacy commercial process that is struggling to keep up with next generation SaaS business and pricing models. New approaches, price methods and techniques are required. To gain both quantitative and qualitative deal-structure inputs and insights in B2B SaaS pricing models. But more importantly, an entirely new commercial process and price architecture is required to ensure any new strategies and techniques deliver outcomes.
There are many benefits of moving away from legacy commercial structures and processes to a more flexible strategic price architecture. Firstly, strategic pricing changes the sales conversation on a fundamental level. Having the right price structures and people in place (like a revenue and pricing team) will really help SaaS firms move the focus away from margin based targeting and discounting to win deals to understanding how to capture more $ value and how to turn customer value into higher margin sales. An essential component of any new commercial SAAS process.
However, embedding customer insights deep into the commercial process is what will drive and build a sustainable SaaS business going forward. It is all well and good to create a new commercial process. But you need to ensure that what goes into it sticks. This includes: a market-relevant list price, value-based price setting methodology logic, quote configuration, compensation, streamlined price and approval levels, and a new approach to sales performance management and selling (i.e., new value metrics).
The ROI is significant too. Research shows that building and embedding commercial capability in SaaS can create significant improvements in return on sales ranging from 4 to 10 percent. Sometimes even more in software. Which is much higher than in any other industry and well worth the investment.
Despite some great improvement in pricing, the level, depth and consistency of discounting in SaaS highly suggests that discounts, not strategic pricing or value based selling is really the no. 1 driver of SAAS sales growth. A very precarious situation to be in for SaaS.
Like in other B2B industries, the number 1 pricing challenge for B2B SaaS is not so much how to deal with big data. But, rather, it’s how to get valuable pricing insights out of any data.
In many ways, strategic pricing capability in SaaS is largely dependent on the Chief Revenue Officer/ Commercial Directors true commitment to improving core pricing and commercial processes. If they are not behind it, sales teams just have to lump working in a fundamentally broken commercial process issuing prices they know (and their customers know) are largely made up without sound logic, rigour or science.
B2B SaaS Pricing Models: Conclusion
Building and embedding commercial capability in SaaS is an important next step for SaaS to curb excessive discounting.
In this article, we have discussed the major drivers of discounting in SaaS. We find that relying on top-down corporate discount guidance and price lists leads to more red tape and pricing problems. Also, objective market intelligence and strategic price architecture is now required in B2B SaaS pricing strategy. In order to provide sales with real price flexibility and the opportunity to capture share and higher commission.
Redesigning the whole commercial process; in particular, the approvals process and price architecture can improve price realisation rates significantly. But also drive commercial strategy across the business. It is also an area that sales reps would wholeheartedly agree needs to be improved.
However, building commercial capability is not enough. It has to be embedded into BAU too.
Leaders that are committed will capture the $ value from pricing. Leaders who are not or who pay lip service to price improvement will continue to deal with excessive discounting. Also misaligned incentives, chaotic deal review and approvals processes. A precarious situation to be in when next-generation SaaS firms are hungry for success and keen to become no. 1.
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